Trouble Ahead For Auto Industry’s Two-Tier Wage Structure

LIVONIA, Mich. – When Chrysler CEO Sergio Marchionne made his disdain for a two-tier wage system known at the conclusion of UAW contract negotiations in October, his comments weren’t so much parting shots as they were a preview of coming attractions.

The viability of the two-tier wage structure will be a defining issue of the next round of labor negotiations.

“What has to be decided in 2015 is, ‘Where are you going with the second tier,” said Art Schwartz, president of Labor & Economics Associates and a former lead labor negotiator for General Motors. “Where’s this going to lead eventually? That’s the big issue.”

Several analysts at a conference hosted Tuesday by the Center for Automotive Research predicted caps on the number of second-tier employees will gradually be raised, and that an intermediate wage rate between the two rates could be negotiated.

Under the current agreement, second-tier workers make about half the hourly rate as their legacy counterparts. At General Motors, for example, new hires start at rates as low as $14.78 while veterans make $28.49 per hour. Yet they do the same work and meet the same productivity standards.

That’s the rub, said Sean McAlinden, CAR’s chief economist.

“It’s a mess,” he said. “It’s one of the reasons Marchionne wants to get away from that. I don’t think it’s a permanent solution.”

As a temporary one, it has been effective in controlling labor costs. In 2007, General Motors total hourly cost per worker was $78. In 2011, the cost dropped to $56. Hourly costs for two-tiers are substantially lower. Across the Big Three, their total hourly labor cost is $33.70 in 2011 and expected to rise to $39.70 by 2015. Retirement and health care costs account for other differences.

Two-tiers first appeared in contracts between the UAW and Big Three in 2003, and evolved as one way for the automakers to remain competitive with competition. In the 2007 negotiations, they were expanded and then entrenched during the federal bailout of the auto industry in 2009.

Experts say the lower overall labor costs will help the domestic automakers compete with foreign automakers that operate North American plants. Toyota’s overall hourly labor cost is $55 and Honda’s is $50, according to CAR research. Workers at Toyota’s new plant in Mississippi start at $15, although hourly wage rates for veteran workers at their assembly plants in the Southern United States are approximately $24 to $26 per hour.

That’s where the targets will start in 2015 negotiations, possibly for an intermediate tier.

“To be perfectly frank, we’re not setting the pattern for international auto makers,” McAlinden said. “They’re setting the pattern for us. That will make our companies’ labor contracts look much more like the transplants.”

He anticipates the Big Three will seek hikes in the entry-level percentages of their workforces, if not removal of the caps all together. Currently, the limits are 17 percent at GM, 12 percent at Ford and 23 percent at Chrysler.

CAR assistant research director Kristin Dziczek says the caps are irrelevant right now, since entry-level workers are just a fraction of the total.

“For all intents and purposes, the speed limit is 300 miles an hour,” she said of the potential hiring pace of two tiers. “Go as fast as you can. They will be renegotiated in 2015, and second tier will be one of the key issues.”

Perhaps the more thorny aspect of the negotiations will be determining the compensation of traditional employees already making $28 to $29 per hour. By 2015, they will have gone 14 years without a raise, according to CAR. Union leaders may favor a single-tiered wage structure, but any proposal that involves a pay cut for legacy workers is a non-starter.

“The key issue will be how will that gap close,” Schwartz said. “Will it evolve to an intermediate rate with no cap? How do you negotiate between $19 and $29?”

The one thing everyone – from Marchionne to union leaders to analysts – agrees upon is that the two-tier system is a temporary patch, one that could either be mended or further frayed during the next round of negotiations.

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