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 Review Notes on  LU 9:  Wage & Benefit Issues in Bargaining
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 Intro to Wage & Benefit Issues in Bargaining   
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 The Framework of Wages:  Equity, Ability to Pay, & Standard of Living   
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 Pay Programs   
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 Pay Structure   
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 2 Tier Pay Plans   
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 Pay Form   
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 Pay System   
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 The Scanlon Plan   
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 The Rucker Plan   
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 Impro Share   
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 Union Effects on Pay   
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       Externalities   
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 Union Effects on Pay Structures, Forms, & Systems   
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 Union Effects on Firm Performance   
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 Organizational Investment, Growth Decisions, Profitability, & Returns to Stockholders   
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 Wage Issues in Contracts    
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 The Minimum Wage Debate   
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            The  Ratchet Effect on Wages   

 
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 Outline on  Intro to Wage & Benefit Issues in Bargaining
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  WAGE DEMANDS ARE CENTRAL TO EVERY CONTRACT NEGOTIATION
 
  Wages are always a major issue in bargaining 
 
  In forming their bargaining positions, unions are often concerned w/:  equity among intra firm wkr grps, equity among inter firm wkr grps, the ability of the firm to pay an increase, & the change of its member's standard of living   
  Mgt is concerned w/ wage & benefits b/c its ability to compete depends to some extent on its labor costs 
 
  Firms producing equivalent output w/ lower labor costs will have higher profits & be better able to operate during downturns 
 
  Both labor & mgt are concerned about a variety of pay aspects 
 
  Labor & mgt are concerned w/:  the overall level of pay, pay rates & pay increases determination for different jobs, the mix of wages & benefits paid to wkrs, & the rate of change for wages & benefits, esp benefits 
 
  THE WAGE ISSUE EMBODIES THE FUNDAMENTAL CONFLICT BTWN LABOR & MGT:  THE ALLOCATION OF THE BENEFITS OF ENTERPRISE 
 
  The union mvmt has always argued that wealth is ultimately created by labor, in all its forms, & that the distribution of income is excessively unequal 
 
  While not denying owners' rights to a return on investment (ROI), unions would not agree that profit maximization should be a firm's primary goal 
 
  Unionization aims to increase the power of wkrs to increase their share of the firm's revenue 
 
  Private sector corp owners are ultimately interested in maximizing shareholder value 
 
  Owners would also prefer the greatest possible flexibility in structuring their operations, including the mobility of capital 
 
  Owners would prefer to manage pay programs to minimize labor costs & obtain the most output per dollar   
  Workers recognize the need to minimize labor costs & be efficient w/ output, but they also believe wkrs deserve a 'square deal,' which primarily means a reasonable standard of living, a safe job, & a share of the wealth, or responsibility for a downturn in profits   
  Mgt & labor thus have some conflicting self interests, but they also have some not only compatible, but also equally vital interests of the profitability & survivability of the enterprise   

 
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 Outline on the   Framework of Wages:  Equity, Ability to Pay, & Standard of Living
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  THE FRAMEWORK FOR ANY NEGOTIATION ON WAGES & BENEFITS CENTERS AROUND THE ISSUES OF EQUITY, THE ABILITY TO PAY, & THE STANDARD OF LIVING
 
  In framing its wage demands, the union relies on the major criteria of equity w/in & across employers, the firm's ability to pay, & its members' standards of living 
 
  Unions make a number of comparisons & compromises among the criteria of equity, ability to pay, & the standard of living in formulating wage demands 
 
  EQUITY REFERS TO WHETHER PAY IS COMMENSURATE W/ OTHER OR SIMILAR WORK FOR UNION & NON UNION WKRS   
  Unions & union members want wages for jobs they represent to exceed, or at least be consistent w/, those of equivalent nonunion jobs in the firm   
  Unions & union members expect equivalence in insurance benefits across jobs because personal risks are not related to job or salary level   
  Unions pay attn to:  wages, benefits, conditions of wk, autonomy on the job, & more in other industries but b/c of global competition & dereg, pattern bargaining across ind has declined   
  Unions want uniformity in wages, benefits, etc for the same jobs in different locations of the same company   
  These patterns of equity w/in a single employer are eroding; however, as plant level negotiations lead to concessions in older, less efficient plants to avoid shutdowns & the resulting loss of jobs   
  TO A LESSER EXTENT, UNIONS ARE CONCERNED W/ THE SOCIETAL ISSUE OF INCOME INEQUALITY:  IF THE VARIOUS CLASSES ARE SHARING IN THE BENEFITS OF SOCIETY; FOR THE LAST 35 YRS INCOME INEQUITY HAS INCREASED AS WE HAVE SEEN THE MC SHRINK WHILE THE UC & THE LC HAVE GROWN   
  Income inequality is also part of the equity demand for unions & members   
  Unequal dist exists where different wkrs in different jobs can earn different pay   
  For the union, excessive inequality would be related to differences btwn production wkrs, prof, & execs that are larger than members can justify   
  Inequality suggests there may be an opportunity to redistribute income from higher to lower level jobs if that inequality is not based on productivity, but rather 'tradition' or status   
  Income inequality has increased substantially since the 80s   
  Some of the growing inequality is the result of occupational changes, & part is the result of reduced union coverage   
  During the same period, income inequality in the public sector has decreased b/c union membership has grown   
  INTERNAL EQUITY ADDRESSES PAY LEVELS W/IN A FIRM WHILE EXTERNAL EQUITY ADDRESSES PAY LEVELS AMONG FIRMS   
  Internal equity issues are concerned w/ whether non union wkrs in the same firms have better wages & benefits that union wkrs   
  External equity issues are concerned w/ whether union wages & benefits are equivalent to similar firms w/ similar jobs   
  ABILITY TO PAY ADDRESSES THE ISSUES OF BOTH CAN FIRMS AFFORD TO PAY WKRS MORE & REMAIN COMPETITIVE; & THUS ADDRESSES THE ISSUE OF HOW HIGH SHOULD PROFITS BE FOR A CORP, & HOW HIGH SHOULD MGT PAY BE   
  Tied closely to the equity issue is the ability to pay issue b/c equity includes the org needs to be able to afford the wages to estb a fair sys of pay equity   
  The most important aspect of analyzing the ability to pay relates to a firm's profitability   
  When profits are increasing, unions expect to receive pay increases   
  Unions try to avoid accepting reduced pay when profits decline, but since the 80s have often been required to make concessions on both wages & benefits when firm's have incurred substantial losses   
  Firms often make the argument that they must either have concessions from labor or make lay offs of wkrs   
  The heart of a union analysis of a firm is to determine whether profit levels are sufficient for wage increases, while maintaining competitiveness, or conversely, determine whether loss levels are deficient enough to demand concessions or lay offs  
  Some internal union critics have condemned concessions, arguing that past labor leaders would not have accepted them; however since the labor climate estb by the Reagan Admin & followed by Republicans since then, corps have been emboldened to break unions, demand concessions, close factories & move them overseas, & fight new unions more intensely   
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 UAW President Frazier was forced to accept concessions in the 80s & he justified this to union members by citing a former long time UAW President, Reuther's acceptance of concessions & the mandate of the econ & Labor climate of the times   
  THE GREATER THE PROPORTION OF LABOR COSTS TO TOTAL COSTS, THE MORE SENSITIVE THE FIRM IS TO CHANGES IN RATES OF PAY   
  The proportion of labor costs when compared to the total cost of a product also impacts the ability to pay   
  The larger the proportion of labor costs to total costs, the more difficult it is for a firm to give wage & benefit increases b/c it will raise total costs substantially   
  If labor costs are only a small part of the total cost, then an increase in wages & benefits will not raise the cost of the product very much   
  Generally, unions believe that the lower a firm's labor intensity, ie the lower the share of costs going to labor, the greater its ability to pay   
  In industries w/ lower labor intensity, there is a relatively lower elasticity of demand for labor, meaning that there is less likely to be a surplus of 'extra' wkrs who are willing to work for less   
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 The Table on Cost Comparison for Labor & Capital Intensive Firms shows that changes in labor costs have a greater impact on firms w/ labor intensive cost structures & a lesser impact of firms w/ capital intensive cost structures   
  WKRS & UNIONS BELIEVE THAT INCREASES IN PRODUCTIVITY SHOULD BE SHARED W/ WKRS IN THE FORM OF PAY   
  The main issue related to the ability to pay is whether firms are enjoying a large % of profits of which they are not sharing w/ wkrs, esp if gains in profits have been made b/c of increases in productivity   

 
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Table on Cost Comparison for Labor & Capital Intensive Firms
Labor Intensive Firms
Capital Intensive Firms
Material Costs
$  500,000 
$  500,000 
Capital Costs
100,000 
400,000 
Labor Costs 
400,000 
100,000 
       Total Costs
1,000,000 
1,000,000 
Cost of 10% wage increase
40,000 
10,000 
        Net Total Cost
1,040,000 
1,010,000 
The Table on Cost Comparison for Labor & Capital Intensive Firms shows that changes in labor costs have a greater impact on firms w/ labor intensive cost structures & a lesser impact of firms w/ capital intensive cost structures 

 
UNIONS & THE LABOR MVMT DO NOT PURSUE MAXIMIZATION OF WEALTH; UNIONS & THE LABOR MVMT PURSUE A FAIR SHARE  
  In the 1980s in the midst of the globalization of business, declining union power, an econ recession, & open hostility from the Reagan Admin toward unions, Douglas Frazier, President of the UAW from 1977 to 1983, was attempting to get members to accept wage concessions   
  Frazier expected opposition to concessions at one union meeting   
  Frazier says, 'I went into one lion's den last week, a union meeting, & there was this old Commie there who I knew would raise that precise issue:  "Reuther spinning in his grave'' referring to the fact that the 'old Commie' believed the former, highly respected leader, Walter Reuther, would oppose concessions   
  Frazier responded to the concession opposition by reading Reuther's letter, which supported concessions in some circumstances   
  While unions always fight hard against concessions, they do recognize the problems of profitability & productivity, & so will concede concessions when necessary for the survival of the firm; however, unions prefer to give something on concessions, & get something in return, such as job security   
  When unions sacrifice by giving concessions, they prefer that mgt & stockholders also 'share the pain' & also make concessions   
  'All industries & all companies w/in an industry do not enjoy the same econ advantages & profit ratios.  We cannot blind ourselves to this fact at the bargaining table.  As an employer prospers, we expect a fair share, & if he faces hard times, we expect to cooperate.... Our basic philosophy toward the employers we meet at the bargaining table is that we have a great deal more in common that we have in conflict, & that instead of waging a struggle to divide up scarcity, we have to find ways of cooperating to create abundance & then intelligently find a way of share that abundance.'
JP Hoert.  And the Wolf Finally Came.  1988.  University of Pittsburgh Press, Pittsburgh. p. 195. 
  
