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.' 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, GM's U.S. employment was 96,000, including 48,000 hourly employees. 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 ( delete $17 and progress through higher wage rates over time. For already employed Tier 2 employees at GM, under the previous Contract, it took8 years for a Tier 2 employee to progress to the top $28 rate. Under the new contract at GM (https://uaw.or g/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./ 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" (GM's 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. Finally, it appears that, except for Tier 1 employees, the retirement plan is switched benefit 78 from a defined benefit to defined contribution plan (a 401k-discussed in Chapter 13) and there is no retiree health care.

4. 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?