CHAPTER FIFTEEN
UNION ROLE IN WAGE AND SALARY
ADMINISTRATION
Overview
Many experts believe that unions are facing their most critical challenge of the last 50 years.
From 1983 to 2014, union membership fell from 20.1 percent to 11.1 percent among wage and
salary workers. While 35.7 percent of firms in the public sector are unionized, the figure is
only 6.6 percent in the private sector, of which the lowest unionization rates were in agriculture
and related industries. Four popular explanations are usually offered for this decline:
The structure of American industry is changing, and declining industries are most
heavily unionized, while growing industries are less so
Unionization may be declining because workers do not view unions as a solution to
their problems.
There has been reduced intensity of union organizing efforts.
Management is taking an increasingly hard stance against unions in general and union
demands in particular.
A large portion of this management opposition to unions is spurred by increasing pressure from
both domestic and international competitors. Management more frequently resists wage
increases that would give nonunion competitors, both domestic and foreign, a competitive
price advantage. Competitive pressures, starting in the 1980s and continuing today, have
triggered lower-than-normal wage increases in unionized firms and even some wage
concessions. Despite strong management efforts to lessen the impact of unions, they still
assume an important role in wage determination.
The first part of the chapter outlines four specific areas of union impact:
Impact on general wage and benefit levels
Impact on the structure of wages
Impact on nonunion firms (also known as spillover)
Impact on wage and salary policies and practices in unionized firms
The chapters’ concluding section focuses on the union response to the changing economic
environment and the alternative compensation systems that have evolved in response to these
changes.
Learning Objectives
Identify the impact of unions on wage determination including union impact on general
wage levels.
Understand the structure of wage packages and the role of unions in wage and salary
policies and practices, including the spillover effect.
Discuss unions impact on alternative reward systems including lump-sum awards,
ESOPs, pay-for-knowledge plans, gain-sharing plans and profit-sharing plans.
Lecture Outline: Overview of Major Topics
I. The Impact of Unions in Wage Determination
II. Unions and Alternative Reward Systems
III. Your Turn: Predicting a Contract’s Clauses
Lecture Outline: Summary of Key Chapter Points
Many experts believe that unions are facing their most critical challenge of the last 50 years.
From 1983 to 2014, union membership fell from 20.1 percent to 11.1 percent among wage and
salary workers. The number of union certification elections for firms fell 85 percent from a
high of 8,799 in 1973 to 1,463 in 2014. Out of these elections to unionize, those that swung in
favor of unionization in 1950 were about 70 percent compared to 63 percent in 2014. Today
collective bargaining, except in the public sector, is not a major force. While 35.7 percent of
firms in the public sector are unionized, the figure is only 6.6 percent in the private sector, of
which the lowest unionization rates were in agriculture and related industries.
Four popular explanations are usually offered for this decline:
The structure of American industry is changing, and declining industries are most
heavily unionized, while growing industries are less so. (While this is true, research
suggests this is not a primary explanation for union decline).
Unionization may be declining because workers do not view unions as a solution to
their problems.
There has been reduced intensity of union organizing efforts (frequently cited as a
reason why several large and powerful unions, including the Teamsters, broke off from
the AFL-CIO in 2005).
Management is taking an increasingly hard stance against unions in general and union
demands in particular. A large portion of this management opposition to unions is spurred
by increasing pressure from both domestic and international competitors. The end result
of these competitive pressures is a declining union-nonunion wage differential.
Competitive pressures, starting in the 1980s and continuing today, have triggered
lower-than-normal wage increases in unionized firms and even some wage concessions.
Although the statistics indicate a decline in unionism, some of the issues that are important
cornerstones of unionization continue to be important for workers. Fully 63 percent of
employees say they want to have more influence in workday decisions. If need be, 40 percent
of workers would vote union to achieve their needs. Workers show strong interest in joining a
union when:
Workplace relations are bad
Management is not trustworthy
Workers feel that they have little influence over decisions affecting them
Over 70 percent of workers who see management acting in a way that shows little concern for
employees’ welfare and is unwilling to share power, claim they would vote for a union. Unions
may be down, but not out. One indication is the changing stance of unions on two-tier wages.
One of the hallmarks of unionism is equality of treatment. In recent years, many unions
have agreed to two-tier wages where new hires receive significantly lower wages.