  STANDARD OF LIVING ISSUES ARE CONCERNED W/ WHETHER WKRS ARE MAINTAINING THEIR PURCHASING POWER & WHETHER THEY CAN LIVE THE 'AMERICAN DREAM,' IE A MIDDLE CLASS LIFE   
  One component of determining a standard of living relates to the purchasing power of employees' pay, ie their real wages   
   If prices increase by 10 % for items the average wkr purchases, but wages rise only 6 %, then real wages have eroded by 4 %   
  A cost of living adjustment (COLA) is intended to maintain parity btwn wages & prices & from a union, & equity, pt of view, should be included in all wage contracts, union or not   
  Unions take the standard of living issue one step further & advocate that their members' purchasing power needs to be improved so that they can enjoy higher qualities of goods & services over time   
  One aspect of the standard of living issue is whether present wages are adequate to meet consumption standards, ie a basic, middle class style of life   
  One aspect of the standard of living issue is whether real wages have been eroded, maintained, or increased   

 
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 Outline on  Pay Programs
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  PAY PROGRAMS ARE IMPACTED BY THE LABOR TO CAPITAL RATIO OF THE INDUSTRY, PAY EQUITY OR MIRRORING ACROSS THE INDUSTRY, PROFIT SHARING & BONUSES AS SUBSTITUTES FOR BASE PAY, & THE PRESENCE OR ABSENCE OF COLAs
 
  Collective bargaining substitutes a contract for mgt's unilaterally determined practices related to pay, benefits, conditions of work, safety practices, & more   
  Pay programs are generally analyzed & negotiated around the issues of pay level, pay structure, pay form, & pay systems   
  Pay programs, whether negotiated in contracts or formulated by the firm, address issues related to the: 
-  level of pay in relation to the mkt 
-  structure of pay rates for jobs w/in the org 
-  form in which pay is delivered as wages or benefits 
-  system used to determine individual entitlements 		  
  Pay level refers to how a firm's average pay rates compare w/ other firm's rates   
  Pay structure consists of sets of wage rates the employer applies to different jobs & the ranges of wage rates possible w/in specific jobs in the org   
  Pay form is the method by which compensation is received, whether it be cash, insurance pmts, deferred income, preferential discounts, payments in kind, & recreational & entertainment programs   
  Pay systems refer to the methods used to determine how much each wkrs will earn w/in a job  
  A sys might be based on piece rates, other productivity, or performance indexes, skill level, time worked, seniority w/ the org, or other factors   
  A variety of concerns are subject to negotiations, w/ unions stressing equality & ability to pay issues & mgt favoring pay programs that positively influence productive wkr behavior   
  Mgt is interested in lowering base pay levels & in making a larger proportion of pay flexible & responsive to changes in econ conditions   
  PAY LEVELS & THE ABILITY TO PAY ARE IMPACTED BY FIRM'S LABOR TO CAPITAL RATIO, IE WHICH PAY INCREASES HAVE A LARGER IMPACT ON LABOR INTENSIVE INDUSTRIES   
  The general level of business activity influences profits   
  Then the econ is strong & unemployment is low, wage demands increase & the incidence of strikes to support bargaining demands rises   
  Firms who have relatively capital intensive production or who bargain w/ several small units do not have the incentive to avoid wage increases compared to labor intensive firms   
  The ability to pay is usually an issue raised by the union, but firms experiencing reduced profits, or losses, or change in their industries' competitive level argue for pay reduction   
  Pay level comparisons become more difficult to make as pay form becomes more complex   
  FIRMS SEEK TO REDUCE THE FIXED PROPORTION OF PAY BY PROFIT SHARING PROGRAMS & GIVING BONUSES INSTEAD OF PAY RAISES   
  Firms are often interested in reducing the fixed proportion of pay   
  Employees may be interesting in making pay flexible if it leads to more job security   
  Profit sharing is becoming more common in labor contracts, esp as a quid pro quo for concessions   
  Today auto wkrs have opportunities for profit sharing if their firms do well & if profits are down or losses occur, a lower level of pay enables the firms to retain more wkrs   
  Another recent pay innovation is the lump sum bonuses given instead of a pay increase which permanently increase base wage levels   
  Furthermore, lump sum bonuses require no matching increase for benefits   
  PAY LEVELS & EQUITY ARE IMPORTANT B/C PAY EQUITY HAS THE EFFECT OF MAKING FIRMS COMPETE ON FACTORS OTHER THAN WAGES  
  Achieving equity across firms in a given industry is important for unions b/c it has the effect of removing wages as an element of competition for the firms   
  Wage equity means firms who want a competitive edge are more likely to seek that edge based on innovation, technology, mkting, mfr processes, & not on the wages   
  Lack of wage equity means that firms will attempt to compete by squeezing wkrs as much as possible   
  W/ wage equity firms pay essentially the same, so advantages must be earned through more marketable products or greater productive efficiency   
  UNIONS PREFER PAY EQUITY TO CUT DOWN ON INTER UNION COMPETITION  
  Some argue that unions respond to the wages of their counterparts simply in order to remain competitive w/ other unions in organizing & representation   
  If a given union cannot achieve the pay level of the other unions, then it is likely that union members will leave & possible join the more successful union   
  Wage imitation if likely to be decreased by  
  1.  differences btwn industries in which firms operate   
  2.  differences in the ability to pay w/in these industries   
  3.  the time btwn pattern setting & later settlements   
  As competition has increased in many industries, mgt negotiators have increasingly emphasized productivity trends & profit levels & de emphasized industry patterns & settlements in other industries   
  Mgt has succeed since the Reagan era of the 80s in increase wage inequity in industries & competing on the basis of wages by squeezing wkrs   
  PAY LEVELS IMPACT THE STANDARD OF LIVING PRIMARILY THROUGH MECHANISMS THAT ALLOW, OR DO NOT ALLOW, PAY TO MATCH OR EXCEED INFLATION  
  Inflation increases the importance of maintaining a standard of living   
  The use of COLAs (Cost of Living Allowances) by unions increase in the 70s when there was a high level of inflation   
  W/o COLAs, which most union wkrs & non union wkrs do not have, most wages do not keep up w/ inflation & so there is a slow loss of the standard of living   
  During the 80s, & since then, firms increasingly made the deferral, modification, or elimination of COLAs as a major concession bargaining objective   
  COLA tie pay level changes to the consumer price index (CPI) which is our best measure of inflation for wkrs   
  COLAs are the most effective when increases are incorporated into the base wage b/c if COLAs simply come as bonuses, they are more easily taken away from wkrs   
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 The Table on UAW Contract Settlements shows that unions work to estb equity & maintain a standard of living & that equity is estb when contracts mirror each other   

 
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Table on UAW Contract Settlements 
Daimler Chrysler:  Sept 2003, nationwide 4 yrs
$3000 signing bonus, performance bonus in 2nd yr
Base pay increases of 2 % in 3rd yr & 3 % in 4th yr
Copays for brand name drugs increase from $5 to $10
All other health care fully paid
Retirees receive $800 lump sum
Surviving spouses receive $520 lump sum in each yr
Plant closing ban dropped
GM:  Oct 2003, nationwide, 4 yrs 
Mirrored Daimler Chrysler settlement
GM required to give Delphi at least $ 1 bb in business for 4 yrs
Ford:  Sept 2003, nationwide, 4 yrs 
Mirrored Daimler Chrysler settlement
Transfer rights specified for  movement btwn Ford & Visteon
Ford required to give Visteon at least $1 bb in business for 4 yrs
Delphi:  Oct 2003, nationwide, 4 yrs 
Mirrored GM settlement except new hires will start at a lower rate to be agreed later
GM agrees to buy at least $1 bb in business for 4 yrs
Visteon:  Sept 2003, nationwide, 4 yrs 
Mirrored Ford settlement except new hires will start at rates 30 % below current wkrs
Ford agrees to buy at least $1 bb in business for 4 yrs 
Saturn:  June 2004; Spring Hill, TN & Troy, MI; 4 yrs
Abandoned earlier innovative contract that provided for co mgt, no layoff provision, & bonus related to plant performance & adopted GM UAW agreement
GM agreed to convert the plant into a flexible production facility to produce several different vehicles 
Maytag:  July 2004, Newton, IA 4 yrs
Wkrs will pay 10 to 20 % of health care costs & have deductibles
2.5 % wage increase
FIve lump sum pmts of $550 to $600 during 4 yrs contract
Wkrs hired after June 1, 2004 will be offered a 401(k) retirement plan, current wkrs will remain in the present defined benefit plan 
After 2008, retiree medical coverage beyond age 65 will be eliminated 
The Table on UAW Contract Settlements shows that unions work to estb equity & maintain a standard of living & that equity is estb when contracts mirror each other 

 
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 Outline on  Pay Structure
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 PAY STRUCTURE REFERS TO THE PATTERN OF WAGE RATES FOR JOBS W/IN THE ORG 
 
  Unionization is assoc w/ higher pay levels   
  Pay structures tend to be flatter that in non union orgs w/ a larger proportion of pay given in benefits   
  Col barg agreements contain fewer contingencies surrounding pay increases & have a larger proportion of pay in the form of deferred compensation   
  W/in a bargaining unit (BU), the union negotiates wage rates w/ mgt & pay differentials may be negotiated on a job by job basis or may result from using a negotiated job eval sys   
  Job by job negotiations often create difficulties over time b/c the original job structure estb a hierarchy of jobs separated by specific pay differentials   
  Bargaining often results in across the board equal pay increases for all jobs in the BU   
  While wage differentials are maintained, relative differences shrink, causing wage compression, the gap btwn the highest & lowest pay decreases   
  JOB EVALUATION IS A PROCEDURE USED TO MEASURE THE RELATIVE VALUE OF JOBS TO AN ORG, USUALLY EXAMINING FACTORS SUCH AS:  SKILL, EFFORT, RESPONSIBILITY, WKING CONDITIONS, & MORE   
  Estb pay rates for new jobs & determining rates where no external comparisons exist cause problems, but job evals help firms & unions deal w/ these problems   
  Job evals determine the relative position of jobs w/in a pay structure   
  Job Evals have several steps & require decision mking rules that must be negotiated   
  THE STEPS IN JOB EVAL OFTEN INCLUDES:  SPECIFYING JOBS, ANALYZING JOBS, IDENTIFYING BEHAVIORS, DEFINING CRITERIA, ASSIGNING PTS, WRITING EVAL MANUALS, & RATING ALL JOBS   
  In general, job evals include the step of:   
  1.  specifying the jobs to be evaluated   
  2.  analyzing jobs to determine the behaviors required & / or the traits or skills necessary to perform the job   
  3.  identifying the behaviors or traits & those that vary across jobs which are agreed to be of value to the firms which are grped into compensable factors   
  4.  defining each eval factor, ie measurement criteria, & the degree of involvement for each factor   
  5.  assign point values to each eval factor & degrees w/in a factor   
  6.  write job eval manuals to apply the eval manual   
  7.  rating or weighting all jobs   
  B/C JOB EVALS ARE SO CENTRAL TO WKRS' QUALITY OF WK & PAY EQUITY, UNIONS ARE OFTEN HEAVILY INVOLVED IN DESIGN & IMPLEMENTATION   
  Job evals involve either / or: 
1.  using a union mgt committee to determine compensable factors & the degree to which they are required in BU jobs, 
2.  negotiating the pts to be applied to evaluations completed by mgt		  
  Advantages of evals include the reduction of compression in wage differentials if increases are given based on eval scores & the ease w/ which a new job can be slotted into an existing pay structure   
  The primary disadvantage of evals is that the union & mgt must agree on identification, definition, & point assignments assoc w/ compensable factors   
  GRADE STRUCTURES ESTB THE HIERARCHY OF JOBS BASED ON SKILL LEVEL, CREATING A PROMOTIONAL LADDER   
  Orgs divide jobs into different grades to reflect differences in the skill levels required & also to crate a promotional ladder that wkrs may climb   
  A firm is likely to implement a sys of grade structures if jobs are filled from w/in & there is a need for training & experience w/in the firm to perform these jobs   
  Grade structures have several common characteristics   
  1.  Mgt & Labor must decide how many grades are in the structure   
  2.  Mgt & Labor must assign jobs to each grade   
  3.  Mgt & Labor must determine differences in pay btwn the grades   
  4.  Mgt & Labor must decide the minimum & maximum pay rates w/in a grade   
  There could be separates structures for production, maintenance, & skilled trades   
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 The Table on an Example of Knowledge Segmented into Degrees for a Pay Structure demonstrates how difficult & complex it can be to partition even just one criteria like knowledge for a given job in a given pay grade   

