Contract Terms and Employment Outcomes: Wage and Benefit Issues

1. Contract Terms and Employment Outcomes:Wage and Benefit Issues (a.k.a. Financial Compensation or Economic Issues)

2. Importance of Compensation • Probably overstated only by labor economists • Indications of worker compensation’s importance • Comprises 50-60% of total cost for typical (median) firm • Accounts for about 70% of GNI • An important “price” signal to decision makers, e.g., college students in choosing majors • The main source of one’s livelihood for most workers, despite “the myth of popular capitalism” (Samuelson) • Wealth and income highly concentrated, and becoming moreso (increasing inequality) in the U.S. over the last 20 years • Example: Top 20% of U.S. stock, bond, fund, and pension holders have about 97% of the wealth in these funds (1998) • If minimum wage rose at same rate as executive pay in the 1990s ...

3. Wages and Benefits: Complements or Substitutes? • Notable instances of substitutes -- where one foregoes wages for better benefits or vice-versa • Construction workers, relative to other workers, generally illustrate substitution (high pay, low benefits) • On net, complementarity prevails: wage and nonwage (e.g., benefit) outcomes “go together” • Median correlation in CB agreements between wages and indicators of nonwage provisions = .59 • “Common sense” or casual empiricism … who gets the better benefits, the janitor or the CEO? • Note: Positive correlation convenient for generalizations

4. Criteria Commonly Used in Wage Bargaining • Common use doesn’t preclude disagreement on use in specific instances, nor does it assure agreement on implications for a given criterion • Equity/Comparability (Q: How’s your wife/husband? A: Compared to?) • Ability to pay (and inability to pay, in hard times) • Relative to company performance (e.g, profit or sales) • May be explicitly tied to labor productivity • Standards of living (term used two different ways) • In terms of inflation adjustments to maintain standards • In terms of hypothetical standard (e.g., family of four)

5. Pay Programs -- Pay Level • Ability (or inability) to pay • Healthy ERs should be able to increase pay; labor productivity gains may contribute to health gains • Firms increasingly favor variable pay rather than increases in base pay, e.g., profit sharing, lump sums, or bonuses (recall “Final Offer”) • Key problems: Difficult to measure, and “inability” pleas may be challenged on “good faith” grounds, requiring opening the books • Equity or comparability • Controversy on whether pattern bargaining has weakened • Regardless, patterns still matter, as do less rigid comparison processes • Standards of living • “Hypothetical” form most relevant for lower paid workers • COLA for inflation (e.g., $.01 for each .3 or .4, or %-for-%, CPI change) • Some COLA issues: Capped or not? Folded or not folded in base ? • Re-openers & deferred increases also used to anticipate, adjust for inflation

6. Pay Structures • Negotiation could be job-by-job, but not usually. Instead ... • Rates are negotiated for broad (say 10) job classes (“labor grades”), or • Increases of equal absolute amounts (e.g., 50 cents) or equal relative amounts (e.g., 4%) are given “across the board” • Job evaluation often used to determine the relative position of jobs within the pay structure • Focus on internal equity, what job requires of incumbent • “Universal” compensables: Effort, skill, responsibility, working conditions • Point systems most common; seem fair, objective, and straightforward • Pay surveys link internal structure to external market • Skill-based pay or “pay for knowledge” stresses paying for job-related attributes of workers, not specific job requirements • Encourages EEs to learn more skills, jobs • Gives ER more flexibility in assigning workers to jobs • Two-tier plans -- Popular in cost-cutting 80s, less so now.

7. Pay Form: Wages vs. Benefits • Benefits once a “fringe,” now almost 30% of total compensation • Varies positively with size of ER • Varies positively with full-time • Varies by industry • Varies positively with union status • Major items • Paid leave (vacations, holidays, etc.) • Pensions • Insurance (life, healthcare, dental, vision, disability) • Mandatory elements • Social security (SS, but actually OASDI) -- federal • Worker’s compensation (WC) -- state-fed injury compensation (formerly “workmen’s comp”) • Unemployment insurance (UI) -- state-fed

8. Detail on Union and Nonunion Worker Pay FormsSource: 1991 Bureau of Labor Statistics Data on Employer-Paid Compensation

9. Some Other Pay Form (Benefit) Issues • Contributory versus noncontributory plans (e.g., for pension, healthcare insurance) • Defined-benefit versus defined-contribution (cost-based) plans • Healthcare and related • Increased HMO use in healthcare plans • Healthcare and prescription cost containment • Selected pension-related issues • Retiree-to-worker ratios will rise dramatically (1980 1:4, 2010 1:3, 2040 1:2) barring major change in work-retirement patterns • Vesting -- when do you “own” the funds paid for you? • Plan funding -- will the money be there when you retire? Is it set aside for that purpose, or a promise from the ER? What’s a Studebaker? • Plan management: Blue chips or casinos? “Prudent person” rule. • ERISA or Pension Reform Act of 1974 dealt with most of these

