978-1305576209 Chapter 7 Solution Manual

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CHAPTER 7

Economic Issues

Outline

I. Economic Issues

a. Industrial Wage Differentials

i. Competition in the product market

ii. Value added by employees

iii. Labor costs as a percentage of total costs

II. Occupational Wage Differentials and the Role of Job Evaluation and Wage Surveys

a. Evaluating jobs within the Organization

i. Job factors

ii. Job analysis

iii. Job description

iv. Job specification

b. Union Perspectives

i. Wage structures (Exhibit 7.1)

c. Surveys to Compare Firms’ Wage Structures

i. Results from wage survey (Exhibit 7.2)

d. Production Standards and Wage Incentives

i. Production standards

e. Typical Contract Provisions

i. Piece rate

ii. Hourly wage rate

iii. Profit-sharing plans

iv. Gain sharing plan

v. Scanlon plan

vi. Rucker plan

vii. Improshare plan

viii. Skill-based pay (SBP)

f. Wage-Setting Criteria: Arguments Used by Management and Union Officials in

Wage Determination

i. Factors to bolster wage claims

ii. Living wage ordinances

III. Differential Features of the Work: Job Evaluation and the Wage Spread

i. Wage spread (Exhibit 7.3)

ii. Skill pay differential

a. Two-Tier Wage Plans (Exhibit 7.4)

b. Wage Comparability

i. Wage Comparability Across Organizations

2. Degree of labor intensiveness

c. Wage Comparability within Organizations

i. Me-Too clause

d. Ability to pay

i. Reasons for wage determination

e. Productivity

i. Labor productivity (Exhibit 7.5)

f. Problems with Productivity Sharing

g. Effect of Unions on Productivity and Efficiency

i. Reasons for higher union productivity

ii. Productivity vs higher labor costs

h. Cost of Living

i. Consumer price index

i. Wage Adjustments during the Term or Duration of the Labor Agreement

i. Cost-of-living adjustment (COLA)

ii. Deferred wage increase

iii. Wage re-opener clause

j. Cost-of-Living Adjustments

i. Selection of the particular price index and base point.

ii. Frequency and timing of the wage adjustment.

iii. COLA formula.

iv. Effect of COLA on other elements of the compensation package.

v. “Caps.”

k. Deferred Wage Increases

i. Back-loaded contract

ii. Front-loaded contract

iii. Even-loaded contract

l. Wage Re-Opener Clauses

m. Lump-Sum Pay Adjustments

IV. Employee benefits

i. Employer cost per hour (Exhibit 7.6)

a. Insurance and Health Benefits

b. Health Care Cost Containment

i. Patient Protection and Affordable Care Act

ii. Preferred provider organization plan (PPO)

iii. Health Maintenance Organization (HMO)

iv. High deductible health care plans (HDHCP)

c. Income Maintenance

i. Severance pay

ii. Supplemental unemployment benefit plan (SUB)

d. Severance Pay

e. Supplemental Unemployment Benefits

i. Work sharing

f. Premium Pay—Overtime and Other Supplements

i. Premium pay

ii. Overtime premium pay rates

iii. Shift differentials

iv. Reporting pay

v. Call-in pay

g. Pay for Time Not Worked—Holidays, Vacations, and Rest Periods

h. Pensions

i. Age Discrimination in Employment Act (ADEA)

i. Common Types of Pension Plans

i. Defined benefit pension plans

ii. Defined contribution pension plan

iii. 401(k) plan

iv. Employee stock ownership plan (ESOP)

v. Preliminary conclusions

vi. Pension Protection Act of 2006 (PPA)

vii. Cash balance plan

viii. Early retirement options

ix. Vesting

x. Employee Retirement Income Security Act of 1974 (ERISA)

xi. “Cliff” vesting schedule

xii. “Graded” vesting schedule

xiii. Elective deferrals

xiv. Matching contributions

j. Family and Child-Care Benefits

i. Family and Medical Leave Act (FMLA) of 1993

V. Other Benefits

i. Prepaid legal service plans

ii. Employee assistance plans (EAP)

iii. Wellness programs

iv. Education tuition aid

v. Transportation subsidy

vi. Child-care assistance

vii. Subsidized home computer

VI. Union Effects on Wages and Benefits

i. Union-nonunion wage differential (Exhibit 7.7)

ii. Spillover effect

Discussion Questions

1. List the main factors that may help to explain the wage differential between two different

jobs in an organization with which you are familiar.