 
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Table on an Example of Knowledge Segmented into Degrees for a Pay Structure
1.  Knowledge The knowledge factor measures the knowledge or equivalent training required to perform the position duties 
1st Degree The 1st degree of knowledge encompasses the use of reading & writing, adding & subtraction of whole numbers; following instructions; use of fixed gauges; direct reading instruments & similar devices; where interpretation is not required 
2nd Degree The 2nd degree of knowledge encompasses the use of addition, subtraction, multiplication & division of numbers including decimals & fractions; simple use of formulas, charts, tables, drawings, specs, schedules, wiring diagrams; use of adjustable measuring instruments; checking of reports, forms, records & comparable data; where interpretation is required 
3rd Degree The 3rd degree of knowledge encompasses the use of math together w/ complicated drawings, specs, charts, tables; various type of precision measuring instruments.  Equivalent to 1 to 3 yrs applied trades training in a particular or specialized occupation 
4th Degree The 4th degree of knowledge encompasses the use of advanced trades math, together w/ the use of complicated drawings, specs, charts, tables, handbook formulas; all varieties of precision measuring instruments.  Equivalent to complete accredited apprenticeship in a recognized trade, craft or occupation; or equivalent to a 2 yr tech college ed 
5th Degree The 5th degree of knowledge encompasses the use of higher math involved in the application of engineering principles & the performance of related practical ops, together w/ a comprehensive knowledge of the theories & practices of mechanical, electrical, chem, civil or like engineering field.  Equivalent to complete 4 yr tech college or university ed 
The Table on an Example of Knowledge Segmented into Degrees for a Pay Structure demonstrates how difficult & complex it can be to partition even just one criteria like knowledge for a given job in a given pay grade 

 
  SKILL BASED PAY (SBP) ESTBS PAY PRIMARILY ON DEMONSTRATED SKILLS & THUS IS OFTEN BASED ON PASSING A SKILLS TEST FOR EACH LEVEL   
  Most pay structures base pay differences on wkrs grades & jo classifications   
  Skill based pay (SBP) ties pay to the skills wkrs have acquired   
  An inexperienced wkr is hired at a starting rate   
  As the wkr learns skills, pay is increased   
  W/ SBP relatively few job classifications exist, & wkrs can be moved btwn assignments based on the firm's needs   
  An SBP combines structural, ie job or task relationships, & pay changes based on individual behavior or skills   
  SBP is often used in team based production which blurs job boundaries & is not found in many unionized firms   
  LANE & STEP PLANS (LSPs) OFFER PAY PLANS SUBDIVIDED INTO STEPS WHERE EACH STEP HAS A LANE OR PAY LADDER   
  Lane & Step Plans (LSPs) are implemented for jobs where increased ed & experience are assumed to be related to productivity or performance   
  LSPs are prevalent in unionized primary, secondary, & non research university teaching occupations   
  LSPs base pay rates on the length of a wkrs service in the org & on the highest amt of ed completed   
  LSPs indicate the trade offs that exist btwn accumulating experience & additional ed if a wkr wants to improve his or her pay   
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 The Table of an Example of a High School Lane & Step Schedule demonstrates that lane & step schedules can be very complex, w/ extensive steps & lanes for advancement  

 
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Table of an Example of a High School Lane & Step Schedule
Lane 
Step
I
BA
II
BA +15
III
BA +30
IV
BA +45 or
MA
V
MA +15
VI
MA +30
1
29521
30179
30824
32051
32997
33939
2
30930
31456
32282
33700
34692
35684
3
32567
33033
33891
35550
36566
37488
4
34478
34788
35684
37286
38575
39598
5
35066
36579
39002
40301
41403
41915
6
37881
38478
41186
42631
43001
43539
The Table of an Example of a High School Lane & Step Schedule demonstrates that lane & step schedules can be very complex, w/ extensive steps & lanes for advancement 

 
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 Outline on   Two Tier Pay Plans
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  2 TIER PAY PLANS MAY MERELY REQUIRE WKRS START AT A LOWER PAY RATE, BUT SOME ESTB 2 FULL TIERS WHERE SOME WKRS NEVER ATTAIN THE TOP PAY RATES   
  2 tier pay plans lower wage costs through a decreased starting rate for new hires   
  The firm starts wkrs at a lower rate & requires more time than for present wkrs to reach top rates   
  The other creates a permanent differential under which new hires will never earn the current top rate   
  Firms benefit most if turnover is hi or if the firms plans to expand   
  The rate of change is most rapid when retirement rates are also increasing  
  Forth the firm & the union might expect problems when lower tier wage levels begin to exceed half of the total   
  Implementation of 2 tier pay plans should be accompanied by communications & assurances to wkrs that job security will be enhanced   
  2 TIER PAY PLANS ARE OFTEN ONLY ACCEPTED BY UNIONS AS A CONCESSION   
  2 tier pay plans are more prevalent in unionized firms & have usually been negotiated w/o mgt concessions   
  In the airlines, 2 tier pay plans were negotiated in the absence of financial distress or mkt share shifts & frequently negotiated following other union concessions   
  Airlines justified 2 tier pay plans as aligning their pay rates to comparable jobs in the mkt   
  The effects of 2 tier pay plans on performance are mixed, w/ slightly positive effects on shareholder value   
  Given long run wkr dissatisfaction w/ these plans & their low returns, they have not been widely adopted   
  WKRS ARE OFTEN MORE DISSATISFIED W/ THE FIRM THAN THE UNION, UNDER 2 TIER PAY PLANS, BUT FIRMS IMPLEMENT THEM, REGARDLESS, B/C THEY HAVE A HI WKR TURNOVER RATE & SO CARE LITTLE ABOUT WKR SATISFACTION   
  Under 2 tier pay plans, unless many new wkrs are hired, the union does not experience dissatisfaction w/ the union   
  Under 2 tier pay plans, mgt may face problems b/c wkrs doing equal wk are being paid differently   
  As pay falls behind what other firms pay, dissatisfaction results   
  Dissatisfaction occurs if wkrs compare their outcome given their effort w/in the firm   

 
Internal
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 Outline on  Pay Form
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  PAY FORM IS THE MANNER IN WHICH PAY IS PROVIDED, SUCH AS CASH, DEFERRED COMPENSATION, INSURANCE, PAID TIME OFF, & MORE
 
  Pay components not received in cash are received as either insurance or deferred compensation   
  Insurance typically includes hospital & medical coverage, life, disability, & dental benefits   
  Deferred compensation usually involves pension benefits   
  Non monetary wage forms have advantages & disadvantages   
  Wkrs w/ dependents need life & family health care insure more than those who do not   
  The value of many benefits in untaxed income b/c the value is not reported as income to the recipient   
  Pension contributions are not taxed until the wkr uses them after retiring   
  Some benefits, such as holidays or vacations are paid in cash at the wkr's rate 
 
  FIRMS ARE FOCUSED ON BENEFITS B/C:  THE COST OF BENEFITS ARE RISING FASTER THAN WAGES, THEY ARE A STRONG DRAW FOR WKRS, BENEFITS COSTS ARE DEFERRED & THUS SOMETIMES AVOIDABLE, & SOME BENEFITS COSTS ARE UNDETERMINABLE 
 
  Firms are concerned w/ the form of pay b/c contracts specify the amts of insurance coverage rather than firm contributions, meaning the firm absorbs cost increases 
 
  Since the 80s & the Reagan admin, the wkr now pays a significant proportion, sometimes the majority of the cost of health, life, etc, & the wkrs absorbs cost increases 
 
  Unorganized wkrs hope the union receives a large settlement, which might obligate mgt to do the same for all, ie the unorganized wkrs hope to be 'free riders' 
 
  As health care costs escalate more  rapidly than pay, & wkforce demographics change, firms interests in how benefits are provided increased, & firms, under the 'new labor relations' forged since the Reagan Admin, were able to pass these costs on to wkrs 
 
  Given firms desire for certainty or predictability in contracts' effects, their resistance to benefits packages w/ unknown future costs would be expected b/c these packages specify coverages, not costs 
 
  Health care costs containment has increased in importance for both parties   
Link
 The Table on the Cost / Wkr for Wages & Benefits Increases demonstrates that increases in the costs of benefits increases total cost dramatically, & makes firms more likely to push for overtime b/c benefit costs remain fixed while only wages increase w/ OT   
  Mgts have sought to negotiate contribution limits rather than to pay for coverage, or at least to require deductibles or co pays, & / or move plans to managed care providers   
  B/c benefits packages generally specify coverages, not costs, & b/c benefits costs are per yr costs, benefits cost per hr decrease as the number of hrs wked increases   

 
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Table on the Cost / Wkr for Wages & Benefits Increases 
 
Present
Rate
Total
Cost / Yr
Cost per
Hour
Increase
Offered
Anticipated
Cost
Cost per
Hour
Possible
Cost
Cost per
Hour
Full Time
2080 hrs / yr
$10 / hr
20800
10
.40 / hr
21632
10.40
21632
10.40
Cost of Benefits
$150 / mo
1800
.87
30 / mo
2160
1.04
2340
1.13
Total
  
22600
10.87
  
23792
11.44
23972
11.53
Overtime
2496 hrs / yr
$10 / hr
$15 / hr OT
27040
10.83
.40 / hr
28122
11.97
28122
11.27
Cost of Benefits
$150 / mo
1800
.72
30 / mo
2160
.87
2.34
.94
Total
  
28840
11.55
  
30282
12.13
30462
12.20
The Table on the Cost / Wkr for Wages & Benefits Increases demonstrates that increases in the costs of benefits increases total cost dramatically, & makes firms more likely to push for overtime b/c benefit costs remain fixed while only wages increase w/ OT 

