In this chapter we talked about the implications of different pay-level strategies for costs and revenues. We saw examples both of employers seeking to control/reduce pay levels and of employers increasing pay levels. Here, we continue our earlier discussion on how U.S. automakers have used two-tier wage structures to control labor costs and consider what might happen going forward. Also important is their use of profit sharing as a way to keep fixed labor costs under control and to make labor costs move more in line with profitability, so that labor costs decline when profits decline and labor costs increase when profits increase. That reduces the problem of having high, fixed labor costs when the company is under financial duress.

As we noted earlier, automobile production in the United States has declined over time. Employment has too. At the beginning of this century (January 2000), the motor vehicle and parts manufacturing industry (including both domestic and overseas owned U.S. producers) employed about 1,300,000 in the United States. That number bottomed out at 660,000 in 2009 during the recession and bankruptcies of that era. As of January 2020, it was back up to 976,000, or about 25% less than in January 2000. (We use January 2020 here to avoid the temporary effect on employment of the pandemic in 2020. For example, employment was down as low as 627,000 in April 2020.) Looking only at motor vehicle manufacturing (without parts), employment in January 2000 was 292,000, hitting its low of 123,000 in 2009, and growing to 235,000 by January 2020.74 Consider that, according to Bloomberg, in the late 1970s, GM alone had U.S. employment of over 600,000, including over 500,000 hourly employees. As of January 2020, GMs U.S. employment was 96,000, including 48,000 hourly employees.75 As we noted earlier, Mexico, by contrast, with its much lower labor costs, proximity to the large U.S. market, and access to export markets elsewhere, has, by contrast, grown its production and employment significantly over time.

As we saw earlier in this chapter, a two-tier wage structure allows a company to pay new hires at a lower wage. That is a major tool in reducing labor costs. At the Big Three (GM, Ford, Fiat Chrysler), as a result of their most recent contract agreements with the United Automobile Workers (UAW), the hourly wage for Tier 1 workers is $32.32 (up from $28 previously). In contrast, the wage for Tier 2 workers is up to $17 to $29.94, up from the previous $17 to $28. New hires start at $17 and progress through higher wage rates over time. For already employed Tier 2 employees at GM, under the previous contract, it took 8 years for a Tier 2 employee to progress to the top $28 rate. Under the new contract at GM (https://uaw.org/wp-content/uploads/2019/10/56100-UAW_hourly-1.pdf) that runs through 2023, in contrast, it will take already employed GM Tier 2 employees only 4 years to progress to the top rate, now $32.32. However, it appears that new Tier 2 employee hires going forward will still take 8 years to progress to the $32.32 top rate.76 It is estimated that 20% and 45% of Big Three hourly employees, depending on the company, are on the Tier 2 wage scale. Thus, the savings are substantial.

In the GM-UAW contract, there are also separate wage rates for GMCH (GM Components Holdings) employees and for CCA (GMs Customer Care and Aftersales) employees. The GMCH rate starts at $16.25 and tops out (after 8 years on the job) at $22.50. The CCA wage rate starts at $17.00 and tops out (again, it appears after 8 years) at $31.57. There are also supplemental (temporary) employees at the GM (and the Big Three). These employees also have lower wages ($16.67) and have the least job security, offering the company a way to easily reduce headcount when demand declines. In addition, there are flex temps and part-time temps.77 Finally, it appears that, except for Tier 1 employees, the retirement plan is switched from a defined benefit to defined contribution plan (a 401kdiscussed in Chapter 13) and there is no retiree health care benefit.78

Here are some questions to consider:

Besides Tier 1 employees, what are the other categories of hourly workers at GM? How many categories are there? How does the wage rate of each compare to that of Tier 1 employees?

page 250How much more would it cost today if all Tier 2 employees at GM were paid the same as Tier 1 employees are paid today? How much more will it cost in each of the four years of the recent contract to implement the contract agreement to move current Tier 2 employees to Tier 1 wage levels over time? Hint: Use the information on the percentage of employees who are Tier 1 and Tier 2. Compute the average wage in each year and multiple it times the number of employees in each Tier and multiply by 2,080 hours per year.

Refer back to our earlier exhibit (EXHIBIT 7.1) and use the difference in average hourly compensation (which includes benefits costs) between GM and Toyota/Honda to compute the labor cost difference between them.

Look at the GM annual report (10-K) dated February 5, 2020 (again, to look at financials pre-pandemic). What is its operating cost and what is its operating income? Compare the labor costs you computed above to these financials? How big of an effect on costs and operating income do two-tier wages have?

To what extent is the renewed job growth in the automobile industry in the United States due to the use of two-tier wages and the associated lower labor costs? What if labor costs had been higher or go higher in the future. What is the risk for employees? (Hint: Recall that automobile production has increased substantially in Mexico.)

To what degree is two tier-wage system sustainable? Consider, for example, that a previous Fiat Chrysler CEO stated, in the long term, (the system) is not a viable structure. It creates two classes of workers within the plant. It doesn't work in the same direction we are workingto get this organization to work in unison.79 It seems the concern is with cooperation and unity of vision/goals among everyone. Explain why that might be under a two-tier system. How serious of a concern do you think this is? When would we expect any such drawbacks to materialize?

Will the two-tier wage structure go away in the near future? Summarize the pressures to eliminate it as well as the pressures to keep it. Be sure to consider labor costs and productivity of workers and plants at other companies and in other parts of the world.