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Chapter 10 Contract Terms and Employment Outcomes McGraw-Hill/Irwin An Introduction to Collective Bargaining & Industrial Relations, 4e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserv 10-3 1 - 3 Tracing the Effects of Union Wage Increases • An increase in wages may result in a corresponding, automatic “roll up” in fringe benefits such as sick leave, vacation, pensions, and unemployment benefits - Such wage or benefit increases may pressure the firm to hold down costs by tightening work rules - These “primary direct effects” of unions set off a chain reaction 10-4 1 - 4 The Consequences of Union Effects on Wages 10-5 1 - 5 Stage 1: Primary Union Effects • The primary union effects are on the compensation received by their members • If unions did not raise wages, they would have difficulty attracting and keeping members • Thus, the primary effect is positive - The critical question concerns the size of this and other primary effects 10-6 1 - 6 Stage 2: Management Adjustments • Motivation is to recoup the costs associated with union-negotiated improvements in wages through productivity increases - Management adjustments may include: • Reduction in output or employment • Increase in product price • Substitution of capital for labor 10-7 1 - 7 Stage 3: Secondary Union Effects • The union may react to management adjustments - Union may seek more elaborate job security language - Seek stricter seniority rules in subsequent contract negotiations - These represent secondary union effects on employment conditions 10-8 1 - 8 Escape and Takeovers as Responses • The option of finding a nonunion alternative location or way to get work accomplished - There has been an increase in such responses in recent years • Another possibility is for a different firm to take over the operation and extract concessions 10-9 1 - 9 Union Effects on Employment Conditions • The primary and secondary effects of unions on pay and working conditions depend on the union’s bargaining power - How do union worker earnings compare to earnings if there were no unions anywhere? - This comparison is termed the “Absolute Union Wage Effect” - The “Relative Wage Effect” compares the earnings of union and nonunion workers 1 - 10 10-10 The Empirical Evidence of Relative Union Wage Effects • Empirical studies indicate that the relative union wage effect averages 15 to 20% - That is, unionized workers earn roughly 15 to 20% more than nonunion workers • Various studies show that wage effects of unions vary: - 1. Over time 2. Over the course of the business cycle 3. Across occupations 4. Across industries 5. By workers’ gender, race, education, and age 1 - 11 10-11 Research Techniques • Regression analysis is most frequently used to measure relative union wage effects - The wages of a pool of union and nonunion workers are used as the dependent (or outcome) variable - The union status of each individual or group is entered as an independent (or explanatory) variable • The “threat effect” of unionization makes accurate analysis difficult • The “supply effect” may alter results, as displaced union workers seek jobs in the nonunion sector 1 - 12 10-12 Variation in Union Effects over Time • Unions have the largest relative wage effects during periods of recession - They resist wage cuts whereas nonunion employees are not able to resist such cuts - These relative wage effects decline during upturns - Studies show that perhaps 20% of the inequality in real wages is due to the declining power of unions 1 - 13 10-13 Shifts in Pay Bargaining Over Time • Union bargaining power varies over time - Partly due to changes in the economy • Increased price competition in international and domestic markets made it hard to take wages out of competition since the mid-1980s - This weakened union bargaining power • Rises in salaries in the non-union sector exceeded the increases in the union sector - Partly due to highly educated workers in nonunion workplaces 1 - 14 10-14 Union Effects on Wage Administration • Union Contracts tend to link worker wages to specific jobs and not worker characteristics - While seniority is a guiding principle for worker transfers and other rights, it does not typically directly influence worker wages in the U.S. • Collective bargaining has brought innovations to wage administration, such as: - Cost of living adjustments - Deferred wage increases (sometimes referred to as annual improvement factors) - Red circle wage rates (stipulations that provide for rate retention to employees whose jobs are evaluated downward due to technological change) - Wage reopener provisions 1 - 15 10-15 Union Effects on Fringe Benefits - In general, unionized workers receive a wider variety and higher level of fringe benefits than nonunion workers - During WWII, the War labor Board first sanctioned bargaining over fringe benefits as a means of holding down the size of basic wage increases - In the 1948 Inland Steel case, the NLRB ruled that pension and retirement issues belonged on the mandatory list of subjects • By the late 1950s, the Board added health insurance, sick leave, supplemental unemployment benefits, vacations, and holidays 1 - 16 10-16 The Sources of Unions’ Demands for Fringe Benefits - Union membership typically includes a high number of older workers and workers with long tenure who place a high priority on benefits such as pensions and insurance - Older members typically carry greater political influence within the unions - Low turnover also leads to higher benefits - Employee demand for benefits increases as income rises, since tax issues make benefits more desirable 1 - 17 10-17 Trends in Fringe Benefit Provisions - Unionized employees exhibit a strong preference for fringe benefits - Union workers receive a wider range of fringe benefits - They also receive a greater percentage of total compensation in fringe benefits than non-union employees • Health insurance benefits remain an integral part of nearly all collective bargaining agreements - Recent evidence indicates that new jobs in the U.S. are less likely to provide health & pension benefits 1 - 18 10-18 Union Effects on Quit Rates • Unionized business have lower quit rates than nonunion companies - Unionized operations provide the ability for employees to redress problems - Unions provide a voice mechanism for workers to gain higher compensation than in a similar nonunion job • Even after controlling for the union effects on wages, union establishments have been found to have lower quit rates 1 - 19 10-19 Union Effects on Work Rules - Protection from Arbitrary Treatment • Among the most important effects of unions has been protections from arbitrary discipline, discharge, or denial of benefits • Unions developed grievance procedures ending in arbitration • Although nonunion grievance procedures have grown in recent years, few end in arbitration - Seniority • Seniority plays an