 
  PENSIONS ARE IMPORTANT BENEFITS THAT ARE USUALLY A PAYMENT THAT IS:  USUALLY FIXED, OTHER THAN WAGES, PAID AT REGULAR INTERVALS TO A PERSON OR THEIR SURVIVORS FOR PAST SERVICES, OFTEN BASED ON LENGTH OF SERVICE, AGE, MERIT, POVERTY, INJURY, OR LOSS   
  Pension plans are negotiated by the employee Retirement Income Security Act of 1974 (ERISA)   
  ERISA does not require a firm to offer a pension plan, but where one exists, the firm must comply w/ rules   
  The 2 types of pensions plans are defined benefit & defined contribution plans   
  Defined benefit pension plans specify rules used to determine future pension benefits   
  An example of a defined benefit plan is that a wkr will earn 2% of wage rate of the last 3 yrs of there wk time the number of yrs wked, so a wkr who works 30 ys would get 60% of their wage rate upon retirement   
  Firms face funding risks w/ defined benefit plans b/c of  variations in investment returns over time   
  Defined contribution pension plans specify what the firm will set aside for the wkrs' retirement, but they promise no fixed amt upon retirement   
  Defined contribution pension plans are essentially personal IRAs that have a % of the contribution matched by the firm which are mandated to be invested in the stk mkt, w/ a limited amt of control over the nature of the investments by the wkrs   
  Wkrs prefer to avoid a defined contribution plan b/c the investment risk is shifted to them   
  ERISA obligates firms w/ pension plans to allow all wkrs to participate   
  As wkrs accrue service, they become vested after 5 yrs & own their accrued contributions   
  If wkrs quit, their previous firm must allow them to make a tax free transfer of funds to an IRA   
  If the firm has a defined benefit plan, it must make an annual actuarially based contribution that will cover the expected future retirement costs   
  The firms contribution ensures that if the firm fails, the accrued pension benefits will, never the less be paid   
  Firm contributions must be turned over to a financial trustee (fiduciary) whose responsibility is to  invest them for the benefit of the future retirees   
  Not more than 10% of the plan's assets can be invested in stocks or bonds of the firm   
  In practice, many firms have not met their pension contribution obligation, preferring to use the money for other purposes, & paying pensions from current earnings   
  B/c firms often rely on current earnings, rather than accumulated or saved funds, they often fail to meet pension costs, & many pension systems fail.   
  Other types of benefits might include newborn care, family care, tax free dependent care reimbursement accts, resources & referrals for professional family care, adoption assistance, flexible hrs, & more   
  THE MOST COMMON DEMOGRAPHICS RELATED TO BENEFITS ARE YRS SERVED, IE SENIORITY, & INCOME, IE WAGE RATE   
  Contracts often increase benefits as seniority accrues   
  Amts of vacation are linked to yrs of service   
  W/ longer service, a wkforce will receive more paid time off, increasing the cost of time wked, other things being equal   
  Health care costs are assoc w/ age & gender   
  Under the contract & discrimination laws, if firms provide benefits, they cannot differentiate entitlements based on age & gender   
  May firms self insure while other purchase health insurance from an ins co or contract w/ a health mgt org (HMO)   
  The costs of health care are closely assoc w/ the experienced health events the wkforce encounters health care costs for women are higher until about age 55, then men's annual care costs cross & exceed women's for the rest of their lives   
  B/c negotiated contracts often link benefits & promotions to seniority, turnover of more senior wkrs is reduced in unionized firms   
  Older applicants are  less likely to look for union job b/c they would be unlikely to accrue enough seniority to acquire benefits that seniority confers   
  When no or few benefits being offered, b/c wkrs receive time & a half for OT, a firm reduces costs by hiring new wkrs when more wk is needed   
  When benefits are offered, esp if they exceed 50 % of base pay, a firm would prefer paying OT   
  Benefits in union contracts not add about 41 % to salaries, & less to non union wkplaces   
  The inclusion of wkr tied benefits restricts new hiring   
  Even if benefits are below 50 %, the incidental cost of hiring adds to non wage related costs   
  Firms often prefer paying OT rather than hiring new wkrs b/c OT can easily be reduced if they need to cut production   

 
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 Outline on the  Pay System
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  A PAY SYSTEM IS THE METHOD USED TO DECIDE PAY FOR EACH WKR 
 
  Labor contracts often provide many forms of compensation for membership in the org   
  Benefits are based on membership & are usually unrelated to the number of hrs wked, as long a the wkr was active during a designated period   
  Pay system features are often related to seniority   
  Benefit status seniority refers to the entitlements that individuals accrue from continued employment   
  Pay systems generally provide for step pay increases based on length of service w/in a job or grade level   
  Step increases usually have a cap b/c a certain pay rate is assigned to a given job   
  Tenure influences pay if the pay structure includes steps based on length of service w/in a given grade   
  Tenure may entitle wkrs to use accrued benefits such as retirement 
 
  Some contracts allow wkrs to retire after a defined length of service, often 30 yrs rather than at a specific age 
 
  For all non salaried jobs, wages are calculated on an hourly basis 
 
  The level of wages frequently depends on the amt of time worked during a given period & the time of day during which the work is accomplished 
 
  Overtime (OT) is earned, as defined by law, for hrs in excess of 40 in a week 
 
  Shift differentials are earned for working grave yard shift, typically midnight to 8 am, & for working swing shift, typically 4 pm to midnight 
 
  MERIT PAY PLANS LINK PAY INCREASES TO THE FIRM'S EVAL OF THE INDIVIDUAL WKR'S PERFORMANCE 
 
  Merit pay's strength is that it rewards the hardest wking & most productive wkrs 
 
  Merit pay's weakness is that wkrs that do not receive it may be resentful, & the determination of merit is subjective   
  Unions often resist merit pay b/c it is often so subjective & prone to favoritism   
 
 PIECE RATE PAY PLANS LINK PAY INCREASES TO THE AMT OF OUTPUT EACH INDIVIDUAL WKR PRODUCES 
 
  Over 40% of labor contracts base wages on output levels   
  Piece rate incentive plans have a bargained base output level, above which firms receive extra compensation   
  Depending on the plan, piece rate additions are on a straight line, increasing or decreasing based on production increases or decreases   
  Negotiating an appropriate base is often difficult, & grievances occur when wkrs are transferred to jobs where they lack sufficient experience to exceed the standard   
  Circumstances beyond the wkrs' control can intrude, reducing chances to achieve high output, such as poorly fitting components on an assembly line job   
  GAIN SHARING PLANS PAY BONUSES TO GRPS OF WKRS WHOSE PRODUCTIVITY EXCEEDS AN ESTB STANDARD   
  Gain sharing plans are complex & more difficult to implement that other pay plans   
  Gain sharing plans avoid the pitfalls of merit pay & piece rates b/c everyone shares in some of the profits from increased productivity, recognizing that the causes of increased productivity is the result of both individual, as well as grp / team efforts   
  New instituted gain sharing plans also generally increase profits for the firm   
Link
 See Also:  The Scanlon Plan   
Link
 See Also:  The Rucker Plan   
Link
 See Also:  Impro Share   
  PROFIT SHARING IS A METHOD OF COMPENSATION THAT ALLOWS WKRS TO SHARE CHANGES IN PROFITS, IE INCREASING PAY WHEN THERE ARE GAINS & DECREASING PAY WHEN THERE ARE LOSSES   
  To make labor costs more flexible, ie responsive to changing profits & losses, firms implement profit sharing plans when wkrs forgo increases in their base wages   
  Wkrs' total pay is based on both job level & employer profitability   
  Profit sharing is most common among US auto makers   
  The size of a wkr's bonus depends on his or her proportion of total pay in the unit, the size of the firm's profit, & the agreed formula for determining the size of the pool to share   
Link
 The Exhibit on UAW GM Profit Sharing Formula demonstrates that profit sharing formulas are complex & the share of profits that are shared increases as profits increases   
  Profit sharing makes compensation more flexible b/c during econ downturns, pay goes down as profits fall, potentially reducing the need to lay off wkrs   
  There is evidence that as unemployment increases, firms w/ profit share are less likely to lay off wkrs   

 
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Exhibit on UAW GM Profit Sharing Formula 
"Profits" ... means income earn by US Operations before income taxes & "extraordinary" items ... Profits are before any profit sharing charges are deducted.  Profits also are before  incentive program charges for US Operations 
"Total Profit Share" ... means an obligation of the Corp for any Plan Year in an amt equal to the sum of: 
a.  6 % of the portion of Profits ... which exceeds 0.0 % of Sales & Revenues ... but does not exceed 1.8 % 
b.  8 % of the portion of the Profits ... which exceeds 1.8 % of the Sales & Revenues ... but does not exceed 2.3 % 
c.  10 % of the portion of the Profits ... which exceeds  2.3 % of the Sales & Revenues ... but does not exceed  4.6 % 
d.   14 % of the portion of the Profits ... which exceeds  4.6 % of the Sales & Revenues ... but does not exceed  6.9 % 
e.   17 % of the portion of the Profits ... which exceeds  6.9 % of the Sales & Revenues ...
The Exhibit on UAW GM Profit Sharing Formula demonstrates that profit sharing formulas are complex & the share of profits that are shared increases as profits increases 

 
  SOME COMPENSATED TIME NOT WORKED IS DEFINED BY LAW, EG SOME VACATION & HOLIDAYS, SOME IS DEFINED BY CONTRACT OR CORP POLICY, EG SOME VACATION, STRIKE LEAVE, & MORE   
  Wkrs receive pay when not at work for many reasons such as holidays, vacations, sick leave, jury duty, & more   
  Recent additions to pay for time time wked include the family leave act as passed by the Clinton Admin & then broadened in scope by the Obama Admin   
  Supplementary unemployment benefits (SUB) are paid during layoffs under some contracts   
  SUBs add income from a trust fund to required state unemployment insurance benefits   
  The addition of SUBs enables wkrs to maintain income close to regular straight time wages   
  If layoffs are pervasive & long duration, total benefit payments may exceed the funds available to pay them & SUB ends until funds are restored   

 
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 Outline on  Scanlon Plans
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  SCANLON PLANS ESTB GAINSHARING PROGRAM, BASED ON SUGGESTIONS, WHICH ARE PAID THROUGH BONUSES  
 
 1.  A SCANLON PLAN IS A GAINSHARING PROGRAM IN WHICH EMPLOYEES, AS A GROUP, RECEIVE BONUSES FOR IMPROVEMENTS IN LABOR PRODUCTIVITY 
 
  Scanlon plans are designed to improve productivity   
  Scanlon plans allow wkrs grps to screen & implement suggestions & the suggestion process is under the control of the union or wkrs   
 
 The Scanlon plan was born in the late 30s in a struggling steel mill 
 
  Joseph Scanlon, a union leader, saw that wage increases w/o increased productivity would close the plant 
 
  Scanlon proposed labor & mgt wk together to increase productivity ot which a wage bonus would be linked 
 
  The foundation of the Scanlon plan is that all production employees in a unit participate in increasing productivity & there is equity in reward distribution 
 
  Scanlon plans recognize that abilities are widely distributed in the org & that change in the org's env is inevitable 
 
  2.  SUGGESTIONS FOR PRODUCTIVITY IMPROVEMENT ARE RESEARCHED & IMPLEMENTED THROUGH A JLMC   
 
 Because change occurs & employees at all levels may have solutions to problems or suggestions to improve productivity, the system includes  an open suggestion procedure 
 
 Link
 The Figure:  Scanlon Plan Production Committee details a typical committee structure & their actions in a Scanlon Plan 
 
  The Figure:  Scanlon Plan Production Committee shows that wkr suggestions receive a thorough review & implementation, which leads to a proportional reward for many of the wkrs involved   
  Suggestions are evaluated & acted on by joint  wkr mgt committees who make recommendations up the line 
 
  Suggestions are evaluated by a wk unit's production committee 
 
  If suggestions have merit & can be implemented in the unit, the production committee can implement it 
 
