Domestic auto manufacturers were hit particularly hard by the recession. Struggling to overcome rising material and pension costs, they felt they couldn’t compete with foreign car makers without drastically cutting labor costs. Part of their response was a two-tier wage system that pays new workers significantly less than existing ones doing the same job. What is the future for such two-tier wage systems?
A New Contract
In Ford General Motors, and Chrysler manufacturing plants across the United States, newly hired workers are earning an hourly wage that may be half of those of their more experienced co-workers who perform identical tasks. Their benefits—health insurance paid time off and retirement funding—are also less than those received by experienced workers. These differences are the result of two-tier contracts in which labor unions permit corporations to hire new workers with wage and benefit packages below those earned by veteran employees in the same jobs.
In the past, two-tier contracts have been stop-gap measures, since the diminished wages often disappeared once the economy picked up again. Now they appear to be here to stay, and it’s easy to see why. The auto firms had long paid unionized workers a comfortable salary and a healthy pension. But as labor and pension costs rose, the Big Three needed to restructure labor costs to match wages offered by foreign manufacturers with American plants. The United Auto Workers (UAW) negotiators conceded to two-tier contracts in order to prevent layoffs and protect the union’s presence in the auto plants.
‘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? And is that good for job security?
What about the Workers?
The labor markets reaction to the two-tier wages has been 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 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, well take a signing bonus or profit sharing instead.’
Two-tier plans still have the potential to divide workers across salary lines. As 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’.
Chrysler CEO Sergio Marchione hopes to eliminate the higher wage tier altogether as senior workers retire. The United Auto Workers union wants to eliminate the two tiers and move to a higher uniform wage rate for all. The new UAW president Dennis Wilhams says: ‘Its time to bridge the gap.’ ‘If you know you’re going to get to the top wage eventually the [two tier] system can work,’ says Peter Cappelli, professor at the University of Pennsylvania’s Wharton School. ‘The big problem is when you think you’ll never get there.’
- Discussion: How do Employee Value Propositions* differ for those being paid at different levels in two tier wage plans? What are the implications of these differences for organizations in—attracting, developing and maintaining a talented workforce?
- Discussion: What challenges do two-tier wage plans pose to the future in industry? How should management, employees and unions address the issues of a Two-Tier Wage System?
- Further Research: Look into current events, scholarly research, and even financial analysts’ reports for information on two-tier wage systems and their outcomes in various industries.
- Find the pros and cons from both management, employee and union points of view.
- Look for interviews with managers and workers (unions) who express their real feelings about being on each side of the two-tier system.
- Create a report that summarizes the current status of two-tier plans and what we know about how they work. What direction we can expect from them in the future and how should stakeholder concerns be addressed?
Management Environment (Chapter 3); Staffing (Chapter 10); Motivation (Chapter 12); and other related external sources
* Employee Value Propositions: the package of opportunities and rewards that make diverse and talented people want to belong to and work hard for an organization.