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Is high-paying Tier 1 at risk in UAW talks?

Detroit 3 seek more entry-level workers

DETROIT -- The slogan "No More Tiers" will be on the lips of many of the thousands of UAW delegates trekking to the union's bargaining convention here this week.

They'll be calling for hard limits on -- or even eradication of -- the so-called Tier 2 wages that entry-level workers have been paid since 2007.

The system of paying new hires roughly half the wages and benefits of the UAW's Tier 1 legacy workers is partly responsible for the addition of some 25,000 jobs. But it is anathema to the union's core values of equality and solidarity.

Analysts and other industry sources interviewed by Automotive News, however, say the outcome of the negotiations could just as readily find the Tier 1 system in jeopardy rather than the Tier 2. The UAW contracts with the Detroit 3 expire in September.

The Detroit 3 see the expansion of the entry-level wage system as key to achieving labor-cost parity with their Asian rivals eventually.

This year's talks are likely to highlight how Tier 2 -- long viewed by the UAW rank and file as a stopgap meant to resuscitate the Detroit 3 from their financial crises -- has become cemented into the system, even as the automakers are flush with profits.

In fact, there are almost 40,000 Tier 2 workers now, accounting for 29 percent of the three companies' 137,000 hourly jobs. Tier 2 workers make up 42 percent of the UAW membership at Fiat Chrysler, 29 percent at Ford Motor Co. and 20 percent at General Motors.

Industry analyst Kristin Dziczek sees the tiers basically merging within the next two contract cycles as Tier 1 workers retire and Tier 2 workers grow in number and receive higher wages. Dziczek is director of the industry and labor group at the Center for Automotive Research in Ann Arbor, Mich.

"Over the next eight years, we won't even be talking about tiers," Dziczek said.

Sergio Marchionne, CEO of Fiat Chrysler Automobiles, has been outspoken on the point. Like union leaders, Marchionne says he's philosophically opposed to paying workers widely different wages for the same work.

At the Detroit auto show in January, he called the practice "impossible" and "almost offensive," saying he wanted to freeze the number of Tier 1 workers at FCA US and raise compensation for Tier 2 based on the company's profits.

Rankled ranks

How the Detroit 3 and UAW leaders deal with Tier 2 will be watched closely by the rank and file.

Auto worker Gary Walkowicz, a bargaining committeeman at Ford's Dearborn Truck assembly plant, intends to use his delegate status at the convention to advocate for an end to Tier 2.

He said Ford could convert overnight its 14,685 Tier 2 workers to a full $28-an-hour Tier 1 wage for about $335 million a year, or a fraction of the $6.9 billion the company earned in North American profits last year.

Converting the workers to Tier 1 pay could be executed without those workers ever getting the lofty benefits and pensions that Tier 1 workers enjoy, he said.

GM, likewise, can afford to do the same given its agreement this month to commit $5 billion in cash to a stock buyback that benefits common shareholders dominated by big Wall Street investors, Walkowicz said.

On the other hand, Ford and GM pay hourly labor costs far in excess of what the U.S. operations of the German, Japanese and Korean automakers do.

Ford and GM's hourly labor costs are about $59 while the aggregate of the transplants is in the high $40 range, Dziczek said. FCA US is the exception.

FCA's costs are very close to those of the transplants, predominantly because it makes far greater use of Tier 2 workers than Ford and GM do, she said. Tier 2 workers make between $15 and $19 an hour vs. about $28 for legacy workers. Their benefits also are roughly half those of Tier 1 workers.

FCA, in particular, has benefited from a special UAW contract provision during the 2009 bankruptcy of Chrysler that suspended a cap instituted in 2007 on total Tier 2 hiring. That has allowed FCA to hire an unlimited number of Tier 2 workers, swelling their ranks to 42 percent of the carmaker's 36,000-person hourly work force.

If the Detroit 3 had their way, they'd like to see those Tier 2 caps permanently removed. Detroit 3 executives, particularly Joe Hinrichs, Ford president of the Americas, have pointed to Tier 2 as allowing the automakers to increase U.S. factory jobs. Ford, for example, has brought about 3,400 jobs, previously done through contractors, in-house at Tier 2 compensation.

But those caps, which limit the Tier 2 work force to between 20 and 25 percent of total hourly employment, will be automatically restored at FCA and GM on Sept. 14 unless they are renegotiated in the upcoming talks. Ford's 20 percent cap never was suspended, but Ford has been able to exceed it because of exemptions.

Bill Parker, a bargaining convention delegate, fought against Tier 2 in 2007 and agrees that Tier 2 should be eliminated.

But at the very least, the UAW should enforce the current caps and use them as a starting point in negotiations to improve compensation for Tier 1 and Tier 2 workers, Parker said. He aligns cars coming off the assembly line at FCA's Sterling Heights, Mich., plant and is a former president of the plant's UAW Local 1700.

The Detroit 3 "negotiated those contracts; they need to live by them," he said.

Aging demographic

Unless the UAW can roll back Tier 2 in this round of bargaining, the demographics of the current hourly work force will contribute to making Tier 1 workers an endangered group, Dziczek said.

The average age of Tier 1 workers at GM and FCA is 51; it is 49 at Ford, the automakers report. In contrast, the average age of Tier 2 workers is 39 at GM and FCA and 34 at Ford.

In eight years, or two contract cycles, nearly all the current Tier 1 workers will have retired or will be nearing eligibility for retirement under 30-and-out contract provisions.

Starting last month, Ford's cap forced it to promote about 500 workers who were hired in 2010 to what the union calls "new traditional" status. Their wages were bumped up from $19.28 to $28.50, a 48 percent raise, though most of their benefits remain unchanged.

That path to Tier 1 wages was an important part of selling the system to the UAW. Increasing the caps would make it harder for workers to get moved up, particularly if the industry entered a downturn and hiring slowed.

Coming compromise?

Perhaps there's a middle road for preserving Tier 2 and closing the wage gap between Tier 1 and Tier 2 workers at the same time, said Art Schwartz, a former GM labor negotiator who now runs Labor and Economics Associates, a consulting firm in Ann Arbor, Mich.

In the contract talks that kick off this summer, Schwartz believes the UAW could come away with wage increases for both tiers, citing the severe pressure on UAW leaders to deliver a wage increase to Tier 1 workers after a decade without one. But he thinks the companies will offer a heftier raise for Tier 2 workers as a way to close the pay gap.

Doing away with Tier 2 is a nonstarter for the Detroit 3, Schwartz said, because it has helped the automakers to hire far more low-wage plant workers than they would have otherwise.

For example, a GM-UAW agreement that allowed GM to hire up to 40 percent Tier 2 workers at its Orion Assembly plant outside Detroit -- where the Chevrolet Sonic and Buick Verano are made -- helped the company to reopen the factory in 2011, keeping about 1,800 jobs from going to Mexico.

"Getting rid of Tier 2 could put those jobs in jeopardy," he said.

Still, Schwartz believes that the UAW will win some limits on the percentages of entry-level workers that the companies are allowed to employ. Whether those caps are set at levels that would significantly raise the Detroit 3's labor costs will be an overriding issue during the talks, he said.

The automakers, Schwartz said, "eventually are hoping to land on Tier 1.5."

You can reach Mike Colias at mcolias@autonews.com -- Follow Nick on Twitter: @nickbunkley

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