  If the suggestion is questionable or has wide impact, it is sent to a screening committee comprised of executives & employee representatives 
 
  The screening committee is responsible for determining the bonus  which is calculated by comparing the usual share of product costs attributed to labor compared to the most recent actual costs 
 
Link
 The Table:  Simple Labor Formula represents a formula on labor gainsharing which demonstrates that many factors go into determining productivity, not just production rates 
 
  3.  BONUSES ARE USED TO REWARD PRODUCTIVITY & ARE CALCULATED BY A SOPHISTICATED METHOD TO ENSURE FAIRNESS   
  Companywide & individual bonuses are calculated after the screening committee receives operation results 
 
Link
 The Table:  Bonus Report gives an example of a company bonus report   
 
 The Table:  Bonus Report show demonstrates how bonuses are calculated to distribute gain shares among all wkrs based the amt of gain share, while saving some for possible distribution losses in the future   
  The purpose of a Scanlon plan is to increase rewards to labor & mgt for productivity gains, encourage & reward participation, & link pay to performance   
  The plan focuses on reducing labor costs for a given level of output, a factor more directly win workers' control   
  Thus, the behavior outcome relationship is higher than it is for profit sharing????   
  Productivity gains are shared across wk grps which encourages solutions that benefit several depts   
 
 In one Scanlon program, over a nine yr period, they paid bonuses all but 13 months because productivity was consistently up, though it did not increase as rapidly as in the industry as a whole 
 
  Another Scanlon program often failed to pay bonuses because of the orgl env of falling prices, but suggestions & saving have continued to increase   
  SCANLON PLANS MUST ESTB PARTICIPATION, FAVORABLE ATTITUDES, SUFFICIENT TIME FOR THE PLAN, REALISTIC EXPECTATIONS, MGT COMMITMENT, ETC.   
  For a Scanlon plan to succeed:   
  1.  wkrs must perceive that participation is necessary   
  2.  mgt attitudes must be favorable   
  3.  sufficient time must be allowed   
  4.  expectations should be high but realistic   
  5.  a high level mgt exec must lead the implementation   
  Company size, plant size, or the type of production tech is not related to the success or failure of the Scanlon Plan   

 
Top
  
Table: Simple Labor Formula
Sales $  96,000
Returned Goods       3,000
Net sales     95,000
Inventory +       5,000
Production Value $100,000 
Labor Bill  
      Wages $  16,000
      Salaries       8,000
      Vacations and holidays       1,800
      Insurance       1,700
      Pensions          500
      Unemployment          500
      FICA       1,500
            Total labor bill $  30,000
Ratio          .30
The Table:  Simple Labor Formula shows that represents a formula on labor gainsharing which demonstrates that many factors go into determining productivity, not just production rates
Source: C.F. Frost, J.H. Wakeley, and R.A. Ruh, The Scanlon Plan for Organization Development: Identity, Participation, and Equity (East Lansing: Michigan State University Press, 1974), p. 103.

 
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Table: Bonus Report
a. Scanlon ratio 0.40  /  1.00
b. Value of production $ 100,000
c. Expected Costs (a x b)      40,000
d. Actual Costs      30,000
e. Bonus pool (c-d)      10,000
f. Share to company - 20% (e x 0.20)        2,000
g. Share to employees - 80% (adjusted pool) (e x 0.80)        8,000
h. Share for future deficits - 25% of adjusted pool (g x 0.25)        2,000
i. Pool for immediate distribution (g - h)        6,000
j. Bonus for each employee* as a percentage of pay for the production period (i/d)           20%
The June pay record might look like this for a typical employee:
 
Name Mary Smith
Monthly Pay for June $ 900
Bonus Percent    20%
Bonus $ 180
Total Pay $ 1,000
* This example assumes all employees are participating in the plan at the time this bonus is paid; for example, there has been no turnover and no employees are in their initial 30-, 60-, or 90- day trial.
Table:  Bonus Report show demonstrates how bonuses are calculated to distribute gain shares among all wkrs based the amt of gain share, while saving some for possible distribution losses in the future
Source: Modified from C.F. Frost, J.H. Wakeley, and R.A. Ruh, The Scanlon Plan for Organization Development: Identity, Participation, and Equity (East Lansing: Michigan State University Press, 1974), p. 15.

 
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 Outline on  Rucker Plans
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  A RUCKER PLAN IS A GAINSHARING PROGRAM IN WHICH WKRS, AS A GRP, RECEIVE BONUSES FOR IMPROVEMENTS IN LABOR PRODUCTIVITY & REDUCTIONS IN MATERIAL COSTS 
 
  Rucker plans, which were named after the indl engineer who developed them, have some of the participative elements of Scanlon plans, but mgt names an idea coordinator to handle suggestions 
 
  Rucker plans are designed to improve productivity   
  Rucker plans allow wkr grps to screen & implement suggests, & the suggestion system is controlled by mgt, not the wkrs nor the union   
  Bonuses are calculated by determine the historical value added by direct labor 
 
  Any improvement in value added will earn a bonus 
 
  Wkrs receive bonuses based on output increases, lower scrap rates, & other material or subcontracting savings 
 
  If costs increase in the the face of improved productivity, it will negate bonuses   
  Rucker plans are good for those unions or firms who are not ready to participate in a full blown Scanlon plan 
 

 
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 Outline on  Impro Share Plans
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  IMPRO SHARE IS A GAINSHARING PLAN IN WHICH GRPS OF EMPLOYEES RECEIVE BONUSES AS  A RESULT OF  PRODUCING PRODUCTS IN FEWER HOURS THAT STANDARDS REQUIRE 
 
  Impro Share plans shares saving resulting form performance improvement over an engineered standard & allows employers to make "buyouts" or productivity improvements if new technologies are introduced   
  Impro Share plans tie pay to improve productivity 
 
  While consultative mgt is suggested, participation is minimal except a bonus committee is responsible for determining some aspects of the bonus formula 
 
  Impro Share plans have complex bonus formulas where the actual hours wked are subtracted from the base value earned hours & if the result is positive, then that savings is shared as a bonus
 
  Impro Share plans allow owners to direct incentives to specific jobs or grps 
 
  Impro Share plans make it more difficult to determine wage costs 
 
  Wkrs have difficulty calculating what they will earn 
 
  In one Impro Share plan, productivity increased 8 % the 1st yr & was up 17 % by the 3rd yr 
 
  Often productivity gains can be attributed to reductions in defects & downtime 
 
  Larger wkplaces had lower rates of improvement, suggesting that free riding is less of a problem in smaller plants 
 

 
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 Outline on  Union Effects on Pay
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  UNIONS CREATE PREMIUMS FOR WKRS ON WAGES & BENEFITS, BUT THESE PREMIUMS VARY BY:  TYPE OF WKR, MKT CONDITIONS, THE CONCENTRATION OF THE IND, LEVEL OF UNIONIZATION IN THE INDUSTRY, & MORE 
 
  Unionization fixes wages for the unionized firm   
  Hi levels of unionization & pattern bargaining w/in an industry decrease competition among firms   
  Union influences on wages & some specific org env characteristics may vary based on wage differences both among firms, as well as among unionized & non unionized firms   
  Analyses of the effects of unions on wages finds positive effects   
  Effects can be examined at the industrial, occupational, & individual levels  
  Wage effects are greater for increased unionization w/in an industry than for increased unionization w/in an occupation   
  Industry effects increase as competition decreases, while occupational effects are most pronounced through increased union representation at the local level   
  Where a firm has built a degree of asset specificity, ie methods or processes unique to the org, unions are able to capture larger than normal increases 
 
  Wage premiums do not come w/o a cost to labor b/c industries having the highest wage premiums have the greatest employment decreases during econ downturns 
 
  A variety of union wage effect occur across definable grps 
 
  Wkrs who have:  less ed & short tenure, are nonwhite, younger, or older, male transport, operatives, or laborers, are more highly advantaged, ie able to capture large wage premiums 
 
  Across wkr subgrps, becoming unionized, remaining unionized, or becoming employed in unionized orgs is assoc w/ higher wages 
 
  Unionization may occur b/c of dissatisfaction w/ low wages compared to the wages of other firms or other wkrs in one's community 
 
  Unions can also raise wages from a below average position to one of equivalence w/ others 
 
  A study of firms facing organizing drives found that in the yr subsequent to the drive pay levels were higher than those of a control grp facing no union activity 
 
  The study also found that firms where organizing activity occurred had pay levels lower than comparative levels before the drive began   
  The premium following unionization activity was nowhere near the level found btwn union & nonunion firms, in general, w/ initial contract demands focusing more heavily on issues of wkplace democracy   
  UNION / NONUNION WAGE LEVEL DIFFERENCES  OVER TIME:  RANGED FROM 2 TO 46 %, ARE GREATEST DURING RECESSION, LEAST DURING INFLATION,  ARE LESS IN COMPETITIVE IND, ARE NOT CLOSELY TIED TO CONCESSIONS   
  Union wage premiums have swung widely over the last 80 yrs   
  Wage premiums have ranged from a high of 46 % in the 30s to a low of 2 % in the late 40s   
  Premiums were greater during recessions & narrowed during inflation b/c of the rigidity in long term contracts   
  Improved productivity & reduced labor intensity are both assoc w/ larger wage increases   
  Profits & wage increases are negatively related meaning that wage increases are often gained independently of profitability, causing future profits to be lower   
  Firms are more likely to grant increases in less concentrated industries w/ improving productivity   
  Bargaining power in highly competitive industries is reduced b/c competitive products would be easy substitutes, thus frequently highly competitive industries must be organized as a whole rather than 1 firm at a time   
  In the short run, union wages are insensitive to changes in the unemployment rate compared to wages in the nonunion sector   
  There is no evidence that union wage premiums declined as a result of wage concessions in negotiations   
  Real wage concessions did not occur in the early 80s & inflation abated faster than nominal wages   
  Concessions were more frequently negotiated in small, hi paying firms w/ lower union coverage   
  A hist of layoffs & poor stock performance also increased their likelihood   
  From 67 to 77 union wkrs received a 24 % premium   
  Nonwhites, Southerners, & low ed persons gained higher premiums   
  Real wages for both the union & the nonunion sector increased in tandem during this period   
  The average union nonunion gap is about 10 %; narrowing occurs during periods of expansion & widening during periods of hi unemployment as a result of the rigidities of contracts   
  STRUCTURAL & LEGAL FACTORS IMPACTING WAGE PREMIUMS INCLUDE:  GLOBAL COMPETITION, INCREASED RIGHT TO WK STATES, DEREGULATION OF INDUSTRY   
  In the 70s, union wages were about 18 % over those who were not unionized   
  The inverse relationship btwn unemployment & wages became more pronounced in the early 80s   
  Factors positively influencing wage levels were plant size & industrial concentration   
  See Also:  Deindustrialization   
  Global competition influences union pay premiums   
  For every 10 % increase in mkt share gained by imports in an industry, the differential narrowed about 2 %   
  Unions are less likely to seek increases in domestic industries w/ heavy import competition   
  Heavily unionized industries were most resistant to a narrowing of differentials   
  Foreign production by US firms appears to have less effect on employment of union members than on nonunion wkrs   
  In the 80s, the anti union sentiment of the Reagan Admin resulted in more states passing right to work laws & deregulation of industry   
  In states w/ right to work laws, wkrs cannot be required to belong to a union as a condition of employment   
  For union members, right to work laws or strong campaign activity for such laws is assoc w/ lower wages   
  Right to work laws are also assoc w/ inequality in income dist while unionization decreases inequality   
  Deregulation occurred during the 80s & this affected wages   
  UNION SPILLOVERS INCREASE NONUNION WAGES & BENEFITS   
 Link
 See Also:  Externalities   
 
