4 ways UAW could end 2-tiered wages with Detroit Three

UAW President Dennis Williams has made it clear that one of his top priorities in contract talks is to "bridge the gap" in hourly pay between entry level workers and workers hired before 2007, to kill or make strides toward eliminating the two-tier wage system.

What's less clear is how he plans to do that. Analysts see at least four options the UAW could pursue as it renegotiates a contract that expires on Sept. 14, but all of them come with challenges and drawbacks.

The entry level, or tier 2 wage, the union agreed to back in 2007 is despised by UAW members and leaders alike because it violates a historic principle held by the union of equal pay for equal work. It also creates tension between workers who earn different pay for the same job.

Today, new workers are hired at $15.78 per hour and earn a top wage of $19.28 per hour after four years.

"Their future seems somewhat bleak, because they have no path (to full pay)…and for many of them they feel like second class citizens," Williams said last Tuesday.

Fiat Chrysler CEO Sergio Marchionne agrees with Williams, and said the two-tier wage structure is unsustainable. But most analysts doubt that means Marchionne -- or any of the Detroit Three -- will simply agree to bump workers up to the $28 per hour that most legacy workers make.

Top executives for General Motors, Ford and FCA have all said labor rates must remain competitive. But union leadership quickly points out that the Detroit Three are making more money than in years.

Historically, multi-tier wage structures are adopted by companies in severe financial distress and are opposed by unions and difficult to eliminate -- especially after thousands of workers are hired, said Stacey McKee Knight, a partner with Katten Muchin Rosenman in Los Angeles.

So what options does Williams have in his quest to dramatically change or eliminate the two-tier wage structure for the 138,000 hourly workers the UAW represents? Below, we will explore four different scenarios:

Option 1 -- Finding a middle ground: The UAW could try to push GM, Ford and FCA to agree increase the entry level top wage to a higher rate and freeze the legacy wage rate. Under this scenario, workers hired after 2007 could earn a top wage of somewhere between about $23 and $26 per hour, or whatever final wage negotiators agree to adopt. Eventually, as older workers retire, the entry level wage will become the only wage rate.

Chance of it being adopted: Some form of this scenario is among the most likely outcomes, according to Art Schwartz, president of Labor and Economics Associates in Ann Arbor.

"I think what Marchionne wants to do is create a tier 1.5 -- a wage somewhere between one and two," Schwartz said.

The problem with this idea is the workers haven't had a base wage increase since 2005 -- a decade -- and many believe they deserve a wage increase from this contract. Williams also has vowed to press for a wage increase for those workers.

Option 2 -- Pathway to the top: Create a long-term, multi-year wage scale that takes entry level workers to the top of the pay scale. Under this scenario, the union and automakers could agree to provide workers with a raise every year for six or eight or 10 years, until they get to $28 per hour. Any consideration of inflation or cost-of-living adjustments would be a separate topic.

This would be similar to the contract that Unifor, previously known as the Canadian Auto Workers, has with the Detroit Three. Unifor resisted pressure in recent contract talks to adopt a two-tier wage structure. Instead, Canadian auto workers start at $20.33 Canadian dollars per hour and can work their way up to CA$33.89, after 10 years.

Chance of it being adopted: Automakers are likely to fiercely resist this option because it would cause their labor costs to increase over time.

But Kristin Dziczek, director of the industry and labor group at the Center for Automotive Research in Ann Arbor, predicts this will emerge as the best option for both the UAW and automakers because it would give all workers a clear path to the top wage.

That means the UAW could claim victory and tout the complete elimination of the hated two-tier structure -- a powerful message that would help immensely with the contract ratification process.

It's also what Tommy Wolikow, 33, who works at GM's Lordstown, Ohio plant would like to see.

"We are hoping that at least we see some light at the end of the tunnel," said Wolikow, who will have worked at the plant for nine years by the end of the next four-year contract. "What am I going to be? An entry level employee when I am ready to retire?"

This option also could include another component. Both the UAW and automakers would like to bring additional work into auto plants that is currently done by suppliers. That could create new jobs at a lower wage rate. Technically, this would not be considered another tier because it would be a different type of work, and therefore would not violate the union's "equal pay for equal work mantra."

Option 3 -- Adjusting the caps: The UAW and the Detroit Three could agree to reinstate and/or adjust the caps on the percentage of entry level workers they are allowed to employ and commit to boosting workers up to the full wage if they exceed the caps.

Originally, two-tier structure included a commitment by automakers to automatically begin bumping workers up to the full wage as soon as more than 20% or 25% of the workforce became entry level workers.

Chance of it being adopted: This scenario is complicated because each automaker has hired a vastly different percentage of entry level workers over the past five years and have different contractual obligations.

FCA and GM convinced the UAW to eliminate their caps in

2009 and 2011 with the idea that they would be reinstated under the next contract. Since then, FCA has hired more than 15,000 entry level workers, or about 43% of its total U.S. hourly workforce. That's much more than the approximately 19% of entry level workers employed by GM and 29% at Ford. Ford, which was not released from its cap, has transitioned more than 800 workers to the tier 1 wage rate this year.

"All of these scenarios are complicated," Schwartz said. "And there is a chance…the UAW could do something different (with each company.) If they are going to stick to the same pattern (for all three), then its going to be really tough."

Option 4 -- Abolish it: Completely eliminate the two-tier structure and move all workers up to the higher wage rate.

Chance of it being adopted: This is obviously the dream scenario for the UAW but a nightmare scenario for the Detroit Three. Top auto executives have vowed to keep labor costs competitive with Asian and German automakers with plants in the U.S. and say the industry cannot afford to repeat the sins of the past. So this will not happen.

Brent Snavely: 313-222-6512 or bsnavely@freepress.com. Follow him on Twitter @BrentSnavely.

A closer look at two-tier wage structure

Why was it adopted? In 2007, the Detroit Three were losing money and their labor costs were far higher than Asian and German automakers with plants in the U.S. The UAW agreed to a new, entry level wage in return for job commitments.

What was the initial pay scale? Originally, new workers were hired at $14.20 per hour and were to earn a top wage of $15.34 per hour.

Has that changed? Yes. In 2011, the UAW won a raise for entry level workers. Today, new workers are hired at $15.78 per hour and earn a top wage of $19.28 per hour after four years. However, that's about $10 per hour less than $28 per hour that workers hired before 2007 make.

Has the two-tier wage structure led to more jobs? In many ways, yes. Automakers say the lower wage rate is one of the key reasons that their labor costs are now closer to being competitive with Asian and German automakers and are among the main reasons that each automaker has invested billions for new products in U.S. plants. Today, about 40,023, or 29%, of the 138,000 hourly workers at General Motors, Ford and Chrysler were hired at the entry level rate.

So, why do UAW members and workers hate it so much? Even labor lawyers who represent corporations concede that two-tier pay structures lead to discontent and low morale.

"Since the founding of the UAW, equal pay for equal work has been one of the guiding principals of the union," said Mike Smith, Archivist for the Michigan Historical Collection at the University of Michigan. "The idea of equal pay for equal work was developed during the 1930s, an era when industrial workers were poorly treated and faced capricious management. This is why the UAW has defended the principle for about 70 years."