Chapter 7
Economic Issues
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All rights reserved.
PowerPoint Presentation by Charlie Cook
The University of West Alabama
Industrial Wage Differentials
• What Wages and Benefits Represent
 A standard of living for employees
 A cost to be controlled for employers
• Reasons for Wage Differentials
 The degree of competition or monopoly in the product
market
 The value added by workers in a particular industry
 The percentage of total product or service cost
represented by labor costs
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7–2
Evaluating Jobs within the Organization
• Job Analysis—What is the Job?
 Job description

A listing of job factors (tasks, duties, and responsibilities)
required to perform the job
 Job specification

A listing of the knowledge, skills, abilities, and other factors
(KSAOs) required to be possessed by holders of the job
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7–3
Evaluating Jobs…(cont’d)
• Methods of Job Evaluation—What is the Job
Worth to the Organization?
 Ranking

Compares each job to every other job to create a hierarchy of
jobs.
 Classification

Groups similarly valued jobs into classes
 Point system

Assigns points to each job based on the degree to which job
(compensable) factors are present in the job
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7–4
Preferences for Determining Wage
Structures during Collective Bargaining
Union Preferences
Include if favorable
External
Factors
Grievances
Wage
Structures
Wage Surveys
Internal
Factors
Job Evaluation
Company Preferences
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7–5
Exhibit 7.
Typical Wage Structure for a Manufacturing Firm
SOURCE: Adapted from Collective Bargaining Negotiations and Contracts
(Washington, D.C.: Bureau of National Affairs Inc., 1992), p. 18:331.
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7–6
Surveying Firms’ Wage Structures
• Sources of Wage Surveys
 U.S. Department of Labor

National Compensation Survey (NCS)

Occupational Employment Statistics (OES)
 Trade and professional groups
 Employer-initiated surveys
 Union-initiated surveys
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7–7
Exhibit 7.2
Typical Results from a Wage Survey
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7–8
Production Standards and Wage Incentives
• Production Standards
 Expected employee output consistent with the
working capacities of normal (typical) operators.

Determined by time studies of effort and motion

Used as the basis for calculating standard and incentive
wages
• Goals for Wage-Incentive Plans
 Increase employee productivity
 Attract prospective employees
 Reward employees monetarily
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7–9
Incentive Plans
• Employee Reward-Incentive Plans
 Lump-sum bonuses
 Profit sharing plans
 Skill-base pay (SBP)
• Group Gain-sharing Incentive Plans
 Scanlon Plan

Sharing of savings from the reduction of total labor costs
 Rucker Plan

Ratio of labor costs to dollar value added
 Improshare Plan

Reduction in labor costs over base-period labor costs
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7–10
Arguments Used by Management and
Union Officials in Wage Determination
• General Factors in Wage
Outcomes
 Differential features of




the job
Wage comparability
Organization’s ability to pay
Productivity
Cost of living
• Internal Factors
 Firm-specific labor costs
 Expected profits
 Labor market conditions
• Competitive Factors
 Operating efficiency
 Cost-cutting
 Productivity improvement
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7–11
Differential Features of the Work:
Job Evaluation and the Wage Spread
• Wage Spread
 Represents the internal distribution of the proposed or
negotiated wage increase to the bargaining unit
employees
• Importance of Spread to Management
 Retaining skilled employees
 Motivating lesser-skilled employees
• Union Focus
 Equal pay for equal work = single rate pay
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7–12
Exhibit 7.3
Three Examples of Internal Wage Spreads
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7–13
Exhibit 7.4
Examples of Two-Tier Pay Scales
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7–14
Wage Determination Arguments
• Wage Comparability
 Wage rates are equal or related among comparable
bargaining units.
• Degree of Labor Intensity
 Wages are less important and easier to bargain for
when they are a low percentage of total costs.
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7–15
Wage Determination Arguments
• Ability to Pay
 Ability to pay has limited usefulness; focus is on firm
performance, not on employee performance.
 Unions expect a firm in good financial condition to pay
higher wages, but not reduce wages when the
condition of the firm declines.
• Productivity
 Conceptually, workers’ wages should vary with
changes in their productivity (output to costs).
 Productivity increases can occur for reasons
unrelated to workers increasing their efficiency.
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7–16
Exhibit 7.5
Average Annual Rates of Change in Manufacturing Output per Hour
for the United States and Selected Countries
SOURCE: U.S. Department of Labor, ‘‘International Comparisons of Manufacturing
Productivity and Unit Labor Cost Trends, 2005,’’ News Release, September 26, 2006, p. 6.
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7–17
Wage Determination Arguments (cont’d)
• Cost of Living
 Unions demand higher wages to maintain real wage
purchasing power when the cost of living rises.
• Consumer Price Index (CPI)
 An index that measures the monthly change in the
prices of goods and services for a typical household.
• Comparable Worth
 The concept that different jobs that make comparable
contributions to the organization should have the
same pay rates.
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7–18
Wage Adjustments during the Term or
Duration of the Labor Agreement
• Methods for Adjusting Wages
 COLA provisions—scheduled wage increases based
on the degree of change in the chosen index