Students will probably select a large variety of jobs; however, the factors that help to

explain wage differentials should include:

2. Explain why job evaluation plans must take into consideration external and internal factors if

they are to be successful.

If the wages paid to employees must be sufficient for the company to recruit, reward, and

3. Assume that labor and management are negotiating a labor agreement and the wage spread

becomes an issue of disagreement—management wants a wider wage spread, and the union

wants a smaller wage spread. Why should management be cautious about the union’s

proposal, even though the total costs may be the same?

Management usually wants a wider spread for several reasons:

4. Which party (union or management) would likely be in a stronger position to bargain for its

preferred wage outcome under the following conditions and why?

a. High profits, an expanding market share, a healthy economy, and the cost of living rising

at less than 2 percent per year.

b. Low profits, stagnant sales growth, uncertain economic conditions, and a projected 4

percent annual rise in cost of living.

a. Unions will emphasize the following:

Management may counter by stating that:

b. Unions will focus on:

5. Assuming that a firm’s costs for employee benefits are 38 percent of payroll, why doesn’t

the firm just let the union determine the manner in which the amounts are apportioned to

various benefits, such as insurance, holidays, and vacations, without negotiating each

specific clause?

This approach is called the “cafeteria-style” or “smorgasbord” approach to employee

benefits and accommodates the individual preferences of employees. Some companies have

6. Which type of pension plan would you prefer to be covered under (i.e., defined benefit,

defined contribution, or cash balance) and why, if you were an employee? An employer?

Employers are typically concerned about the cost of a pension plan while employees are

are risk takers and competent to manage their own investments may prefer the defined

contribution plan. An employee with little seniority who expects to change jobs within five

years might prefer a cash balance plan. An employee with higher seniority who does not feel

qualified to manage his or her own investments might prefer a defined benefit plan. Any

employee concerned about minimizing risk and ensuring a stable retirement income might

prefer a defined benefit plan.

7. To what extent can a union exploit benefit issues (e.g., health care insurance, pension, child–

care benefits, and family leave) in an effort to organize more union members? Explain your

reasoning.

To the extent a union can demonstrate to unrepresented employees that it has been

8. What type of control should an employee have over shares issued under an employee stock

ownership plan? For example, should an employee have a right to sell their plan shares at

any time or vote those shares in shareholder meetings to elect board of director candidates or

approve a merger or bankruptcy plan?

Many ESOP plans, particularly those in nonunion firms designed and implemented by

management, hold employee shares in trust for the employee and do not permit the employee

9. Is early retirement (prior to age 62) still a realistic option for most employees to achieve

without experiencing a substantial decline in their preretirement standard of living?

1. Retirement plans are not keeping pace with rising living costs.

3. During periods of economic stress, employers often suspend discretionary company

matching contributions to employee 401(k) plans as a cost savings measure, reducing

Exploring the Web

Economic Issues

1. Sources of Economic Data: Bureau of Labor Statistics

2. National Compensation Survey

3. Occupational Pay Relatives (OPR)

4. International Labor Organization

Suggested Readings and Term Paper Topics

1. What do you think the future will hold in terms of fringe benefits? What will be a

popular new type of fringe benefit for the upcoming decade? Justify your positions.

Possible references:

Emanuele, R. (2000). Corporate culture in the nonprofit sector: A comparison of fringe benefits with the

for-profit sector. Journal of Business Ethics, 24, (1), 87–94.