important role in collective bargaining • Seniority is pivotal in personnel decisions, such as promotions, job assignments, and layoffs 1 - 20 10-20 Frequency and Common Forms of Seniority Language • Seniority is a factor in promotion decisions in 73% of manufacturing and 57% of non-manufacturing agreements in 1995 - Only 5% mentioned that seniority is the only criterion - Seniority was the determining factor in 49% of cases if the employee was qualified • Pros and Cons of Seniority Provisions - They produce longer tenure, but reduce advancement of younger workers - Such provisions may slow the advancement of younger employees with above-average abilities - Strict adherence to seniority can be costly to businesses in a period of changing technology 1 - 21 10-21 Job and Income Security - Job security is of special concern to union members, since management adjusts to unions’ primary effects • As unions increase wages, they give employers reasons to make compensating adjustments that reduce employment levels - Employers often oppose demands for job and income security • Since they increase costs, reduce employers’ ability to adjust labor costs to economic conditions, and limit managerial discretion • The comprehensiveness of the job and income security protections that union workers achieve is a function of bargaining power 1 - 22 10-22 Job Preservation • Unions can negotiate work-sharing provisions that cut workweek hours during slack times - This practice is found in 17% of all union contracts and almost all apparel industry contracts - A disadvantage is that unemployment benefits do not cover work-sharing provisions - Management sometimes considers such provisions as costly and featherbedding • Income Security During Temporary Layoffs - When sales decline, firms commonly reduce employment levels - Temporary layoffs are common in durable goods industries such as automobile and household appliance manufacturers 1 - 23 10-23 Programs in Response to Permanent Job Loss - Not all laid off workers area recalled - Thus, Congress passed the “Worker Adjustment and Retraining Notification Act of 1989” • Requires employers to provide advance notice to employees affected by plant closings • Employers with 100 or more employees must give 60 days notice of plant shutdowns when they affect at least 50 workers • Mass layoffs that last more than six months and impact 50 or more workers, or impact 33% of the work force of more than 500 workers for any time period, require advance notice 1 - 24 10-24 Employment Security Initiatives • A number of collective bargaining agreements in recent years provide enhanced employment security - These include lifetime job guarantees to workers on the payroll as of a specified date - Auto and certain other contracts provide retraining alternatives for workers on layoff • Some other agreements provide increased incentives for older workers to retire or quit - This is a way to avoid layoffs 1 - 25 10-25 Why the emphasis on employment security? • The emphasis on employment security is not surprising in light of the layoffs of recent years - Layoffs after WWII had mostly been temporary and workers eventually recalled - In four recessions prior to 1990, 44% of those laid off were expected to get their job back - In the 1991-1992 recession, this number declined to 14% - The average displaced worker could expect a 20% reduction in pay and reduced benefits • Thus, the Saturn-UAW agreement that promised 80% of workers guaranteed jobs was popular but rare 1 - 26 10-26 Management’s Response to Work Rules • Many provisions of the bargaining agreement limit management’s discretion - In response, management has taken a number of steps to expand its discretion over work rules • Management Rights Clauses - Some clauses are simple, such as “the supervision, management, and control of the company’s business, operations, and plants are exclusively the function of this company” - Others are more specific in areas such as the right to hire, promote, discharge, locate plants, schedules, and methods 1 - 27 10-27 The Residual Rights Doctrine • The residual rights doctrine assumes that all rights not covered by a specific clause in the contract are retained by management - Most popular for management; derives from property rights of stockholders • Implied Obligations Doctrine - The implied obligations doctrine assumes that the union recognition clause requires management to negotiate changes in terms and conditions of employment even in the absence of an express contract provision that covers the issues involved • Some use this to limit a firms freedom to hire and fire at will 1 - 28 10-28 Productivity Bargaining • Productivity bargaining can take one of two forms: - One-time buyout of outmoded practices - Long-term, joint union-management program for adjusting to change • The Pacific Maritime Association signed a mechanization and modernization agreement with the International Longshoremen and Warehousemen’s Union in 1960 that provided a $5 million productivity fund, wage and employment guarantees, and incentives for early retirement in return for changing work rules • In 1974, typographers in New York City entered a productivity agreement regarding computerization 1 - 29 10-29 Alternative Work System: From Work Rules to Teamwork • From the 1980s, one-time buyouts gave way to more comprehensive efforts to restructure work and enhance flexibility, teamwork, and continuous improvement in quality • From the 1940s through the 1970s, unions and companies modified provisions incrementally • By the mid-1970s, the stability had failed and broader restructuring was demanded • By using the Toyota production system and flexible teams, training, and collaboration, the New United Motors Manufacturing Inc. - the GM-Toyota venture outperformed both low and high technology GM plants with traditional work systems 1 - 30 10-30 Safety and Health • Unions historically used three strategies to improve safety and health: - Supporting governmental regulation - Negotiating safety provisions - Encouraging the formation of joint union-management safety and health committees • Unions were a driving force behind the passage of OSHA in 1970 • Union demands for higher compensation also affect plant safety - Safety and health committees rose from 31% in 1970 to 64% in today 1 - 31 10-31 Summary • Unions raise the wages of their members over nonunion workers • Concessionary bargaining in the 1980s and the moderation of wage settlements in the 1990s have resulted in pay increases that are substantially below those of previous years • Unions increase the range of fringe benefits available to workers • Unions have negotiated a wide range of job security provisions • Unions reduce turnover, primarily by increasing the value of jobs over the alternative nonunion jobs • The average effect of unions, after management made adjustments to increase compensation costs, was to increase productivity