Selection of an index (generally, CPI-W) and base point

Frequency and timing of COLAs

Adoption of a formula (e.g., one cent increase in wages for
each three-point rise in CPI)

Effects of COLA in increasing the costs of other
compensation elements
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7–19
Wage Adjustments during the Term or
Duration of the Labor Agreement (cont’d)
• Methods for Adjusting Wages (cont’d)
 Deferring wage increases in multi-year labor contracts

Back-loaded: larger wage increases occur later in the
contract period.

Front-loaded: smaller wage increases occur later in the
contract period.

Even-loaded: Wage increases are equal in all years of the
contract.
 Lump-sum pay adjustments

Lump-sum does not become part of regular compensation.
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7–20
Exhibit 7.6
Employer Costs per Hour Worked by Bargaining Status, March 2007
SOURCE: U.S. Bureau of Labor Statistics, ‘‘Employer Cost for Employee
Compensation—March 2007,’’ News Release, June 21, 2007, p. 11.
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7–21
Health-Care Cost Containment
• Cost Shifting to Employees
 Co-payments, deductibles, and increased premium
contributions by employees
• Fee-for-Service Plans
 Preferred Provider Organization (PPO)

Agree to a fixed/lower rate schedule of fees for their services
to company employees.
 Health Maintenance Organization (HMO)

Contracts with the employer to deliver services to company
employees for a fixed contract amount.
 Consumer-directed Health Care Plan

Involves a high deductible insurance policy combined with a
health savings account.
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7–22
Income Maintenance
• Severance Pay
 Provides employee with a lump-sum payment at the
time of an employee’s termination.
• Supplemental Unemployment Benefit Plan
(SUB)
 Pays an additional amount to an employee during the
time when the employee is temporarily unemployed.
• Work Sharing
 In order to avoid a layoff, the parties agree to a less-
than-40-hour work week.
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7–23
Premium Pay—Overtime
• Overtime Pay
 Time-and-a-half rate for all hours worked beyond an
8-hour day

Fair Labor Standards Act requires overtime pay only after 40
regular hours of work in a week.
 Double-time rate for Sundays and holidays
 Equalization of overtime hours among workers,
typically by seniority
 Mandatory overtime requirements within a required
minimum advance notice
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7–24
Premium Pay—Other Supplements
• Shift Differential
 Hourly premium paid for working undesirable shifts
• Reporting Pay
 Minimum guaranteed pay when employee is sent
home due to no available work on a workday
• Call-In Pay
 Payment for working nonscheduled hours
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7–25
Payment for Time Not Worked—Holidays,
Vacations, and Rest Periods
• Incidental Nonwork Benefits
 Bereavement leave
 Jury duty leave
 Sick leave
 Military leave
 Personal leave
 Voting leave
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7–26
Payment for No Work—Holidays, Vacations,
and Rest Periods
• Major Paid-Leave Benefits
 Holidays

Eligibility for pay
– Typically, there is a required length of service before qualifying
for holiday pay.
– Must work scheduled work day before and scheduled work day
after holiday to qualify for holiday pay.
 Vacations
An employee’s amount of annual vacation time increases with
the employee’s length of service.
 Scheduling of vacations is based on an employee’s seniority.