 An externality is a cost or benefit that is not recognized, ie it is external to the transaction 
 
  An externality, aka a spillover, is a benefits or cost associated w/ the consumption or production of a good or service which is obtained by or inflicted w/o compensation on a party other than the buyer (user) or seller (producer) of the good or service   
  Externalities are costs or benefits that are not included in the cost or price structure of the mkt   
  An external benefit, aka a spillover benefit, is the benefit obtained neither by producers nor by consumers of a production but w/o compensation by a 3rd party, including society as a whole   
  An external cost, aka a spillover cost, is the cost of producing a product borne neither by producers nor by consumers of the product buy w/o compensation by a 3rd party, including society as a whole   
  Externalities or spillovers are mkt relationships which produce the "wrong" amounts of certain goods & services   
  Examples of spillover benefits include the benefits to a community or a small business when a new major plant locates in a county & the benefit I receive when you are vaccinated   
  Examples of spillover costs include the costs to a community or a small business when a major plant closes, & the cost I incur when you are not vaccinated   
  Union wage increases lead to nonunion increases, but the reverse is not true   
   Hi unemployment dampens the union increase rate, while increasing cost of living raise them   
  Union to union spillovers are common, suggesting that pattern bargaining has influenced union settlements   
  Wages in highly unionized Las Vegas hotel, gaming, & rec industry is about 40 % higher than in Reno which is nonunion   
  Wages for hotel wkrs in nonunion hotels in cities compared to unionized cities is substantially higher   
  Political & equity issues promote spillovers over & above mkt forces   
  Nonunion wage changes do not appear to have any effects on union wage levels   

 
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 Outline on  Externalities or Spillovers
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  AN EXTERNALITY IS A COST OR BENEFIT THAT IS NOT RECOGNIZED, IE IT IS EXTERNAL TO THE TRANSACTION   
 
 An externality, aka a spillover, is a benefit or cost associated w/ the consumption or production of a good or service which is obtained by or inflicted w/o compensation on a party other than the buyer (user) or seller (producer) of the good or service
 
  Externalities are costs or benefits that are not included in the cost or price structure of the mkt   
 
 An external benefit, aka a spillover benefit, is the benefit obtained neither by producers nor by consumers of a production but w/o compensation by a 3rd party, including society as a whole 
 
 
 An external cost, aka a spillover cost, is the cost of producing a product borne neither by producers nor by consumers of the product but w/o compensation by a 3rd party, including society as a whole 
 
  Externalities or spillovers are mkt relationships which produce the "wrong" amounts of certain goods & services   
 
 Examples of spillover benefits include the benefits to a community or a small business when a new major plant locates in a county, & the benefit I receive when you are vaccinated 
 
 
 Examples of spillover costs include the costs to a community or a small business when a major plant closes, & the cost I incur when you are not vaccinated 
 
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 The Table on Externalities shows that externalities are common & gives examples of spillover benefits & costs   
 
 FOUR major areas of externalization or spillovers include:  the medical field, the environment, property rights, & econ development (or lack of) 
 
  In the medical field, the medical costs of cigarettes are borne by the general public & not just the mfrs & users; therefore, the costs of cigarettes spillover onto everyone, even non-smokers; & since mfrs do not pay these costs they escape costs that they do not have to pay for   
  In the environment, the costs pollution of pollution are borne by the general public & not just by the mfrs & the users of the products; therefore, the costs of pollution spillover onto everyone, even people who do not use the products that are produced by polluting factories or by the polluting products; & since mfrs do not pay for the costs of pollution, they escape costs that they do not have to pay for   
  In the area of property rights, the costs of unsafe products may be borne by everyone   
 
 In the area of econ development, plant closings are encouraged by the fact that large firms pay only part of the total costs entailed in moving from location to location 
 
  Plant closings & relocations are externalized in that the firms pay only part of the cost while the workers & the general public experiences many of the costs   
 
 Many costs involved in plant closings are externalized & are paid by taxpayers or by individuals, especially the former employees 
 
 
 Externalized costs in plant closings include tax write offs negotiated btwn the firm & the new localities in which they relocate, accelerated depreciation allowances, & utility discounts 
 
 
 From 1996 to 2000, 61% of US corps in Am paid no corp taxes & 71% of alien corps in Am paid no corp taxes, & the rate of no tax payment is increasing 
 
 
 Costs which are externalized to a state or local econ reduce local tax revenues 
 
 
 The costs of attracting mfrs means that other taxes such as personal property taxes or sales taxes must be increased 
 
  The increased taxes to pay for business subsidies create additional difficulties for communities that are trying to attract skilled labor & professional workers who are discouraged from moving to an area w/ high taxes   
  The costs of attracting mfrs reduces local revenues & then local services must be curtailed   
 
 The increased taxes to pay for business subsidies create additional difficulties for communities that are trying to attract skilled labor & professional workers who are discouraged from moving to an area w/ poor services such as parks, police, ed, etc. 
 
 
 From the firms' standpoint, the pitting of one community or region against another to attract them to their community offers advantages 
 
 
 In order to attract jobs, firms induce communities to offer concessions such as lower taxes, pollution standards, & other regs, & demanding subsidies, tax holidays, free infrastructure such as water, sewer, internet, roads, etc 
 
 
 Regions such as Lenowiseco have built industrial parks, offered tax breaks, low cost worker training programs, free space in buildings, tax holidays, free infrastructure, & more, all in "behind closed doors" negotiations 
 
 
 Offers by regions to attract a firm may be rational to the firms & the communities but they are irrational for the industry & the nation as a whole 
 
  If all businesses in an industry are receiving subsidies, then no business receives any benefits over other businesses because they all cancel each other out   
  When all businesses in an industry receive subsidies, it is like both teams in a game receiving the same amount of extra points   
 
 If all regions in a nation are offering subsidies, then no regions receive any benefits over other regions because they all cancel each other out 
 
 
 The costs of attracting businesses include the costs that regions losing the businesses must pay including moving families, shutting down schools, rebuilding schools in new locations, building new streets, etc   
 
 Federal tax codes allow much of the value of physical plant & equipment of closed factories to be counted as depreciation against income from new plants   
  The loss of jobs & the loss of social safety nets because of plant closings contribute to increased problems of poverty, homelessness, & marginality   

 
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Table on Externalities
Spillover Benefits Spillover Costs
FB MC TF
are the benefit obtained neither by producers nor by consumers of a private product but, without compensation, by a third party (society as a whole)  are the cost or the producing of a private product borne neither by producers nor by consumers of the product but without compensation by a third party (society as a whole)   
are under produced in a free mkt system  are over-produced in a free mkt system   
Examples 

vaccines 
TB x rays 
education 
roads 
infrastructure 
clean air, water, etc 
environmental preservation 

 Examples 
smoking 
obesity 
unsafe products 

pollution 
environmental destruction 

econ development subsidies 

  
The Table on Externalities shows that externalities are common & gives examples of spillover benefits & costs 

 
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 Outline on   Union Effects on Pay Structures, Forms, & Systems 
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  UNIONS' EFFECTS ON PAY STRUCTURES REDUCES PAY DISPERSION & CREATES STEEPER WAGE STRUCTURES 
 
  As compared w/ nonunion firms, w/in job variances in wages are usually lower in unionized firms   
  Those moving form nonunion to union employment had lower wage dispersions, while for those who made opposite moves, the reverse was true   
  Wage compression is increased by across the board wage increases   
  The average decrease in dispersion attributed to unionization is 22 %   
  Differences in wage level dispersion btwn union & nonunion wkrs decreases as the wage rate & job status or complexity increases   
  Wage dispersion in wages decreases in unionized firms b/c that is what the wkrs vote for; ie wkrs have a more egalitarian attitude towards one another while firms would prefer to see more competition among wkrs   
  Wkrs who get a chance to vote & thus influence wage dispersion support the reduction or elimination of individual factors on wage increases   
  The wkr as voter system common in many unionized wkplaces creates steeper wage structures, ie wages start low & go to a hi level 
 
  There is usually a strong relationship btwn length of service, amt of ed & pay 
 
  UNIONS' EFFECTS ON PAY FORMS CREATES MORE COMPENSATION AS BENEFITS & LESS AS PAY   
  Union members prefer larger proportions of their pay as benefits   
  Mgt prefer lower proportions of wkrs' pay as benefits   
  Unions have the greatest impact on small or low wage firms, & they most influence the costs of insurance, followed by vacations & holidays, overtime premiums, & pensions   
  Compared to nonunion situations, unions have the greatest relative influence on pensions, possibly reflecting the returns to seniority included in most contracts, followed by insurance & vacation holidays   
  Unions have a negative effect on the use of overtime, but not premium rates, sick leave, & bonuses   
  Union impact is 17 % greater for benefits than for straight time pay   
  Pension wealth is substantially greater for unionized wkrs than for comparable nonunion wkrs   
  Differences appear greatest for collectively bargained plans having higher initial benefits, earlier retirement opportunities, & larger post retirement increases in benefits   
  In the public sector, prevailing wage laws, wages of construction wkrs were higher & pension benefits were substantially higher, reflecting firm preferences for avoiding forms of compensation that would subject them to payroll taxes   
  UNION EFFECTS ON PAY SYSTEMS MAKES THESE SYSTEMS MORE GROUP ORIENTED, & LESS FOCUSED ON THE INDIVIDUAL   
  Unionized wkrs are more likely to determine pay increases using easily identifiable criteria & automatic progression & are less likely to have merit reviews or other forms of individual determinations   
  Union jobs are more repetitive, have more measurable performance criteria, & have less need to apply incentive pay b/c performance monitoring is easier   
  Across the board increases are frequent, causing compression in the pay structure   
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 The Table on a Summary of Union / Nonunion Differences on Compensation Effects demonstrates that the impact of unions on wages & benefits is significant across a range of factors, including:  pay levels, benefits levels, industries, types of labor mkt concentration, & more   

 
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Table on a Summary of Union / Nonunion Differences on Compensation Effects
Variable Finding
Wage Rates  Union / nonunion hourly wage differential is btwn 10 & 20 % 
Fringe Benefits  Union / nonunion hourly fringe benefits differential is btwn 20 & 30 % 
The fringe benefits differential is higher for union wkplaces at all levels of compensation
Wage Dispersion  Wage inequality is  lower among union members that among comparable nonmembers & total wage dispersion is lowered by unionism 
Wage Structure Wage differentials btwn wkrs who are different in terms of:  race, age, service, skill level, & ed appear to be lower under col barg 
Cyclical Responsiveness
of Wage Issues 		 Union wages are less responsive to labor mkt conditions than nonunion wages 
Determinants of 
Compensation 
Differential 		 The union compensation advantage is higher the greater the % of a mkt's wkrs who are organized 
There is not relationship btwn mkt concentration & wage differentials 
Differentials are large is some regulated mkts & decline as firm size increases 
The Table on a Summary of Union / Nonunion Differences on Compensation Effects demonstrates that the impact of unions on wages & benefits is significant across a range of factors, including:  pay levels, benefits levels, industries, types of labor mkt concentration, & more 

