Two-tier system

A two-tier system is a type of payroll system in which one group of workers receives lower wages and/or employee benefits than another.[1]

The two-tier system of wages is usually established for one of three reasons:

  • The employer wishes to better compensate more senior, ostensibly more experienced and productive workers without increasing overall wage costs.
  • The employer wishes to establish a pay for performance or merit pay wage scheme that compensates more productive employees without increasing overall wage costs.
  • The employer wishes to reduce overall wage costs by hiring new employees at a wage less than the wage of incumbent workers.[1][2]

A much less common system is the two-tier benefit system, which extends certain benefits to new employees only if they receive a promotion or are hired into the incumbent wage structure.[3][4][5]

That can be distinguished from traditional benefit structures, which permit employees to access a benefit, such a retirement pension or sabbatical leave, after they have achieved certain time-in-position levels.

Two-tier systems became more common in most industrialized economies in the late 1980s.[6][7] They are particularly attractive to companies with high rates of turnover for new hires, such as in retail, or with many high-wage, high-skilled employees about to retire.[8]

Motivations

Trade unions generally seek to reduce wage dispersion, the differences in wages between workers doing the same job.[3] Not all unions are successful, however. A 2008 study of collective bargaining agreements in the United States found that 25% of the union contracts surveyed included a two-tier wage system.[3] Such two-tier wage systems are often economically attractive to both employers and unions. Employers see immediate reductions in the cost of hiring new workers.[3] Existing union members see no wage reduction, and the number of new union members with lower wages is a substantial minority within the union and so is too small to prevent ratification.[3][6][8] Unions also find two-tier wage systems attractive because they encourage the employer to hire more workers.[3][6][9]

Some collective bargaining agreements contain "catch-up" provisions which allow newer hires to advance more rapidly on the wage scale than existing workers so that they reach wage and benefit parity after a specified number of years, or they provide wage and benefit increases to new hires to bring them up to party with existing workers if the company meets specified financial goals.[5]

Problems

Some studies have found problems with two-tier systems like higher turnover for newer, lower-paid employees and a demoralized workforce.[8][10] After enough time, a two-tier wage system can permanently lower wages in an entire industry.[8] Lowering productivity expectations for new hires seems to alleviate some of the problems.[9]

References

  1. 1 2 Sherman, Arthur W.; Bohlander, George W.; and Snell, Scott. Managing Human Sesources. Cincinnati, Ohio: South-Western College Pub., 1996, p. 379.
  2. ↑ Garibaldi, Pietro. Personnel Economics in Imperfect Labour Markets. Oxford: Oxford University Press, 2006, p. 115; Symposium on the Social and Labour Consequences of Technological Developments, Deregulation and Privatization of Transport. Bert Essenberg, ed. Geneva: International Labour Organisation, 1999, p. 24.
  3. 1 2 3 4 5 6 Holley, William H.; Jennings, Kenneth M.; and Wolters, Roger S. The Labor Relations Process. Mason, Ohio: South-Western Cengage Learning, 2009, p. 303.
  4. ↑ Cappelli, Peter. Employment Relationships: New Models of White-Collar Work. Cambridge, Massachusetts: Cambridge University Press, 2008, p. 194.
  5. 1 2 Harrison, Bennett and Bluestone, Barry. The Great U-Turn: Corporate Restructuring and the Polarizing of America. New York: Basic Books, 1990, p. 42.
  6. 1 2 3 McConnell, Campbell R.; Brue, Stanley L.; and Macpherson, David A. Contemporary Labor Economics. Boston: McGraw-Hill, 1999, p. 350.
  7. ↑ Saint-Paul, Gilles. Dual Labor Markets: A Macroeconomic Perspective. Cambridge, Massachusetts: MIT Press, 1996, p. 183.
  8. 1 2 3 4 Harrison, Bennett and Bluestone, Barry. The Great U-Turn: Corporate Restructuring and the Polarizing of America. New York: Basic Books, 1990, p. 43.
  9. 1 2 Bewley, Truman F. Why Wages Don't Fall During a Recession. Cambridge, Mass.: Harvard University Press, 2007, p. 147.
  10. ↑ Bewley, Truman F. Why Wages Don't Fall During a Recession. Cambridge, Mass.: Harvard University Press, 2007, p. 146.
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