Problem: Two-tier wages case study:
In Ford, General Motors, and Chrysler manufacturing plants across the country, thousands of newly hired workers are joining the assembly lines. It's a sign of both a rebounding economy and the American auto industry's methodical return from their economic struggles of the last decade.But unlike their counterparts with a few years of service under their belts, these new hires earn an hourly wage as low as $14, nearly half that of their more experienced coworkers performing precisely the same assembly tasks. In addition, the new hires' auxiliary benefits-health insurance, paid time off, and retirement funding-don't compare to those of experienced plant workers.A New Contract with Organized LaborThese differences are the result of two-tier contracts-arrangements in which labor unions permit corporations to hire new workers at wages below those earned by existing unionized employees who perform the same jobs. The compensation differences between the two tiers may be marked by lower wages, slower progression toward raises, alternate health benefits, or reduced or restructured pension plans. Employers may also invoke tier arrangements by creating new job classifications with comparable responsibilities to existing jobs but with lower pay and by expanding part-time positions with inherently lower benefit levels.
More commonly, unions may agree to concessionary contracts which include "tunnel" or "graduation" provisions; in these cases, newer workers can eventually reach the higher wage scales if they stay on the job long enough, which, in most cases, is longer than existing workers would take to reach the same compensation levels.
Though two-tier contracts have existed in one form or another since the 1930s, they're getting more attention than ever now because they play an integral part in the Big Three automakers' plans to return to profitability. And it's easy to see why: By the early 2000s, the Big Three were struggling to survive; unlike foreign automakers with manufacturing plants in the United States, American manufacturers had long paid unionized workers a comfortable salary and a healthy pension. And with labor costs rising and sales in a slump, the Big Three felt they had two choices-restructure labor costs to match wages offered by Toyota and Honda or drastically cut production. In separate talks with each of the Big Three, United Auto Workers (UAW) negotiators conceded to two-tier contracts in order to prevent further layoffs and protect the union's presence in domestic auto plants.Putting a New Face on an Old PracticeTwo-tier contracts drew national attention in the early 1980s after the Airline Deregulation Act of 1978 prompted airlines to reconsider existing salary arrangements. American Airlines led the way, successfully negotiating two-tier plans with the Transportation Workers Union and airline pilots in 1983.
A few years later, grocery unions in many states reluctantly agreed to two-tier wages after a massive wave of grocery store consolidations closed 7,000 stores and cut 100,000 union jobs.
In industries with high turnover, it may not take long for employers who implement two-tier contracts to see the benefits, as new employees may quickly replace their higher-earning predecessors. In addition, companies may offer buyouts to higher-tier workers to speed the transition and increase the percentage of workers paid at lower-tier wages. For example, following 2007 UAW negotiations, 19,000 workers at General Motors (GM) and 4,200 at Ford took a buyout.
In the past, two-tier contracts have been stop-gap measures at best, since the diminished wages often disappeared once the economy picked up again. Companies that put two-tier plans into place often experienced higher turnover, lower morale, and reduced productivity. And in some instances, unions have been able to block two-tier contracts altogether, such as the United Food and Commercial Workers (UFCW) union's negotiations in the 2007 Southern California grocery workers' contract.
Tough Times for the Big ThreeIn 1993 talks with Ford, the UAW agreed temporarily to two-tier wages. And four years later, it reluctantly accepted negotiations including a permanent two-tier system for some workers-the first permanent implementation among the Big Three's workers.
Though neither autoworkers nor automakers forgot this concession, further talk of two-tier plans subsided for the meantime.Fast-forward to 2007. The U.S. economy is tumbling, and executives at each of the Big Three automakers claim that their companies must undergo substantial restructuring to get out of debt and stay in business. Despite each company's individual circumstances, a common contention is that the automakers must slash labor costs and pension obligations in order to remain competitive with foreign automakers. The UAW fights to retain comfortable salaries and benefits for existing employees but concedes to lowering wages for new workers to forestall further layoffs.In accordance with the U.S. government's bailouts of Chrysler and GM, the UAW conceded that second-tier workers would not be eligible for promotion to top-tier wages until 2015. Ford, which did not undergo government-managed bankruptcy, forged a UAW contract permitting it to fill 20% of its union jobs with second-tier workers before any are eligible for top-tier wages.