10. Pay System: Methods Used To Decide Pay For Each Employee • Membership -- Rewards for being an employee • Many benefits are determined this way • Common distinctions: permanent or regular status vs. probationary or temporary status, and full-time vs. part-time status • Tenure -- Rewards linked to years of service (seniority) • Benefit status seniority commonly used for pensions and vacation time • Competitive status seniority used for layoffs, vacation dates, promotions • Time Worked -- premium pay (e.g., 1.5 x base) for overtime usually based on weekly or daily hours • Productive Efficiency -- Performance-based rewards for individual or group performance above standards (31% of contracts) • Profit Sharing -- Bonuses tied to company profit

11. Union Effects On Pay: Preliminaries • Theoretical issues: Can unions have long-term effects on pay? • Mainstream economics: Marginal productivity theory says workers are paid according to the value of their contributions; competition will drive out firms that do otherwise. Evidence on MP theory generally supportive. More recent “efficiency wage theories” are variations on MP theory • Pre-union characteristics explanation for union effects: Unions organize firms where workers are more productive anyway, and/or better paid workers are more likely to favor unionization, since it’s a “normal good” • Price-theoretic adjustments argument: ERs offset higher union pay by letting other conditions deteriorate, yielding no net union advantage • Measurement problems • Crowding effect: Differential overstated because high union pay causes displacement of workers; excess supply drives down nonunion pay • Threat effect: Nonunion pay is higher because ERs pay more to avoid unionization threat (i.e., union substitution); thus differential understated • Unionization correlates with many things. Distinguishing its unique net effect is a challenge, conceptually and statistically

12. Union Effects on Pay:“Observing The Unobservable”? • Effects on pay levels • Average wage effect estimated at 10-20% for recent decades • Recent meta-analysis: 10% • Average conceals much variation • Generally, lowest-paid workers gain the most • Women were an exception to this pattern in 1970s data. Now? • Various structural and legal factors: e.g., union premium is smaller in industries with high import penetration, states with “RTW” laws • Effect tends to vary with business cycle -- larger in recession • Effects on pay structures • Unions tend to compress the wage structure (at a higher level) • Consistent with median voter model, egalitarian norms

13. Union Effects on Pay:Pay Forms and Pay Systems • Effects on pay forms • Unions tilt pay packages toward benefits • Estimated benefit effect 20-30% in recent decades • Consistent with median voter model, seniority influence • Effect varies by benefit type • Largest impact on benefits favored by senior workers, e.g., pensions • Negative impact on some benefits (e.g., profit sharing) • Effects on pay systems • More emphasis on membership, tenure, and job • Less emphasis on individual performance assessments, characteristics • Less responsive to economic conditions (but quantity adjustments -- temporary layoffs and recalls -- are more likely for union workers)

14. Union Pay Effects and Organizational Effectiveness Issues • Productivity: Again, most studies show positive union effects • More educated, experienced (could be considered market distortion) • Voice effects: Lower turnover, sharing knowledge, improved process • Illusion? Inefficient union firms driven out while all NU firms survive • Organizational investment and growth decisions • Pay effects suggest union firms would over-invest in capital • R&D and capital investment actually lower in some studies • Slower employment growth for union firms • Profitability and shareholder returns • Compensation increases exceed productivity gains, so lower profit, at least in less competitive industries. I.e., unions transfer wealth from shareholders to workers • Lower shareholder returns may be offset by greater stability (less risk)

15. Nonwage Issues

16. “Wage” and “Nonwage” Issues • Issues are related across these broad categories and more detailed categories • Parties trade across categories • “Primary-secondary” effects notion, e.g., ERs change some nonwage terms in response to union wage effects, union counters, ER counters that, and so on ... • Wage issues often get more attention simply because they’re easier to measure (like the drunk looking for his lost keys under the streetlamp …) • Nonwage issues can involve critical principles for management (e.g., GM on “production standards”) and/or involve high financial stakes • Similarly for workers and unions (not always the same, of course)

17. Work design Hours of work Federal laws (FLSA) Contract terms Entitlements and restrictions Shift assignment and shift differentials Innovative work schedules Paid time off Contract length Management rights Discipline and discharge Grievance arbitration Strikes and lockouts Union rights and security Work conditions and safety Seniority and job security Layoff and recall Promotion and transfer Time away from work No discrimination Union effects Hiring Promotion, transfer, and T/O Retirement programs Job satisfaction A Wide Variety of Issues