I. The Impact of Unions in Wage Determination
Despite strong management efforts to lessen the impact of unions, they still have an
important effect on wages. Even in a nonunion firm, compensation managers will
adjust rewards (usually upward) when there is a hint of nearby union activity.
This section outlines four specific areas of union impact.
oImpact on general wage and benefit levels
oImpact on the structure of wages
oImpact on nonunion firms (also known as spillover effect)
oImpact on wage and salary policies and practices in unionized firms
A. Union Impact on General Wage Levels
Do unions raise wages? Are unionized employees better off than they would
be if they were nonunion?
Unfortunately, comparing “what is” to “what might have been” is no easy
chore. Several measurement problems are difficult to overcome.
The ideal situation would compare numerous organizations that were
identical except for the presence or absence of a union. Any wage differences
among these organizations could then be attributed to unionization (a union
wage premium).
oUnfortunately, few such situations exist.
One alternative strategy that has been adopted is to identify organizations
within the same industry that differ in level of unionization. Although they are
in the same industry, it is still difficult to argue with assurance that wage
differences between the two firms are attributable to the presence or absence
of a union.
oFirst, the fact the union has not organized the entire industry weakens its
power base (strike efforts to shut down the entire industry could be
thwarted by nonunion firms).
oA second problem in measuring union impact is what if the
nonunionized company grants concessions to employees as a strategy to
avoid unionization. These concessions, indirectly attributable to the
presence of a union, would lead to underestimation of union impact on
wages.
Another strategy in estimating union impact on wages is to compare two
different industries that vary dramatically in the level of unionization.
oThis strategy suffers because nonunionized industries (e.g., agriculture,
service) are markedly different from unionized industries in the types of
labor employed and their general availability.
oSuch differences have a major impact on wages independent of the level
of unionization and make any statements about union impact difficult to
substantiate.
One source of continuing data on unionized and nonunionized firms is the
Bureau of Labor Statistics.
oBetween 1969 and 1985, the union wage premium more than doubled,
from 17.6 to 35.6 percent.
oIn 2003, the union wage premium declined a substantial amount to 24.5
percent.
oIn 2014, union members had a median weekly earnings of $887 private
sector/$994 public sector, compared to nonunion members with $739/839.
oThese differences reflect a variety of influences, including variations in
the distributions of union members and nonunion employees by:
Occupation
Industry
Firm size
Geographic region
oHistorically, union wages have experienced multiple-year upswings
followed by multiple-year downswings.
oSince 1983, the nonunion sector has been securing larger wage increases
than the unionized sector, partially due to unions’ acceptance of lump-sum
payments in lieu of increases in base wage. These differentials differ by
industry.
The best conclusion about union versus nonunion wage differences comes
from a summary analysis of 114 different studies. Two important points
emerged.
oUnions do make a difference in wages, across all studies and all time
periods. Union workers earn between 8.9 and 12.4 percent more than
nonunion workers.
oThe size of the gap varies from year to year.
During periods of higher unemployment, the impact of unions is
larger.
During strong economies, the union-nonunion gap is smaller.
Part of the explanation for this time-based phenomenon is related to
union resistance to wage cuts during recessions and the relatively slow
response of unions to wage increases during inflationary periods
(because it is hard to respond quickly when a union is tied to a
multiyear labor contract).
Union employees in the public sector earn, on average, about 22 percent
more than their nonunion counterparts.
However, historically, this figure masks some large variations across
unions, depending on the occupation(s) they represent.
The largest gains for public sector employees are reported for
firefighters. At the other extreme, however, teachers’ unions have not
fared as well, with reported impacts generally in the range of 1 to 4
percent.
In recent years, wage concessions have become more prominent.
oSome experts claim these concessions are more common in unionized
firms and that this reduces the advantage union workers hold in wages,
particularly during downturns in the economy.
For example, in 1908 the glass-bottle blowers accepted a 20 percent
wage cut in the hopes of fighting automation.
During the 1930s, concessions were a regular feature in the
construction, printing, and shoe industries.
Concessions were also made in the apparel and textile industries
during the 1950s.
More recent trends in public sector legislation don’t bode well for
unions. In 2012 Michigan joined Wisconsin and Indiana in giving
workers the right to not join unions as a condition of employment.
B. The Structure of Wage Packages
One dimension of the union impact on the structuring of wage packages
concerns the division between direct wages and employee benefits.
oResearch indicates that the presence of a union adds about 30 to 40
percent to employee benefits.
oWhether because of reduced management control, strong union-worker
preference of benefits, or other reasons, unionized employees also have a
greater percentage of their total wage bill allocated to employee benefits.