Thus far, roughly 12% of Chrysler's 23,000 union employees earn second-tier wages.
As will most of Ford's 12,000 anticipated new hires.
"This is not going away," said Kristin Dziczek, a labor analyst at Ann Arbor's Center for Automotive Research. "It has allowed the Big Three to reduce labor costs without cutting the pay of incumbent workers. Is it good for the health and competitiveness of the companies? Yes. And is that good for job security? Yes."
That the Big Three are hiring assembly workers at lower wages means that the automakers are on sufficiently stable ground to hire new laborers in the first place, a vast improvement over their financial straits in recent years. And so far, so good: Last year, the Big Three saw their first increases in market share in decades.
Chrysler's yearly sales skyrocketed 26%; G M and Ford showed positive gains of 13% and 11% respectively.
What About Workers?The labor market's reaction to the Big Three's implementation of two-tier wages has been predictably mixed. While no one relishes the thought of earning 50% as much as the worker across the aisle, "Everybody is appreciative of a job and glad to be working," said Derrick Chatman, a recent hire at Chrysler's Jefferson North plant. Before coming on at Chrysler for $14.65 per hour, Chatman was laid off from Home Depot, worked the odd construction job, and collected unemployment.
While new hires may have mixed feelings about joining a labor force with uneven pay for its workers, they may be encouraged that some of their top-tier cohorts gladly extend a helping hand, like Gary Wurtz. A line worker at GM's Orion Township, MI, plant, where 40% of his fellow workers receive lower-tier wages, Kurtz offered, "In order to get those guys up, we'll take a signing bonus or profit sharing instead."
That said, two-tier plans still bear the potential to divide workers across salary lines. As Gary Chaison, a professor of industrial relations at Clark University, pointed out in a 2008 paper, "[Lower-tier workers] might even feel sufficiently aggrieved to someday negotiate away the benefits of retired higher-tier workers. For example, a higher-tier autoworker observed: ‘After we retire, the next generation may ask, "Why should we defend your pensions? You didn't defend our pay when we were young."'"Forty-one thousand UAW workers for Ford, the U.S. automaker least adversely affected by the economic slowdown, gained notable benefits for their lower-tier employees in late 2011 negotiations, including some paid vacation and personal time, paid bereavement and jury duty time, and co-pays for office visits.
Lower-tier workers making $15.50 received a raise to $19.28, bringing their salary in line with comparable GM laborers. And in exchange for future pay raises, new lower-tier workers will each receive a $6,000 signing bonus, $7,000 in inflation protection payments, and $3,700 in profit sharing. In the agreement, Ford also committed to create 5,750 additional manufacturing jobs, for a total of 12,000 jobs it intends to add by 2015. It also promised more than $6.2 billion for U.S. factories.17Will It Last?For now, expect two-tier plans to be a fixture of the domestic automakers for the visible future. Employment is up in Detroit and throughout the auto manufacturing sector. Analysts classify these new jobs as permanent, which is a positive sign for economists, investors, and politicians eager for recent examples of economic growth in a challenged market. And as Pat Walsh, manager at Chrysler's Jefferson North plant, pointed out, the advent of two-tier wages has not hurt production. "Our quality numbers have been very good," he said. "And our data doesn't show any differences per shift or per workstation."18But will workers buy into two-tier systems in the long term? The Big Three will likely find that laborers will insist on opportunities for advancement. "If you know you're going to get to the top wage eventually, the system can work," said Peter Cappelli, a professor at the University of Pennsylvania's Wharton School. "The big problem is when you think you'll never get there."
Discussion Questions
1. How does the Big Three's decision to implement two-tier wage plans align with the concept of comparable worth? Explain your answer.
2. What are the implications of two-tier wage plans for human resource planning?
Problem Solving: Consider yourself to be a negotiator for the United Auto Workers Union. What would be your "union" position on the use of two-tier pay systems? In a collective bargaining situation where you are at the table, what specific responses would you be prepared to make when a management negotiator says not only that his or her firm wants to keep the two-tier wages already in place for some workers, but shift more new workers to them as they get hired in the future? What counter arguments to your positions would you expect from the management side? Do you see any way to forge a shared agreement in this situation?