18. Focus on Three Key Areas • Management rights or prerogatives • Union security clauses and “right to work” laws • Worker seniority rights

19. Management Rights • What rights? • Rights to hire, fire, discipline, decide what to produce, prices, production methods, investment decisions, etc. • In short, the right to manage • Two extreme views and a “middle path” • Rights stem from property. Management is agent for owners. Thus, all rights are management’s unless there’s explicit restriction (law, CB agmt.). Consistent with reserved rights (a.k.a. residual rights) view expressed by many or most arbitrators (if contract silent) • Property rights don’t apply to humans (workers). There are no inherent management rights • A middle path: Interests of all parties to be considered, balanced • Contract provisions • Most (80-85%) contain some form. Does absence imply NO mgmt. rights? • Is a long clause detailing rights better than a “short form”?

20. Some Common Limitations on Management Rights • General notion of implied obligations (e.g., a safe and healthy work place) • Discipline limited by “just cause” requirement • Subcontracting (a.k.a. contracting out and outsourcing) • Various motivations (expertise, temporary surge, “union busting”) • Mandatory subject, can be and often is limited by contract • Bans are rare (2% of contracts) • Limitations common (about 50% of agreements): Where layoffs exist, work could be done by EEs, advance notice required • Work standards, work rules, etc. (e.g., “pegged rates”) • Often have (or had) legitimate basis, but “evolve” beyond that (Aussie “pat man”?) thanks to “scarcity consciousness” and lax management • Not unique to union settings, but more formal and harder to change there • Management role evident by likelihood in less competitive industries

21. Main types of clauses Closed shop (illegal) Union shop (60% of clauses) after 30 days (7 in construction) Agency shop (12% of clauses) Maintenance-of-membership Modified union shop Open shop (a.k.a. merit shop) Other types of clauses Quasi-union shop in RTW states Check-off clause (dues deduct.) Hiring halls (can’t discriminate) Pre-hire agreements (construct.) Accretion agreements Legal issues Union shop actually enforceable only as agency shop. Buckley decision: Can require dues and fees normally required of members, not membership Beck decision: Agency shop fee can be limited to CB activities Pre-hire agreement status in flux: Unilateral repudiation by ER even with no notice to union NLRB involvement De-authorization poll available Authorization formerly required, but a waste of time Union Security Clauses and Related Union Rights

22. A Brief Poll • Should employer and employee representatives be free to negotiate contract clauses supported by a majority of employees? Yes or no? • Should employees be required to join a union to keep their jobs? Yes or no?

23. Nature, history, geography Make union shop illegal or unenforceable; some ban agency shop also Permitted by T-H’s Sec. 14(b); a political compromise Now 22 states (OK in 2001) Mostly south, plains, mountains Pros: Protect individual freedom of contract, prevent compulsory unionism Makes unions more responsive Protect free speech rights; protect “conscientious objector” Cons: Restrict freedom of contract between union and ER, conflict with majority rule principle Weaken unions (80% of NRTWC supporters are ERs) Encourages free-riding (r.t. “all benefit, all should pay”) Symbol or substance? Some correlates noted (e.g., membership, expenses) Cause and effect relations and interpretations less clear Free riders more likely to vote for unions! RTW (“Right to Work”) Laws

24. Worker Seniority Rights • Pervasive and controversial (especially among young) • Benefits status seniority less an issue (vacation, pension) • Competitive status seniority (layoff, recall, promotion, transfer) • Used extensively in both union and nonunion firms • Weight given seniorityUnion FirmsNonunion Firms • In layoffs/heavy wt. 95% 70% • In layoffs/strict 68% 28% • In promotion/heavy wt. 68% 40% • Ditto, but hourlies only 68% 53% • How it’s used for promotion in union contracts • Strict 3% • Main factor 40% • With equal qualifications 40% • Other or unstated 17%

25. Worker Seniority Rights • Used and defined differently for different purposes • Promotions likely to use narrower units (e.g., departmental), less weight • Layoffs: broad units (e.g., plant-wide seniority), more weight • “Bumping rights” often specified when narrower units used • Some generalizations on preferences • Management favors narrower units and less wt.; better for efficiency? • Workers and unions focus on equity; favor broader units • Why is seniority used so extensively? • Objective • Easy to measure • Correlates with skill to some degree (learning curve idea) • Perceived as fair by workers (a norm of cumulative “job property rights”?) • Seniority effects on compensation noted earlier. Other effects less clear (e.g., efficiency and inefficiency)

26. The End