Chapter 5 Institutional Constraints: Labor Markets & Labor Unions Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt, Inc., 6277 Sea Harbor Drive, Orlando, Florida Compensation Decision Making Bergmann & Scarpello 4th edition

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Internal Labor Market Generally, all those employees who work for the organization Conceptually, all positions, all jobs, and all job families or job clusters within an organization and the relationship of these positions, jobs, and job families to each other, as well as to the external labor markets of relevance to the organization

Hypothetical Labor Market for Office/Clerical Employees Internal Labor Market VP of Marketing Nat’l Sales Manager Mktg Coordinators Sales Associates Admin. Asst. Secretary II Secretary I Typist Mktg Research Mgr Mktg Researcher II Mktg Researcher I Secretary Receptionist Safety Supervisor Guard-Lead Person Guard Entry Different Internal Market Different Internal Market Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Implications of the Internal Labor Market for Compensation Employees often isolated from external labor market thus organizations can exercise discretion in pay rates Hiring is primarily for port-of-entry jobs thus these jobs must be competitive in the external labor market Many jobs are organization- specific thus perceptions of internal equity are more are more important than perceptions of equity across organizationsEmployee mobility is reducedthusinternal equity is moreimportant than external equity Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Today’s Labor Markets: More Open Due to The need to obtain key personnel with special skills that have not been developed internally A lessening in the value given to experience with a particular firm due to the rapidly changing business environment Notion of career ladder becoming “rock climbing”

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Interindustry Wage Structure Interindustry wage structure: Interindustry wage structure: wage differentials between employees of different industries who have comparable skills >

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Causes of Wage Differentials competition wageIndustry product market characteristics competition wage Industry profitability profitability wage Capital intensity level capital intensity wage Union density level union density wage

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Labor Unions & Compensation: Collective Bargaining Collective Bargaining: Collective Bargaining: the process of negotiations between the labor union and the organization

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Labor Unions & Compensation: Collective Bargaining Prohibited Issues:Prohibited Issues: issues prevented statutorily Permissive Issues:Permissive Issues: issues that labor and management can negotiate if they both want to, but the parties are not bound by law to negotiate them (bargain in good faith) Mandatory Issues:Mandatory Issues: issues that the parties by law are required to negotiate (wages, hours, working conditions)

Labor’sinitialdemand $17.00/hr ABGC HEF Management’s initialoffer initial offer Currentcontractpackage Labor’sstickingpoint $10.00/hr $12.50/hr $13.50/hr $14.50/hr Management’sstickingpoint F = Settlement Range Conceptual Theoretic Bargaining Situation Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Number of Strikes Involving 1000 or More Workers Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Labor Unions and Compensation Basic Patterns –Most CBAs for 3 yr duration –“Just cause” for discharge required in ~85% –Provisions designed to lower health care costs increasingly common In addition to increasing wage levels, over time Us have introduced innovations such as –COLAs (~50% of CBAs in late 70s, now <20%) –Deferred wage increases (~80% of CBAs) –now standard benefits (pensions, health insurance, sick leave, SUBs, vacations, holidays [median is 11]) Recent Developments –Concessions –Reduced (or eliminated) COLAs –Lump sum increases (~15% of CBAs) –Contingent compensation –Two-tier wage agreements (~30% of CBAs)

Labor Union Influence on General Compensation NonWage Benefits Wage Levels Compensation for Nonunion Employees Productivity Wage Structure Board of Directors U.S. Trade Deficit Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Median Weekly Earnings of full-time wage and salary workers by union affiliation and industry, 2004 UnionNonunion Private wage and salary Mining Construction Manufacturing Transportation and utilities Wholesale and retail trade Government * (2001 data) Percentage increase, , overall:2.0% Union:3.1% Nonunion:2.0% Source: U.S. Department of Labor, Bureau of Labor Statistics, January 2005.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Labor Union Influence on General Compensation Wage Structure –Unionized firms less likely to use ranges and merit pay –Two-tier plans (more in ch. 15) Non-wage Benefits –Unions have significant effect on level of benefits, esp. pensions Unions and Productivity –Monopoly model suggests negative effect Unions raise wages, leading to allocative inefficiency Negotiate restrictive work practices Strikes –Collective voice view suggests positive effect Unions reduce quits Seniority principle encourages info sharing w/ junior ees “Shock” effect Unions open communication channels (voice rather than exit)

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Labor Union Influence on General Compensation Union effect on non-union Ees –“Spillover Effect” Trade Deficit –Not clear that unions are significant cause of trade deficit Influence on Boards –Use of proxy resolutions

Labor Union Influence on Specific Compensation Decisions Benefits: Enhanced for Members Wages: COLAs Wage Structure: Rate vs. Range Income Security: SUBs Income Security: Guaranteed Annual Wage Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Labor Union Involvement in Compensation Decision Making Job Classification Committee Wage and Benefits Survey Committee Incentive Plan Committee Health Care Benefits Committee Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Wage Differential at 16% Benefit Differential at 79% Non-union worker Union worker The Union Difference Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Grievance Procedure: Grievance Procedure: a method, outlined in most labor-management contracts, to deal with disputed interpretation of issues in the contract. If the parties can’t agree, a neutral third party may arbitrate the issue. The arbitrator’s decision is usually final and binding. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.