Typically, the higher costs show up in the form of higher pension
expenditures or higher insurance benefits.
One particularly well-controlled study found unionization associated
with a 213 percent higher level of pension expenditures and 136
percent higher insurance expenditures.
A second dimension of the wage structure is the evolution of two-tier wage
pay plans. Basically a phenomenon of the union sector, two-tier wage
structures differentiate pay based upon hiring date.
oA contract is negotiated which specifies that employees hired after a
given target date will receive lower wages than their higher-seniority peers
working on the same or similar jobs.
oFrom management’s perspective, wage tiers represent a viable
alternative compensation strategy.
Tiers can be used as a cost control strategy to allow expansion or
investment or as a cost-cutting device to allow economic survival.
oTwo-tier pay plans initially spread because unions viewed them as less
painful than wage freezes and staff cuts among existing employees. The
tradeoff, however, was a bargaining away of equivalent wage treatment for
future employees.
oLower-tier employees, those hired after the contract is ratified, receive
wages 50 to 80 percent lower than employees in the higher tier. The
contract may specify that the wage differential may be permanent, or the
lower tier may be scheduled ultimately to catch up with the upper tier.
oAlthough such expressions of dissatisfaction are unlikely today, unions
are much more reluctant to accept a two-tier structure and may view it as a
strategy of last resort.
C. Union Impact: The Spillover Effect
Although union wage settlements have declined in recent years, the impact
of unions in general would be understated if the spillover effect were not
accounted for.
Specifically, employers seek to avoid unionization by offering workers the
wages, benefits, and working conditions won in rival unionized firms.
The nonunion management continues to enjoy the freedom from union
“interference” in decision making, and the workers receive the spillover of
rewards already obtained by their unionized counterparts.
Several studies document the existence of this phenomenon, although
smaller as union power diminishes, providing further evidence of the
continuing role played by unions in wage determination.
D. Role of Unions in Wage and Salary Policies and Practices
Perhaps of greatest interest to current and future compensation
administrators is the role unions play in administering wages.
The role of unions in administering compensation is outlined primarily in
the contract.
Basis of Pay
oThe vast majority of contracts specify that one or more jobs are to be
compensated on an hourly basis and that overtime pay will be paid beyond
a certain number of hours.
oFurther, many contracts specify a premium be paid above the worker’s
base wage for working nonstandard shifts.
oAlternatively, agreements may specify a fixed daily, weekly, biweekly,
or monthly rate.
oIn addition, agreements often indicate a specific day of the week as
payday and sometimes require payment on or before a certain hour.
oMuch less frequently, contracts specify some form of incentive system
as the basis for pay. The vast majority of clauses specifying incentive pay
occur in manufacturing (as opposed to nonmanufacturing) industries.
Occupation-Wage Differentials
oMost contracts recognize that different occupations should receive
different wage rates. Within occupations, though, a single wage rate
prevails.
oAlthough rare, there are some contracts that do not recognize
occupational/skill differentials. These contracts specify a single standard
rate for all jobs covered by the agreements.
Usually such contracts cover a narrow range of skilled groups.
Experience/Merit Differentials
oSingle rates are usually specified for workers within a particular job
classification. Single-rate agreements do not differentiate wages on the
basis of either seniority or merit.
oAlternatively, agreements may specify wage ranges.
The vast majority of contracts specify seniority as the basis for
movement through the range. Automatic progression is an appropriate
name for this type of movement through the wage range, with the
contract frequently specifying the time interval between movements.
This type of progression is most appropriate when the necessary
job skills are within the grasp of most employees. Denial of a raise
is rare and frequently is accompanied by the right of the union to
grieve the decision.
A second, and far less common, strategy for moving employees
through wage ranges is based exclusively on merit. Employees who
are evaluated more highly receive larger or more rapid increments than
average and poor performers.
Within these contracts, it is common to specify that disputed merit
appraisals may be submitted to grievance. If the right to grieve is
not explicitly excluded, the union also has the implicit right to
grieve
The third method for movement through a range combines automatic
and merit progression in some manner. A frequent strategy is to grant
automatic increases up to the midpoint of the range and permit
subsequent increases only when merited on the basis of performance
appraisal.
Other Differentials
oThere are a number of remaining contractual provisions that deal with
differentials for reasons not yet covered.
