Question

Answer the following question after reading over the case study below.

Case 10 Two-Tier Wages—Same Job, Different Pay

When domestic auto manufacturers were hit hard by recession and foreign competition, they struggled to control costs and maintain profitability. One response was a two-tier wage system paying new workers significantly less than existing ones doing the same job. What is the future for two-tier wage systems?

A New Labor Contract

At Ford, General Motors, and Chrysler manufacturing plants across the United States, newly hired workers are earning an hourly wage that may be half that of their more experienced coworkers who perform identical tasks, averaging roughly $19 versus $28 per hour. Their benefits—health insurance, paid time off, and retirement funding—are also less than those of experienced workers. These differences are the result of two-tier contracts where labor unions permit corporations to hire new workers with wage and benefit packages below those earned by veteran employees in the same jobs.

Here to Stay?

“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 workers. Is it good for the health and competitiveness of the companies? Yes. And is that good for job security? Yes.” “If you know you’re going to get to the top wage eventually, the [two-tier] system can work,” says Peter Cappelli, a professor at the University of Pennsylvania’s Wharton School. “The big problem is when you think you’ll never get there.” Although lower-tier workers can move up, there’s a lot of uncertainty about how long it takes. The United Auto Workers (UAW) union wants to shorten and clarify the time to jump tiers and close the pay gap between them.

Mixed Reactions

Labor’s reaction to the two-tier wages has been mixed. Although no one is happy about earning 50% less than the worker across the aisle, “Everybody is appreciative of a job and glad to be working,” said Derrick Chatman, a new hire at Chrysler’s Jefferson North plant. Before joining Chrysler for $14.65 per hour, he was laid off from Home Depot, worked the odd construction job, and collected unemployment. Gary Wurtz, a line worker at GM’s Orion Township, MI, plant, where 40% of his fellow workers receive lower-tier wages, said: “In order to get those guys up, we’ll take a signing bonus or profit-sharing instead.” That said, two-tier plans still have the potential to divide workers across salary lines. Gary Chaison, a professor of industrial relations at Clark University, points out, “[Lower-tier workers] might even feel sufficiently aggrieved to someday negotiate away the benefits of retired higher-tier workers.” 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.’”

Bridging the Gap

For many union members, the rallying cry is “No more tiers!” They want to eliminate the two tiers and move to a higher uniform wage rate for all. The new UAW president Dennis Williams says, “It’s time to bridge the gap.” But Chrysler CEO Sergio Marchione takes a very different position. He would prefer to eliminate the higher wage tier altogether as senior workers retire.

A Changing Tide

Although at first the two-tier contracts looked to be here to stay, it appears that among the Big Three automakers—Ford, General Motors, and Chrysler—there may be a changing tide. Ford was loudest in support of the two-tier system. And while recognizing that dropping the system will increase labor costs, Ford acknowledges that there have been benefits to eliminating the system. Said Joe Hinrichs, Ford’s president of the Americas, “One of the great things coming out of the new contract has been that we no longer talk about the differences between an ‘entry-level worker’ and a ‘legacy worker.’ All the workers are the same.” So, although Ford is paying more in wages, it also expects to generate performance benefits by eliminating the system. As Hinrichs said, “That’s really good, because one of the things you really need in a manufacturing plant is there to be focus and discipline. Anxiety or distraction is the enemy of process discipline.” Both Chrysler and General Motors have also made tentative agreements with the UAW to narrow pay gaps across the two tiers.

Case Analysis Question

1. FURTHER RESEARCH: (You need to lookup data on reports to support your answer to the question below. Please cite where you get your sources from whether online or books.)

Create a report that summarizes the current status of two-tier plans, what we know about how they work, and what direction we can expect from them in the future. Find the pros and cons of both management and union points of view. Research online and in books for current events and analyst reports on two-tier wage systems and their outcomes in various industries. Look up interviews with workers who express their real feelings about being on each side of the two-tier system.

Answer 1

Two-Tier Wage Systems

A basic principal of unionism is "equal pay for equal work." This means that people doing the same or comparable job should receive the same hourly or salaried pay. There are some exceptions to this general rule, because often times some benefits and some portion of wages are tied into seniority. For example, vacation time off generally increases as a worker gains more seniority. Pensions increase as a worker gains more seniority. Some workplaces have pay bonuses based upon an employee's length of service, usually called longevity pay. The other way seniority ties into wages is in the "wage progression schedule." This means that a worker is hired in at one rate of pay and over a period of time they get regular pay raises until they reach the top of the rate. Among public sector workers there is often a longer time period until the top rate is reached, it may take 3 to 4 or 5 years. Among manufacturing workers, the time it takes to get to the top rate is usually geared to the time it takes to learn and become proficient in the job.

The slogan, "equal pay for equal work" was coined to deal with employer favoritism- attempts to keep workers fighting each other ("how come he gets more money than me") and to combat outright discrimination. Employers for many years openly had different-lower rates of pay for women workers and lower rates of pay for African-American and other minority workers. This massive employer discrimination shows up in the national lower average rates of pay for women and minority workers.

What is wrong with two-tier wage systems?

• They are basically unfair, since they violate the concept of "equal pay for equal work."
• They cause employee discontent. In every workplace that has instituted two-tier systems there is worker dissatisfication because the lower paid worker feels cheated that he/she is doing the same work as their co-workers but receiving less.
• In many cases even though it was the employer that demanded the two-tier system, it is the union that gets blamed for agreeing to it. Even if they agreed to it because of threats to move the work if they didn't. It is easier for some workers to blame their co-workers than to blame a boss.
• Employee turnover increases because of employee dissatisfaction. This negates the savings an employer gets from the two-tier system, because of constant training and lower productivity.
• Employers only gain a big savings in costs if there is a big turnover in employees, thus exchanging higher paid workers with new employees that earn less. But turnover really doesn't help them. This leads many employers to demand wage cuts for all employees.
• In the long run, as higher paid employees retire or quit, the wage rates will continue to get lower, thus erasing years of hard work by union members to improve their wages and working conditions.

What can be done about two-tier systems?

Two-tier systems should be fought against because of all the reasons listed above. They are bad for the union and usually bad for the company. Union stewards need to educate members around these facts. Even though current employees may not immediately be affected, they will be in the future.

Because of the tough re-cessionary economy we are in, many unions are leery of striking. Threats of layoffs or moving the work sometimes force unions into the hard position of having to negotiate around two-tier systems. If this is the case, here are some tips:

• Resist a permanent two-tier system. Maintain the same top rate for all employees.
• If necessary negotiate lower starting rates.
• If necessary negotiate longer progression schedules to the top rate.
• Do not give the company the right to move some people quicker along the progression schedule. This gives them an out if they are in danger of losing a new employee who they want to keep, but who is mad about the longer progression schedule. If the new system the employer wants isn't working, make them fix it for everybody.