 
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 Outline on  Union Effects on Firm Performance 
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  UNION EFFECTS ON FIRM PERFORMANCE ARE THAT THE WKFORCE IS  MORE:  EXPERIENCED, KNOWLEDGEABLE, MORE SKILLED, ABLE, & OLDER
 
  Unionization & the usually resulting seniority rules change wkrs orientations toward long run employment & benefits   
  The effects of unionization on mobility & turnover result in an older & more experienced wkforce than their non union counterparts   
  Estimates indicate human capital per wkr, ie knowledge, skills, & abilities related to the job, is about 6 % higher in unionized settings   
  PRODUCTIVITY IN UNIONIZED FIRMS IS GENERALLY HIGHER  
  Overall unionized firms are about 20 % more productive than non unionized firms; however, they are also about 20 % less profitable   
  Productivity differences in favor of unionized firms are generally confined to blue collar jobs & the private sector   
  Unionization is generally assoc w/ lower shareholder returns   
  B/c a unionized wkforce has higher wage costs, in contrast w/ unorganized firms in the same industry, a unionized firm should be at a competitive disadvantage   
  Industry level studies find that unionized firms are 24 % more productive than non union firms   
  If the extent of unionization in the industry is considered, the productivity effect increases to 30 %   
  Unionization has an impact on wkr qual w/in the firm as measured by:  experience, training, ed, & skill   
  Wkr qual in union firms is 11 % higher, while non production wkr qual is lower by 8 %   
  W/in industries, unionization appears to have differential effects   
  In the construction industry, productivity of unionized wkrs on private sector projects were 51 % more productive than their non union counterparts   
  Differentials in the construction industry were lower in public sector jobs than in private sector jobs   
  The lower differentials in the construction industry in public sector jobs than in private sector jobs is due to prevailing wage legislation applying to fed & state projects that require that the union wage in an area be applied to all wkrs, thereby eliminating any wage advantage for non union contractors   
  In ed, student achievement was negatively affected by unionization among public schoolteachers  through increased use of admin & reductions in instruction time, but achievement was positively influenced through increased prep time, teacher experience, & lower student / teacher ratios   
  In hospitals & nursing homes productivity was higher in unionized estb in the private sector, but no different in public sector estb   
  In the auto parts ind, there was little difference in productivity btwn unionized & non unionized firms   
  Decreases in profitability may occur as a result of firms extending wage increases to non represented wkrs to avoid further unionization   
  Productivity increases are found following unionization for represented wkrs, this may not carry over to non union wkrs who receive increased pay   
  Higher turnover in non union orgs explains productivity differences   
  B/c experience is related to skill levels, unionized firms have higher skill levels, leading to greater productivity   
  B/c union contract reduce wage dispersion w/in jobs in firms, wkrs believe seniority  based pay sys reduce competition btwn wkrs & make them willing to share job info & train new wkrs   

 
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 Outline on  Organizational Investment, Growth Decisions, Profitability, & Returns to Stockholders
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  ORGL INVESTMENT & GROWTH DECISIONS IN UNIONIZED FIRMS IS LOWER THAN IN NON UNIONIZED FIRMS 
 
  Since unionization leads to wage premiums, unless productivity increases as rapidly as labor costs, labor becomes more expensive relative to capital   
  Production technologies shift, moving away from least cost combinations   
  Unionized firms invest about 20 % less in physical capital & have lower R & D budgets compared to equivalent non union firms   
  Differences in physical capital & R & D budgets is related to the belief that returns to investment have been decreased by higher labor costs assoc w/ unionization   
  Unionization leads to increased capital intensity   
  Employment growth in unionized plants are also about 3 to 4 % lower than non union plants   
  PROFITABILITY & RETURNS TO SHAREHOLDERS INCREASES W/ CONCESSIONS, IE DECREASING WAGES RESULTS IN HIGHER PROFITS  
  Wage concessions in airlines during the 80s & 90s were related to share price increases   
  Concessions in 1 airline were advantageous for profitability b/c share prices in other airlines dropped on the announcement of the concessions   
  Prior to deregulation, investors responded positively to increases for flight attendants, but negatively to cuts for mechanics   
  Following deregulation, cuts  for flight attendants, clericals, & pilots were positive, reflecting the general unavailability of alt opportunities for these occupations   
  Takeovers of unionized firms result in 41 % higher shareholder returns compared w/ takeovers of  non union firms   
  Wage concessions following acquisition of unionized firms have averaged about 8 % or half of the union premium   
  Unions have not had effects on firm insolvency   
  The rates of union & non union plant closures in mfr are about equal   
  While profitability is lower in unionized firms, insolvency may be related to mgt's failure to convey info for the union to be able to make a saving concession   

 
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 Outline on  Wage Issues in Contracts
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  WAGE ISSUES IN CONTRACTS HAVE CHANGED SINCE THE REAGAN ADMIN, & HAVE GENERALLY BECOME LESS WKR FRIENDLY
 
  Contracts differ in the degree to which they contain particular types of wages & benefit clauses   
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 The Table on Basic Wage & Benefits Clauses in Contracts demonstrates that many contracts have clauses on:  deferred wage increases, early retirement, disability, & life insurance, but few contracts have clauses on:  COLAs, termination pay, work or pay guarantees, maternity, or hospitalization   
  Btwn 1979, the beginning of the Reagan Era, & the roll back of the New Deal policies of FDR, & the present, the pervasiveness of certain contract clauses has changed   
  Dental insurance has increased, but hospitalization & other forms of med insurance have decreased   
  Hospitalization & other forms of med insurance is now mandated by the Affordable Healthcare Act of 2012 (aka AHA or Obamacare), but provisions mandating that businesses offer these & other med related provisions were postponed until 2015, & may be over ruled by the courts, or written out of the law   
  Income maintenance has remained at about the same level, while cost of living allowances (COLAs) have declined   
  Concessionary situations have often been accompanied by improvements in job security   

 
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The Table on Basic Wage & Benefits Clauses in Contracts
Clause
% 
Containing
Clause
Wages  
      Deferred Increases 
 89 %
      Shift Differentials 
86
      Job Classification Procedures 
60
      Work Progression 
49
      Incentive Plans 
42
      Cost of Living Adjustments (COLA) 
34
      Two Tier Structure 
27
      Lump Sum Payments 
23
      Termination Pay 
15
      Hiring Rates 
11
      Wage Reopeners 
8
Income Maintenance   
      Some Provision 
53
      Severance Pay 
40
      Supplementary Unemployment Benefits 
14
      Work or Pay Guarantee 
13
Pensions   
      Some Provisions 
99
      Early Retirement 
98
      Disability 
89
      Noncontributory Plan 
93
Insurance   
      Life 
99
      Dental Care 
82
      Sickness & Accident 
81
      Accidental Death & Dismemberment 
75
      Comprehensive Medical 
70
      Medical Related Insurance 
64
      Alcohol & Drug Abuse Treatment 
58
      Surgical 
52
      Prescription Drugs 
47
      Major Medical 
46
      Optical Care 
43
      Maternity 
42
      Hospitalization 
30
      Doctors' Appointments 
29
      Miscellaneous Medical expense 
23
The Table on Basic Wage & Benefits Clauses in Contracts demonstrates that many contracts have clauses on deferred wage increases, early retirement, disability, & life insurance, but few contracts have clauses on COLAs, termination pay, work or pay guarantees, maternity, or hospitalization 

 
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 Outline on the  Minimum Wage
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  -  Supplement:  Schmitt, John (February 2013). "Why Does the Minimum Wage Have No Discernible Effect on Employment?". Center for Economic and Policy Research. Retrieved 2013-10-06.
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  THE MIN WAGE IS THE RATE OF PAY ESTB BY THE FED GOVT AS THE MINIMUM FIRMS CAN PAY MOST WKRS, IE THOSE IN INTERSTATE FIRMS, FIRMS THAT EARN $ 500 k / YR, NOT IN AG, NOT A FAMILY BUSINESS, & MORE 
 
  Some states & some cities estb their own min wage standards, which may be higher or lower than the fed min wage in order to cover intra state business, & others, or in some cases to estb a wage above the min standard   
  Non fed min wages range from $ 6.25 / hr in AR to $ 15 / hr in Seattle   
  Since the passage of the Fair Labor Standards Act (FLSA) in 1938, the US has had a fed minimum wage 
 
  The min wage has ranged from about 40 to 50 % of the average wage paid to mfr wkrs & is $7.25 in 2014 
 
  The fed min wage prohibits firms from paying covered wkrs less than $7.25 / hr in 2014   
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 The Graph on the Fed Min Wage in Real  & Adjusted for Inflation Dollars demonstrates that in the min wage in the 2010s is about 64 % of its peak value of $11 & about 57 % above its min value of $4   
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 The Chart on the Ratio of the Min Wage to Median Wage for Developed Econs demonstrates that relative to the median wage, the US has a low min wage compared to other developed nations   
 
 Roughly 90 % of all non supervisory wkrs are covered 
 
  Some idea of the empirical problems of the min wage debate can be seen by looking at recent trends in the US   
  The minimum wage fell about 29 % in real terms btwn 1979 & 2003   
  For the median worker, real hourly earnings have increased since 1979; however, for the lowest paid wkrs there has been a significant decrease in the real wage w/o much decrease in the rate of unemployment   
  A major question of the min wage is how effective is the min wage as an antipoverty device? 
 