2. Are “worker sabbaticals” a good idea? Why or why not?

Possible references:

——- (2000). Adjust Work Arrangements to Entice, Retain Professionals. ENR, 244, (1), 67.

Coleman, G. (1999). Someone get the phone—I’m on sabbatical. Journal of Environmental Health, 62, (4),

4-6.

3. Analyze the current state of corporate pension funds. Is there a crisis? If so, who is to

blame? If not, what is being done right? What are the implications of the current state

of pension funds for workers? For labor-management relations? What are your

recommendations?

Possible references:

——– (April 3, 2004). House Backs Temporary Relief On Companies’ Pension, The New York Times, C2,

col 05.

Bruce, S. R. (1988). Pension claims: Rights and obligations. Washington, D.C.: BNA Books.

4. In the 1980s and 1990s, it was not uncommon for managers to take steps to “cut labor

costs.” Some of these steps included: negotiating lower wages, closing “’inefficient”

(unionized) plants, and implementing two-tier wage systems. Many unions have argued

that these requests are merely anti-union ploys. In response to such requests, they have

asked to “see the books.” Managers hesitate to give unions such financial information.

Should they?

Possible references:

——- (1993). Delta cuts not just anti-union ploy. The Atlanta Journal the Atlanta Constitution, pg. A18.

Morishima, M. (Winter, 1991). Information sharing and firm performance in Japan. Industrial Relations,

30, (1), 37-61.

5. Agree or disagree: “Companies in severe financial hardship should be able to use

bankruptcy laws to seek relief from all financial obligations, including existing labor-

management contracts.”

Possible references:

—–(June 17, 1985). Bankruptcy no longer an escape from union contracts. U.S. News & World Report, 78–

80.

Galen, M. (January 25, 1993). A new page for Chapter 11 ? Business Week, No. 3302, 36-37.

6. Agree or disagree: The minimum wage law actually hurts U.S. labor.

Possible references:

7. Should there be a separate, lower minimum wage for teenagers? Why or why not?

Support your position.

Possible references:

—–(March 2003). Study shows minimum wage law hurting businesses. Everett Business Journal, 6, 3, A3.

8. Some union leaders negotiate higher wages for employees who must work night shift.

Others are opposed to management asking people to work such shifts. Argue for or

against the operation of night shifts.

Possible references:

Bohle, P. (1998). Early experience of shiftwork: Influences on attitudes. Journal of Occupational and

Higgs, V. (2000). Learn the rhythm of the night (shift). Nursing, 30, (5), pg. HN14, 2 pgs.

Ratcliffe, C. (2004). The economics of work and family. Industrial & Labor Relations Review, 57, 2, 305–

307.

9. What is the “Urban Informal Sector”? What are the prospects for unionizing this

sector of the economy? What, if any, government actions should be taken to address

worker concerns in this economic sector?

Possible references:

Bromley, R. (Ed.) (1979). The urban informal sector: Critical perspectives on employment and housing

policies. Oxford: Pergammon Press.

10. How have compensation issues and labor relations in meatpacking changed in the last

30 years? What strategies do you recommend for union leaders?

Possible references:

Brueggemann, J. and Brown, C. (2003). The decline of industrial unionism in the meatpacking industry:

11. Freeman and Medoff argue that unionized workers are more productive than non-

unionized workers. Why? Others have criticized their conclusions. Do you believe

unionized workers are more productive than nonunionized workers? Support your

arguments.

Possible references:

Freeman, R. B., & Medoff, J. L. (1984). What do unions do? NY: Basic Books.

487–502.

12. What are the advantages and disadvantages of HMO’s (Health Maintenance

Organizations) relative to traditional medical insurance? If you were a union president,

which type of coverage would you seek for union members?

Possible reference:

Halverson, P. (2000). Working together? Organizational and market determinants of collaboration between

13. Should companies offer day-care facilities or child-care allowances as fringe benefits?

Should labor unions seek such fringe benefits? Why or why not?

