Fat profits put 2-tier pay on UAW agenda

DETROIT -- As billions of dollars in profits pile up for the Detroit 3, so does resentment within the UAW toward the two-tier wage system that has helped produce those profits.

The issue, a source of controversy since the UAW reluctantly agreed to a two-tier system in 2007 amid plant closures and layoffs, is shaping up to be the centerpiece of next year's contract talks. Workers contend that the automakers now can afford to pay top-tier wages to everyone. But the companies say any material increase to labor costs risks landing them in financial trouble again.

"From the union's perspective it was never meant to be permanent because it challenges the central principle of the union, which is broad solidarity," said Harley Shaiken, a labor expert at the University of California, Berkeley. "They will seek to resolve it in a reasonable way in the next round of negotiations."

UAW leaders have become more vocal about their opposition to two-tier wages as the next round of negotiations draws closer. A vice presidential candidate, Norwood Jewell, said the UAW's international executive board "hates two-tier" and wants to eliminate it. Dennis Williams, whom UAW leaders have nominated to succeed Bob King as president in June, was cheered at a UAW conference in Washington this month for saying that he doesn't believe in two-tier wages and that "it's time to bridge the gap" they create.

King told Automotive News last month: "Everybody that I know in the UAW -- myself, Dennis Williams, all the officers -- everybody has said that we believe in equal pay for equal work. We did the entry level because it was necessary to keep the companies viable."

Nearly a quarter of the approximately 134,000 Detroit 3 hourly employees earn second-tier wages, according to data from the companies and the union. Nearly 40 percent of Chrysler Group's hourly workers are so-called entry-level employees; the figure is 21 percent at Ford Motor Co. and 16 percent at General Motors.

Entry-level workers earn $15.78 to $19.28 an hour, compared with about $28 for workers at the full rate. The top tier also includes more generous benefits -- raising the gap to about $20 an hour -- including a pension instead of the 401(k) that entry-level workers can access in retirement.

King declined to discuss the 2015 negotiations because he is retiring before then. He said the union is committed to helping all entry-level workers get "on the path" toward full wages.

Automakers, meanwhile, are digging in their heels, despite their stark reversal of fortunes since the recession. Two days after Ford reported 2013 pretax earnings of $8.6 billion, calling it "one of the company's best years ever," Joe Hinrichs, president of Ford's Americas region, rejected the idea that the company could afford to eliminate two-tier wages.

"We have got to be careful [not] to say, 'Well let's start disrupting the system,'" Hinrichs told reporters Jan. 30, according to WDRB-TV in Louisville, Ky., where he announced plans to add 350 jobs at a plant building Super Duty pickups. "The system is working."

Scott Houldieson, an electrician at Ford's Chicago Assembly Plant and former financial secretary for UAW Local 551 there, disagrees. He said his plant, at which 2,259 of the roughly 4,000 workers earn second-tier pay, suffers from low morale and high turnover as a result.

"Eliminating the two-tier should be a high priority throughout the UAW," Houldieson said. "A two-tier wage structure did absolutely nothing to restore the profits of the companies. It has increased their profits obviously, but it hasn't been the basis of their profits."

All three automakers still would be profitable if they eliminated the lower wage tier, based on publicly available figures and estimates by labor experts.

For example, Ford, which had 9,709 entry-level workers as of Jan. 5, saves nearly $20 million a year for every $1 gap between the two wage scales. Giving those workers full wages and benefits this year would cost about $400 million, or less than 5 percent of the $8.8 billion it earned in North America last year before taxes.

"I have no doubt that this is the big issue coming up," said Kristin Dziczek, director of the industry and labor group at the Center for Automotive Research in Ann Arbor, Mich.

But the companies will be looking long-term at the bargaining table next year and in future rounds of negotiations, she said.

"The companies are going to say 'We can't go back to our old ways, and when we have bad years we can't be locked into paying much higher compensation,'" Dziczek said. "I can't imagine that they're going to get to where entry level is gone completely."

Including profit sharing, overtime and benefits, entry-level workers now cost the companies about $38 to $43 an hour, Dziczek said. Top-tier workers cost $58 to $60 an hour, she said. Profit-sharing checks, which this year average $8,800 at Ford, $7,500 at GM and $2,500 at Chrysler, are not reduced for entry-level workers.

One way the companies could bring the two tiers closer together would be to shift even more of workers' compensation to variable forms such as profit sharing. That effectively would raise pay in good years while keeping costs low in tough times. But workers might resist adding even more uncertainty to their paychecks.

Dziczek said the union may be able to reduce the gap somewhat. She noted that top-tier workers are clamoring for raises as well after going nearly a decade without one. Many of those workers voted against the 2011 contracts, which kept their wages frozen while bumping up the entry-level workers by $1 or $2 an hour.

Another way to reduce the impact of the two-tier system would be a lower cap on the number of entry-level workers the companies can hire.

Ford currently is limited to having no more than 20 percent of its hourly work force on the lower tier, excluding some plants that don't count against the cap. Caps at GM and Chrysler were suspended until 2015 as part of the companies' 2009 bankruptcy reorganizations.

The exclusions at Ford, which allow about 5,000 additional entry-level workers beyond the 20 percent cap and are related to specific job-creating investments, mean the company still has the ability to hire about 3,200 more people on the lower tier.

Lower caps also would hasten the process of moving workers, through the process of attrition, from Tier 2 to Tier 1 status. No worker at any of the three companies has made such a move, and Ford appears unlikely to reach its cap before the current contract expires.

In contrast to Ford, Chrysler CEO Sergio Marchionne has said he opposes the two-tier system and wants to eliminate it in 2015. How Chrysler might seek to do so is unclear.

In October 2011, Marchionne said he and King attempted to change the two-tier system but could not reach an agreement. Marchionne said two-tier wages are "not a viable structure upon which to build our industrial footprint" because the system creates "two classes of workers within the plant."

Dan Akerson, who retired as GM's CEO last month, did not answer directly when asked whether the two-tier system should remain in place. But he made clear that GM would not agree to a substantive increase in labor costs.

"All I want is to have the cost of labor ... be competitive with our competition," Akerson said at last month's Automotive News World Congress.

Dziczek noted that many of the jobs now held by entry-level workers wouldn't exist if not for the two-tier system, which has encouraged automakers to bring some work from parts suppliers in-house and to build vehicles in the United States that they might have moved overseas.

Even King concedes that the two-tier system helped his membership during a troubled time.

"Having that rate of pay has brought tens of thousands of jobs that were outsourced back into GM, Ford and Chrysler," King said. "It's been an important factor in the success of the companies and in keeping manufacturing in the U.S. If the companies don't succeed, all those entry-level jobs go away."

But the automakers' healthy bottom lines are likely to make hypothetical warnings about potential future downturns ring hollow for many workers when it's time to vote on a new contract.

"As they're reporting record profits," said Shaiken, the University of California professor, "it's going to make it a lot harder for them to say, 'Wait a minute, we really need this.'"