A first example deals with different pay to unionized employees who
are employed by a firm in different geographic areas. Very few
contracts provide for different wages under these circumstances,
despite the problems that can arise in paying uniform wages across
regions with markedly different cost of living.
A second category where differentials are mentioned in contracts
deals with part-time and temporary employees. Few contracts specify
special rates for these employees.
Those that do, however, are about equally split between giving
part-time and temporary employees wages above full-time workers
or below full-time workers.
Vacations and Holidays
oVacation and holiday entitlements are among the clauses frequently
found in labor contracts.
oThey, too, use very specific language.
Wage Adjustment Provisions
oFrequently in multiyear contracts some provision is made for wage
adjustment during the term of the contract. There are three major ways
these adjustments might be specified:
Deferred wage increase—negotiated at the time of initial contract
negotiations with the timing and amount specified in the contract.
Reopener clause—specifies that wages, and sometimes such
nonwage items as pension and benefits, will be renegotiated at a
specified time or under certain conditions.
Cost of living adjustment (COLA) or escalator clause—involves
periodic adjustments based typically on changes in the consumer price
index.
II. Unions and Alternative Reward Systems
International competition causes a fundamental problem for unions. If a unionized
company settles a contract and raises prices to cover increased wage costs, there is
always the threat that an overseas competitor with lower labor costs will capture
market share.
Eventually, enough market share erosion means the unionized company is out of
business.
To keep this from happening, unions have become much more receptive in recent
years to alternative reward systems that link pay to performance.
About 20 percent of all U.S. collective bargaining agreements permit some
alternative reward system (e.g., lump sum, piece rate, gain sharing, profit sharing,
skill-based pay).
oWillingness to try such plans is higher when the firm faces extreme competitive
pressure.
oIn the unionized firms that do experiment with these alternative reward systems,
though, the union usually insists on safeguards that protect both the union and its
workers.
The union insists on group-based performance measures with equal payouts
to members. This equality principle cuts down strife and internal quarrels
among the members and reinforces the principles of equity that are at the very
foundation of union beliefs.
To minimize bias by the company, performance measures more often tend to
be objective in unionized companies. Most frequently the measures rely on
past performance as a gauge of realistic targets rather than on some time study
or other engineering standard that might appear more susceptible to
tampering.
A. Lump-Sum Awards
Lump-sum awards are one-time cash payments to employees that are not
added to an employee’s base wages.
These awards are typically given in lieu of merit increases, which are more
costly to the employer.
This higher cost results because:
oMerit increases are added on to base wages
oSeveral employee benefits are figured as a percentage of base wages
For the past 10 years, a stable one-third of all major collective bargaining
agreements in the private sector have contained a provision for lump-sum
payouts.
B. Employee Stock Ownership Plans (ESOPs)
An alternative strategy for organizations hurt by intense competition is to
control base wages in exchange for giving employees part ownership in the
company.
C. Pay-For-Knowledge Plans
Pay-for-knowledge plans pay employees more for learning a variety of
different jobs or skills.
By combining this new wage system with drastic cuts in the number of job
classifications, organizations have greater flexibility in moving employees
quickly into high-demand areas.
Unions also may favor these plans because they make each individual
worker more valuable, and less expendable, to the firm. In turn, this also
lessens the probability that work can be subcontracted out to nonunion
organizations.
D. Gain-Sharing Plans
Gain-sharing plans are designed to align workers and management in efforts
to streamline operations and cut costs.
Any cost savings resulting from employees’ working more efficiently are
split, according to some formula, between the organization and the workers.
Some reports indicate gain sharing is more common in unionized than
nonunionized firms.
Success of these plans is dependent on a willingness to include union
members in designing the plan.
Openness in sharing financial and production data, key elements of putting a
gain-sharing plan in place, are important in building trust between the two
parties.
While unions are not always enthusiastic about gain sharing, they rarely
directly oppose it, at least initially. Rather, the most common union strategy is
to delay taking a stand until real costs and benefits are more apparent.
As exhibit 15.2 illustrates, there are numerous possible costs and benefits to
union members for agreeing to a gain-sharing plan.
Until the plan is actually implemented, though, it is unclear what the impact
will be in any particular firm.
E. Profit Sharing Plans
Unions have debated the advantages of profit-sharing plans for at least 80
years.
In years past, the primary goal of unions was to secure sound, stable income
levels for members.
Coming out of the great recession, saving and creating jobs is rapidly
becoming the top priority.