Two-tier Wages: An Attempt to Salvage US Jobs – Case Study

Two-tier Wages: An Attempt to Salvage US Jobs

BHR 3301 – Compensation and Benefits

A two-tier wage system is described as a salary plan in which senior workers earn substantially more than new workers while doing the same job. Generally, an employer will implement a two-tier wage structure to lower overall wages over time. An employer will hire new workers at the lower rate while current workers are locked in at the old, higher rate. As current workers resign and retire, replacements are hired at the going lower rate and overall labor costs decrease over time. In some cases, there might be stipulations built into a labor contract that grant higher pay increases over time to the lower-paid workers in an attempt to eventually achieve the same rate for all employees. This creates two sets of pay rates, or two tiers of pay. The goal of this practice is to have one pay structure for all employees, getting paid at a lower rate and thus decrease the overall labor costs of an organization.

The automobile industry is probably the most well-known industry in which two-tier wages were implemented. General Motors, a U.S. automotive manufacturer whose workers are members of the United Autoworkers union (UAW), negotiated with UAW to implement a two-tier wage structure to avoid cutting even more jobs in the automotive industry and to bring back U.S. jobs that were previously outsourced to countries with much lower labor costs than the US. Though implementing this type of structure forced the labor union to make drastic concessions to workers’ pay, the alternative would have been a total loss of jobs in the industry, causing high unemployment within the union.

Production of automobiles overseas and automakers who are not bound by union contracts, have led to a much more competitive playing field in the auto industry. Because non-unionized automakers have a much lower hourly cost than their unionized counterpart, they are able to offer their products at much lower prices, which results in a higher stake in market share. If a unionized carmaker cannot stay competitive, by either lowering U.S. wages or outsourcing production overseas to a country with lower labor costs, the survival of the company is doomed. Unions decided to bite the sour apple and agree to the two-tier wage structure with its substantially lower base wages to save union jobs. After all, lower wages are the lesser evil compared to unemployment.

Opponents of the two-tier wage structure argue that this double standard of pay can cause conflict and demoralization between employees of the different pay structures and will cause a decrease in productivity which will not cause any cost savings in the long run. Fiat/Chrysler CEO Sergio Marchionne argues that a two-tier wage structure creates two classes of workers and can cause conflict between said workers rather than creating a cohesive workforce (Milkovich, Newman & Gerhart, 2014).While a two-tier wage structure is definitely not a perfect design, it is meant as a temporary bridge and not meant as a long-term solution. The higher tier workers will either phase out by resigning or retiring and/or the lower tier workers have contracts in place that promise faster pay increases than their higher paid counterparts who may experience minimal or no increase going forward and in time wages will level out to one tier. Some opponents argue that lower wages also translate into decreased spending power of employees, which in turn causes a decrease in sales. This is a relatively weak argument, because the alternative is a higher unemployment rate, which not only decreases spending, but might bring it to a halt altogether.

In the last few decades, automobile manufacturers have been moving production facilities overseas due to substantially lower labor costs in many foreign countries. But with the supply and demand for labor shifting in the favor of employers, rising labor costs in the foreign countries and government incentives for keeping facilities within the United States, many automakers are reopening domestic manufacturing plants. One example is the defunct General Motor’s manufacturing facility in Spring Hill, Tennessee. It reopened its doors in November of 2011, seven years after ceasing production of automobiles. While the hourly rate has drastically decreased when compared to pre-2004 shutdown wages, most residents welcomed the reopening, because unemployment increased tremendously when the plant shut down in 2004 and the current average wages in the local labor market are still well below the now lower hourly rate the automobile manufacturer negotiated (Lee, 2011)

Considering that labor costs for the Ford Fiesta, which is manufactured in Mexico, is only $150 per vehicle as opposed to $710 for Chevy’s Sonic, who utilizes tier two workers as well as workers from an outside supplier (Milkovich, Newman & Gerhart, 2014), unions no longer hold the bargaining power they once had. Without the two-tier wage structure, if only temporarily, and massive government incentives (for which ultimately the taxpayers foot the bill) automakers would see no incentive in keeping jobs in the United States. State governments are in tough competition to attract automakers to settle new manufacturing plants in their states to combat high unemployment rates. Volkswagen, for example, opened a plant in Chattanooga, Tennessee in 2011 and received a total of $577 million in incentives from federal, state, and local governments (Pare, 2011) These incentives, combined with non-union wages (according to Glassdoor.com, an assembly line worker currently makes approximately $15-$16 an hour) make it feasible for automakers to once again build their products in the United States, creating jobs, and thus giving the domestic economy a boost.

References

Milkovich G., Newman J., & Gerhart B. (2014).

Compensation (11th ed.). New York, NY: McGraw-Hill

Lee, D. (2011). Two-tier pay system brings reopening of GM plant, reviving hope. Retrieved

from http://articles.latimes.com/2011/dec/18/business/la-fi-economy-wages-20111218

Pare, M. (2011). VW CEO: Volkswagen delivered on new Chattanooga plant. Retrieved from

http://www.timesfreepress.com/news/news/story/2011/may/25/vw-ceo-volkswagen-delivered-new-chattanooga-plant/50488/