Possible references:

Auerbach, J. (1990). Employer-supported child care as a woman-responsive policy. Journal of Family

14. What effect do unions have on wages and benefits? (That is, compare the union and

non-union sectors of the economy.) Are unionized firms more profitable or less

profitable than their nonunion counterparts within the same industries?

Possible references:

Belman, D. L., & Voos, D. B. (1993). Wage effects of increased union coverage: Methodological

considerations and new evidence. Industrial & Labor Relations Review, 46, 368–380.

15. Several contracts now contain “two-tier” wage clauses, where new workers will begin

working with substantially lower wages than present new employees. Do you believe

that these clauses are temporary concessions, or do they mark some sort of

fundamental shift in labor relations? Support your position.

Possible references:

Nissen, B. (2003). The Recent Past and Near Future of Private Sector Unionism in the U.S.: An Appraisal.

16. Does Human Capital Theory explain lower earnings of African Americans relative to

Caucasians? Does another theory do a better job of explaining the earnings ratio?

Support your position.

Possible references:

Becker, G. (1964). Human Capital: A theoretical and empirical analysis. Princeton, NJ: Princeton

University Press.

17. Should wages be tied more to seniority or performance? Support your position.

Possible references:

Gerhart, B., Milkovich, G. T., & Murray, B. (1992). Pay, performance, and participation. In D. Lewin, O.

18. Is pay a motivator? What role do unions play in the relationship between money and

productivity (if any)?

Possible references:

Lawler, E. E. m (1990). Strategic pay: Aligning organizational strategies and pay systems. San Francisco:

Jossey-Bass.

19. What is gainsharing? How does it work? Is this an idea that unions should embrace?

Or should they be suspicious of gainsharing systems?

Possible references:

D’Camp, K. A., Ferracone, R. A. (Sept. 1989). Spot gain sharing provides high-impact incentives.

Personnel Journal, 68, (9), 84-88.

20. What effect do unions have on corporate profitability? What effect do they have on the

attractiveness of a company as an investment opportunity (if any)?

Possible references:

21. Why do firms give raises when unemployment levels are high and people are willing to

work for less money? Phrased another way: Why doesn’t supply-demand theory work?

What role do unions play in this process? Support your arguments.

Possible references:

Dorman, P. (1998). Wage compensation for dangerous work revisited. Industrial & Labor Relations

Review, 52, (1), 116- 136.

Freeman, R. B., & Medoff, J. L. (1984). What do unions do? NY: Basic Books.

22. Should states give or deny unemployment benefits to striking union members?

Possible references:

Hutchens, R., Lipsky, D., & Stern, R. (1992). Unemployment insurance and strikes. Journal of Labor

Research, 13, 337-354.

23. Should the minimum wage be changed? Should minimum wage laws be changed? If so,

how? Support your position.

Possible references:

Card, D. (1992). Do minimum wages reduce employment? A case study of California, 19871989.

24. How do “informal information networks” affect employment? What role do they play

within the field of labor economics?

Possible references:

Rees, A. (May, 1986). Information networks in labor markets. American Economic Review, 56. Also

reproduced in: Reynolds, L. G., Masters, S. H., & Moser, C. H. (Eds.) (1986). Readings in labor economics

and labor relations, fourth edition. Englewood Cliffs, NJ: Prentice-Hall, 60-65.

25. Imagine that you were charged with writing a report for the AFL-CIO. Your report is

to offer guidance on whether workers and/or the unions should buy out (i.e., own) their

factories or companies (usually through Employee Stock Option Plans—ESOPs). If they

shouldn’t, explain why not. If they should, explain why and under what circumstances.

Possible references:

Dilts, D. A., & Paul, R. J. (1990). Employee ownership of unionized firms: Collective bargining or

26. What role do unions play in failing organizations? What role should they play?

Possible references:

Jacoby, S. M. (2004). Employing bureaucracy : Managers, unions, and the transformation of work in the

20th century. Mahwah, N.J. : Lawrence Erlbaum.