 
Graph on the Federal Minimum Wage in Real (Nominal) & Adjusted for Inflation (2013) Dollars 
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The Graph on the Fed Min Wage in Real  & Adjusted for Inflation Dollars demonstrates that in the min wage in the 2010s is about 64 % of its peak value of $11 & about 57 % above its min value of $4 

 
Chart on the Ratio of the Minimum Wage to Median Wage for Developed Econs, 2011
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The Chart on the Ratio of the Min Wage to Median Wage for Developed Econs demonstrates that relative to the median wage, the US has a low min wage compared to other developed nations 

 
  THE CASE AGAINST THE MIN WAGE IS THAT IT REDUCES OVERALL EMPLOYMENT BY FORCING LAY OFFS, & EVEN BY MAKING SOME SMALL BUSINESSES UNPROFITABLE   
  Critics  note that the above mkt equilibrium min wage pushes firms to hire fewer wkrs & even lay off wkrs   
  In econ terms, critics contend that an above equilibrium wage moves firms back up their down sloping labor demand curves & causes unemployment, particularly among teenage wkrs   
  The higher wage costs may even force some firms out of business   
  The result is that some of the poor, low wage wkrs whom the min wage was designed to help will now find themselves out of wk   
  Critics say a wkr who is unemployed at a min wage of $7.25 per hr is worse off than if she or he were employed at the mkt rate of say $5.50 per hr   
  A criticism of the min wage is that it is poorly targeted as an antipoverty device   
  Some argue that increasing the min wage might reduce youth employment b/c these wkrs are likely to have fewer skills than older wkrs   
  The min wage  is designed to provide a 'living wage' which will allow less skilled wkrs to earn enough to they & their families can escape poverty   
  Critics argue that the primary impact of the min wage is on teen wkrs, many of whom belong to the mid or upper mid classes   
  Some economics research has shown that restaurant prices rise in response to minimum wage increases   
  THE CASE FOR THE MIN WAGE IS THAT IT:  PROVIDES HIGHER INCOME TO THOSE AT THE BOTTOM OF THE OCCUPATIONAL LADDER, MAKES WKRS MORE PRODUCTIVE, REDUCES TURNOVER, & THUS REDUCES THE NUMBER OF PEOPLE LIVING IN POVERTY / RECEIVING GOVT SUPPORT   
  Supporters note that the wkrs who remain employed at the min wage will receive higher incomes than otherwise   
  Advocates of the min wage claim that critics assume a competitive & static mkt   
  The imposition of a min wage in a monopsonistic labor mkt suggests the min wage can increase wage rates w/o causing unemployment   
  Higher min wages may even result in more jobs by eliminating the monopsonistic firm's motive to restrict employment   
  The imposition of an effective min wage may increase labor productivity, shifting the labor demand curve to the right, ie increasing the demand for labor, & offsetting any unemployment effects which the min wage might otherwise induce   
  The min wage increases productivity by way of the 'shock effect' which states that higher wages imposed by the min wage will shock firms into using labor more efficiently & so productivity rises   
  Higher wages will increase the real incomes & therefore the health, vigor, motivation, & loyalty of wkrs, making them more productive   
  Higher wages mean there is less turnover in the lower level job mkt, & wkrs whom stay at one job are more productive, & costs of wkr turnover are reduced   
  In a mkt econ, as opposed to a command econ, the govt can legislate wage rates by passing laws, but it cannot legislate the number of jobs available   
  Min wage laws force firms to pay wkrs socially acceptable & equitable wages, particularly in ind in which laborers are not organized   
  The determination of a socially acceptable, equitable wage is a value judgment   
  THE EVIDENCE FOR THE MIN WAGE IS THAT OVERALL IT RAISES THE INCOME OF THE LOWER CLASS THOUGH IN LIMITED CASES, IT MAY REDUCE EMPLOYMENT   
  The consensus of the many research studies of the min wage is that it does cause some unemployment, particularly among teenage wkrs 16 to 19 yrs old   
  It is est that a 10 % increase in the min wage will reduce teen employment by 1 to 3 %   
  Young adults 20 to 24 yrs old are adversely affect in that a 10 % increase in the min wage reduces employment by 1 % or less   
  Blacks & women, who are disproportionately represented in the low wage occupations, tend to suffer larger declines in employment that do white males   
  Those who remain employed receive higher incomes & tend to escape poverty   
  The overall antipoverty effect of the min wage is positive on the whole since even w/ fewer employed, more money is going to the lower class & more people are pulled out of poverty by higher paying jobs than put into it by not being hired or by being laid off   
  The net positive or negative effect is impacted by the industry, the stage in the econ cycle, the political / admin regulatory climate, the elasticity of demand for labor, the profit level of the industry, the level of mkt concentration, & more   
  The amt of income lost by the unemployed & the income gained by those who keep their jobs will depend on the elasticity of demand for low skilled labor   
  Demand for teen / unskilled labor is quite inelastic so that income gains assoc w/ the min wage exceeds income losses   
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 The Graph of the Elasticity of Labor for Minimum Wage Jobs demonstrates that the demand for low wage is inelastic, meaning that under current econ conditions firms need this labor so much that they will not change their demand for it, ie reduce employment, even if wages increase   
  The case made by critics of the min wage would be stronger if the demand for teen / unskilled wkrs were elastic   
  In econ terms, the impact of the min wage depends ultimately on the price elasticity of demand & supply of labor   
  The marginal revenue product (MRP) of labor is that about of additional product or income that a firm will receive when it hires one more wkr   
  Generally economists agree that the min wage counteracts the monopsony power of firms by setting wages at the level that more nearly equals the MRP of labor   
  Firms will hire more wkrs as long as they make more money, therefore the min wage raises the MRP of labor, resulting in less hiring if the min wage is at or above the MRP   
  While there is no widespread agreement on what the MRP of labor is at any pt in time, one can observe that b/c firms who employ min wage wkrs are continuing seeking more wkrs, that the current min wage is below the MRP of labor   
  It is sufficient to say that minimum wage increases are unlikely to have a simple linear effect on employment   

 
Graph of the Elasticity of Labor for Minimum Wage Jobs 
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The Graph of the Elasticity of Labor for Minimum Wage Jobs demonstrates that the demand for low wage labor is inelastic, meaning that under current econ conditions firms need this labor so much that they will not change their demand for it, ie reduce employment, even if wages increase 

 
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 Outline on the  Ratchet Effect on Wages
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  THE RATCHET EFFECT IS THE TENDENCY FOR THE PRICE LEVEL TO RISE WHEN AGG DEMAND INCREASES, BUT NOT FALL WHEN AGG DEMAND DECLINES B/C THE PRICE OF RESOURCES & WAGES GENERALLY GO UP, BUT NOT DOWN 
 
  Demand today is generally seen as, when plotted on a price & output chart, seen as being a J curve w/ the horz part of the J curve being the Keynesian range, the diagonal part of the J curve being the intermediate range (which is considered to be the dimensions of a normal supply curve), & the vertical part of the J curve being the classic range   
  In the Keynesian range, ie normal range of supply & demand, at the full employment level if demand decreases, output will fall & the price level will remain unchanged   
  In the classical range of supply & demand, at the full employment level if demand decreases, prices fall & real output remains the same  
  In the intermediate range of supply & demand, at the full employment level if demand decreases, both output & price will fall   
  The ratchet effect holds that prices of products & resources, including wages, are 'sticky' or inflexible in a downward directions   
  The ratchet effect holds that for the intermediate & classic interpretations of supply, a decline in demand may not reduce supply b/c the prices of resources & wages will not decline   
  THE CAUSES OF THE RATCHET EFFECT INCLUDE:  WAGE INFLEXIBILITY, FIRMS DO NOT WANT TO CHANGE WAGE LEVELS, FIRM'S 'INVESTMENT' IN THE TRAINING & EXPERIENCE, THE MIN WAGE IS NOT INDEXED TO INFLATION, & FIRMS HAVE MONOPOLY POWER   
  1.  WAGES ARE INFLEXIBLE B/C WAGES CANNOT CHANGE DURING THE DURATION OF A CONTRACT; ONLY AT THE END   
  Wages are inflexible b/c contracts for union or non union wkrs prohibit changes for the duration of the contract   
  Col barg agreements may run 3 yrs   
  Wages & salaries of nonunion wkrs are usually adjusted once a yr, rather that quarterly or monthly   
  In general, wage constitute about 75 % or more of a firm's total costs, but may be significantly more or less, depending on the industry   
  An ind w/ a low % of wages a % of total costs is the airline industry while an ind w/ a hi % of wages as a % of total costs is the fast food industry   
  Given the downward inflexibility of  wages, it is difficult for firms to reduce their prices & remain profitable e
 
  2.  WAGES ARE INFLEXIBLE B/C FIRMS OFTEN DO NOT WANT TO CHANGE WAGES, UP OR DOWN   
  Lower wages lower labor cost per unit of output, lower wkr productivity increase unit labor costs   
  Firms fear that lower productivity more than counterbalances the reduction in wage costs, so that a lower wage rate increases, rather than reduces labor cost per unit of production   
  3.  WAGES ARE INFLEXIBLE B/C FIRMS HAVE AN 'INVESTMENT' IN THE TRAINING & EXPERIENCE OF THEIR LABOR FORCE   
  If firms cut wages in the face of a decline in agg demand, they could expect to lose wkrs more or less randomly   
  Firms reducing wages would lose some highly trained & experienced wkrs   
  Superior wkrs are more likely to leave in the face of wage cuts b/c they have better opportunities for other jobs   
  When good wkrs leave, the firm forgoes any chance of getting a return on the investment made in their training   
  For most firms, a better option than lowering wages is to maintain wages & lay off wkrs on the basis of seniority   
  Generally wkrs w/ less seniority who are laid off will also be the less skilled wkrs in whom the firms has invested the least in training   
  4.  WAGES ARE INFLEXIBLE B/C THE MIN WAGE IMPOSES A LEGAL FLOOR UNDER THE WAGES OF THE LEAST SKILLED WKRS   
  If wages are inflexible, then the cost of production of products will also be inflexible unless other production costs can be reduced   
 
 If wages are inflexible, & other costs are inflexible, the only way to reduce prices is to reduce profits   
  Profits are considered to be inflexible b/c investors will leave a firm & invest in other more profitable firms & b/c mgt salaries are often tied to profit rates   
  5.  WAGES ARE INFLEXIBLE B/C MANY FIRMS HAVE SUFFICIENT MONOPOLY POWER TO RESIST PRICE CUTS FOR A TIME WHEN DEMAND DECLINES   
  Despite the catastrophic decline in agg demand that occurred btwn 1929 & 1933 during the period of the Great Depression, firms in ag implements, motor vehicle, cement, iron, steel, & similar ind had the ability to resist price cuts, accepting large declines in production & employment as an alternative   
  During the decline in agg demand that occurred btwn 2006 & 2012 during the period of the Bush Recession which was the largest econ decline since the Great Depression, prices did not generally fall, instead there were declines in production & employment   
  NOT ALL ECONOMISTS ARE PERSUADED THAT THE RATCHET EFFECT REMAINS RELEVANT TODAY  
  The critics of the ratchet effect not that unions have declined in power & there were large wage cuts in several basic in following the Bush Sr Recession of 1981-1982  
  Growing foreign competition undermines monopoly power & thus the ability of firms to resist price cuts in the face of falling demand   
  Defenders of the ratchet effect note that the price level has fallen in only a single yr, 1955 & the econ had experienced 8 recessions during this period   
  Depending on such factors as the industry, unemployment levels, the stage in the econ cycle, the political climate, & more, wages are generally inflexible in the downward direction   
  During the 50s & 60s, wages were inflexible downward while during the 70s b/c of inflation, wages were rising only in real terms, & as a result of the econ 'Reagan Rev' wages became more flexible downward as a climate of concessions ensued   
  Since the Bush Jr Recession which began in 2006, wages have been inflexible upward; there has been no significant period of real growth in wages since the early 70s, except for 2 yrs at the end of the Clinton Admin   
  THE RATCHET EFFECT'S RELATION TO THE MIN WAGE DEBATE IS THAT EVEN NOW, WAGES ARE GENERALLY INFLEXIBLE DOWNWARD, THOUGH SLIGHTLY MORE FLEXIBLE THAN THE PAST, & THE MIN WAGE SETS THIS LEVEL BY LAW, BUT REAL WAGES HAVE DECLINED  
  While wages did actually fall during the Great Depression, (1929 - 1934) they did not actually fall during the 2nd worse depression, the Bush Jr Depression (2007-2010)   
  While wages did not fall during the Bush Jr Depression, wages have not grown at all & therefore, b/c of  inflation, real wages, ie purchasing power has fallen & continues to fall until 2014   
  While all econ indicators have risen during the Obama admin from about 2009, onward, wage growth is the one exception   
  Most economists believe structural factors, esp globalization, are responsible for flat wage growth   

The End
 
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