Pictured is General Motor Co.'s headquarters in Detroit. Photo courtesy of Thinkstock.
As Detroit 3 automakers and the industry’s largest labor union gird themselves for contract negotiations in 2015, one of the topics on the table likely will be the two-tier wage system.
Late last year a top United Auto Workers official fired an early warning shot, saying that the union wants to eliminate the compensation model in which newer employees are paid at a drastically reduced hourly rate — sometimes as much as half — than their veteran peers despite doing essentially the same work. The union grudgingly agreed to its implementation, presumably to preserve jobs as domestic automakers were struggling to remain competitive when the contract was negotiated in 2007.
Roughly 16 percent of General Motors Co.’s 51,500 hourly U.S. employees are paid as second-tier workers, while 19 percent of Ford Motor Co.’s 46,500 hourly workers are at that level and a quarter of Chrysler Group’s 32,000 hourly employees fall into the same category. With bankruptcy in the past for GM and Chrysler and predictions for record auto sales in 2014, much is at stake for both sides.
'A union would theoretically love to get rid of the two-tier … but that’s going to add wage costs.'
—David Kern, Quarles & Brady
Still, trying to abandon the two-tier system might prove difficult, said David Kern, a partner specializing in labor and employment law at Quarles & Brady in Milwaukee. Globalization and the availability of nonunion plants continue to provide employers with cheaper options, he said. Moreover, it’s always difficult in negotiations to try and take something away that’s provided a benefit to one side for an extended time period.
“A union would theoretically love to get rid of the two-tier … but that’s going to add wage costs,” Kern said. “And anytime that’s going to happen, an employer is thinking, ‘Well, this is getting too costly. Can I do this elsewhere? Can I do this at a nonunion plant? Can I do this in another country?’ That’s a real challenge.”
Use of the two-tier system became prominent in the 1980s, typically in industries that competed against cheap labor abroad or were experiencing hardship, said Robert Bruno, a professor at the School of Labor & Employment Relations at the University of Illinois at Urbana-Champaign.
Unions negotiated these contracts to do two things, Bruno said. First, they wanted to preserve the labor force and keep work in the firm — good news for the employer. Second, they wanted to preserve jobs.
The two-tier system would also protect the core group of senior workers. Over time — usually about six years — those in the lower tier would experience a “catch-up” period with wage rates moving up. Turnover of higher-tier workers to retirement ensures the system has the right mix.
“So it held some promise out that if you stayed with the firm and the firm was successful, your wages would rise,” Bruno said.