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7–27
Pensions
• Age Discrimination in Employment Act (ADEA)
 Prohibits mandatory retirement age requirements.
• Pension Plans
 Defined benefit plan
Plan pays retired employees a specific amount each month.
 The employer must invest sufficient funds such that it can pay
its obligations to the retired employees.

 Defined contribution plan
An employer contributes a specific amount each month to the
retirement account of each employee.
 Payout is based on the financial performance of the invested
contributions.

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7–28
Pensions—Other
• Union Effect on Pension Plans
 Increased pension coverage and larger benefits
 Benefits skewed toward senior employees
 Pensions equalized among bargaining unit
employees
 Higher increases in benefits after retirement
 Earlier employee retirement age
• 401(k) Savings Plans
 An employer may match the contributions of
employees to their tax-deferred retirement accounts.
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7–29
Pensions—Other (cont’d)
• Employee Stock Ownership Plan (ESOP)
 Employees hold stock in their company.
Company stock is basis for employee retirement benefits.
 The value of the stock can have a dramatic effect on the
retirement prospects of employees.
 Unions oppose ESOPs.

• Cash Balance Pension Plans
 A tax-deferred employee account to which the
employee and employer contribute.
Employees have the option of receiving an annuity payment
or a lump-sum payment.
 Benefit-neutral to length of employee service.

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7–30
Pensions—Other (cont’d)
• Vesting
 Is sufficient service to acquire rights to retirement
benefits

Is required by Employee Retirement Income Security Act
 Cliff vesting schedule

After five years of service, employee is considered fully
vested.
 Graded vesting schedule

Employees are vested in stages over a period of time.
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7–31
Family and Other Benefits
• Family and Medical Leave Act of 1993
 Requires private employers to provide eligible
employees with up to 12 weeks of unpaid leave.
 Employee must have been employed for at least one
year and worked at least 1,250 hours within the
previous 12 months.
• Other Benefits
 Prepaid legal services
 Employee assistance plans
 Education tuition aid
 Transportation subsidy
 Child-care assistance
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7–32
Exhibit 7.7
Union Versus Nonunion Employee Median Weekly Earnings, 2006
Nonunion data include the earnings of managers and other salaried (nonbargaining unit)
employees.
Data for both union and nonunion groups exclude employer-paid benefits although union
members typically enjoy an even greater advantage in fringe benefit comparisons (See data in
Exhibit 7.6, on pg. 311.
SOURCE: US. Department of Labor, “Union Members in 2006,” News Release, January 25, 2007, p. 10.
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7–33
Key Terms
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Degree of labor intensiveness
Job evaluation
Job analysis
Profit-sharing plans
Gain-sharing plan
Scanlon plan
Rucker plan
Improshare plan
Skill-based pay (SBP)
Wage spread
Skill pay differential
Two-tier pay plan
Wage comparability
Ability to pay
© 2008 Cengage Learning. All rights reserved.
•
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Labor productivity
Consumer Price Index (CPI)
Cost-of-living adjustment (COLA)
Deferred wage increase
Wage re-opener
Back-loaded
Front-loaded
Even-loaded
Lump-sum pay
Fee-for-service plans
Preferred provider organization
(PPO)
• Health maintenance organization
(HMO)
7–34
Key Terms
• Consumer-directed health care
plan
• Severance pay
• Supplemental unemployment
benefit plan (SUB)
• Work sharing
• Premium pay
• Shift differentials
• Reporting pay
• Call-in pay
• Defined benefit pension plan
• Defined contribution pension
plan
• Employee stock ownership
plan (ESOP)
© 2008 Cengage Learning. All rights reserved.
• Cash balance plan
• Pension Protection Act of 2006
• Employee Retirement Income
Security Act (ERISA) of 1974
• Cliff vesting schedule
• Graded vesting schedule
• Family and Medical Leave Act
(FMLA) of 1993
• Prepaid legal service plans
• Employee assistance plan (EAP)
• Education tuition aid
• Transportation subsidy
• Home computer
• Child-care assistance
• Spillover effect
7–35