27. Do unions increase productivity? Or decrease productivity?

Possible references:

Campbell, N., & Vousden, N. (2000). Import competition and worker productivity in unionized firms.

Review of International Economics, 8, (2), 193-207.

28. How have labor unions reacted to innovations in compensation and benefits? For

example, do unions support gainsharing?

Possible references:

Ceniceros, R. (May 17, 1999). Employers defend alternative comp programs. Business Insurance, 33, (20),

pp. 1 & 15.

Fottler, M. D., Johnson, R. A. McGlown, K. J., & Ford, E. W. (Spring, 1999). Attitudes of organized labor

29. Do unions increase economic development (and worker prosperity) when they form in

relatively underdeveloped areas? Or do they have adverse effects on economic

development and the poor?

Possible references:

Deyo, F. C. (Feb., 1997). Labor and post-fordist industrial restructuring in East and Southeast Asia.

Workand Occupations, 24, 97-119.

30. What is the relationship between labor unions and health care benefits? Within this

general question, you might address any of the following more specific questions: Do

unions typically secure a particular type of health care benefit? Do unions help control

health care costs? Do unions favor a particular type of health care reform?

Possible references:

Fottler, M. D., Johnson, R. A. McGlown, K. J., & Ford, E. W. (Spring, 1999). Attitudes of organized labor

31. Do unionized workers earn more money or benefits than similarly situated workers in

nonunion firms in the same industry?

Possible references:

Easton, T., & King, M. C. (Feb., 2000). Differences in wage levels among metropolitan areas: Less–

educated workers in the United States. Regional Studies, 34, (1), 21-27.

32. What are “Taft-Hartley Plans”? How do they work? How do they differ from

traditional plans?

Possible references:

Fulman, R. (April 3, 2000). Seven union plans join fund. Pensions & Investments, 28, (7), 38-39.

33. Some union-owned pension plans now allow workers to direct how their money should

be invested. How do these plans work? How do they compare to traditional 401(k) or

403(b) plans? How do they compare to other types of corporate “defined contribution”

plans? What unique challenges do these plans pose for unions?

Possible references:

Jacobs, A. (June 26, 2000). Union members getting a say in directing assets. Pensions & Investments, 28,

34. Some communities have passed “living wage” legislation? What is this? How does it

compare to the “minimum wage”? Are these laws a good development for public sector

workers and contractors doing business with the government? Or a bad idea? Should

they be applied to all businesses in a community? Why or why not?

Possible references:

Cleeland, N. (Mar. 4, 1999). Unions Fight to Lift Pay for LAX Workers; Labor: Despite a city ordinance,

many are still denied a ‘living wage.’ Organizers are trying to change that. The Los Angeles Times, 1.

35. What are some current issues with pension funds, given the volatility of the stock

market?

Possible references:

Burr, B. B. (Sept. 18, 2000). AFSCME succeeds in first foray into activism. Pensions & Investments, 28,

36. Unions often own large blocks of shares of stock in other companies. How do they use

this stock ownership to advance their own union’s causes or the causes of organized

labor, generally? Should they use their stock ownership to pursue their union causes?

Or is such activism inappropriate?

Possible references:

Burr, B. B. (Sept. 18, 2000). AFSCME succeeds in first foray into activism. Pensions & Investments, 28,

(19), 38–40.

37. Many American workers are employed by staffing agencies. What benefits do these

contingent workers earn compared to typical employees? What are the implications of

this trend for society? Should new legislation be passed at the state or federal level?

Why or why not?

Possible references:

Grimsley, K. D. (May 24, 2000). Temporary Workers Exploited, Group Says; [FINAL Edition]. The

38. Write a paper on the relationship between unions and unemployment compensation.

You might examine the characteristics of typical Supplemental Unemployment Benefits

(SUBs) found in union contracts. Should union workers receive state unemployment

benefits when on strike?

Possible references:

Budd, J. W., & McCall, B. P. (1997). The effect of unions on the receipt of unemployment insurance

Norris, F. (July 23, 1998). Did