Government reports and the PayScale Index indicate that while job opportunities are up and unemployment is down – wage stagnation remains a problem for many Americans.
The current unemployment rate was 3.7 percent in June 2019, up from a 49-year low of 3.6 percent in the previous month. Since 2006, wages have risen 14.4 percent overall in the U.S. But when you factor in inflation, “real wages” have actually decreased by 9.8 percent. To put it another way, the income for a typical worker today buys them less than it did in 2006. What factors are contributing to this frustratingly sustained phenomenon?
One factor is the two-tiered wage system. This system is a type of payroll system where one group of workers receive lower wages than another group. It became more common in the late 1980s and was attractive to organizations with high rates of turnover for new hires, or with many high-wage, high-skilled employees about to retire.
It is primarily established for one of three reasons:
- The organization wants to better compensate workers with seniority – without increasing overall wages.
- The organization wants to establish a pay for performance or merit based system that rewards more productive employees without increasing overall wage costs.
- The organization wants to reduce overall wage costs by hiring new employees at a wage less than the wages of workers with seniority.
Advantageous to Unions and Employers
Two-tier wage systems have been economically attractive to both employers and unions. Employers see reductions in the cost of hiring new workers. Existing union members don’t get a wage reduction, and the number of new union members with lower wages is a substantial minority (so too small to cause problems). Unions also favor the two-tier wage system because they encourage the employer to hire more workers. But what about the employees?
During the great recession workers lost negotiating power. Employers took advantage of that to lower wages within their two-tiered wage systems and, for many workers, wages were never re-adjusted to market levels after the recession was over. Additionally, many organizations adopted the two-tiered wage system during the recession – including big U.S. automakers. With an economy that grew weaker every day, workers didn’t have any power to push back on wages. They just felt lucky to have a job and be able to put food on the table.
Fast-forward to 2019 when the recession has been over for years. Many organizations who utilized two-tiered contracts failed to update wages as the economy improved. Workers noticed the disparity and realized that they may never catch up. People who were hired after them and doing the same job were receiving better wages. The organizations who stuck with recession wages started to have a retention problem and difficulty filling their open positions since it is currently a job seekers market.
In addition to wage depression, there are additional problems with two-tier wage systems; higher turnover for newer, lower-paid employees and the likelihood of a demoralized workforce. After enough time, a two-tier wage system can permanently lower wages in an entire industry.
Will Recession Fears Keep Two-Tier Wage Systems in Place?
Despite a robust economy and a tight labor market, the word recession is appearing in the headlines frequently. The fears and warnings of an upcoming recession threaten to keep wages stagnant.
According to The Wall Street Journal, the possibility of a global recession ranks as the top worry for CEOs in 2019, up from being ranked 19th out of 28 in 2018. As we reported previously, common recession indicators such as the inversion of the yield curve suggest a recession is likely within the next 12 months. This is coupled with corporate bond debt reaching unsustainable levels, with $3 trillion in bonds just above junk-bond status. Industries especially at risk include natural resource companies, especially oil and gas exploration, which account for a significant amount of outstanding corporate debt. That debt is unlikely to be serviced in the near term due to a prolonged fall in oil prices. Add the fluctuating stock market and political unrest and you have many worried.
There are varying opinions, of course. Goldman Sachs says the U.S. economy is less prone to recession than it has been in the past, “thanks to a confluence of factors that have emerged during the ‘Great Moderation.’ The term refers to the controlled growth with less volatility that has prevailed through much of the period since the mid-1980s, with some notable exceptions.”
We were curious to see if organizations were thinking about recession planning so we asked a question in this year’s Compensation Best Practices survey about recession planning. Of the organizations that responded, only 21 percent have some sort of recession plan in place. The recession planning activities include investing in technology to reduce staff needs, tightening variable spending, delaying capital projects and creating a “plan B” budget with a 20 percent reduction and limited increases to staffing levels.
Will two-tiered wage systems continue as a factor in wage stagnation? Time will tell. No matter the future of these systems, organizations need to have plans in place to attract and retain the best employees in today’s volatile market. Organizations are encouraged to be proactive with their retention activities to guard against the possibility of things taking a turn for the worse. Make sure you are getting pay right. Recognize who your top performers are and compensate them accordingly. Practice transparency and communication with employees – this increases the positivity and legitimacy of your pay brand so you’ll be able to retain and motivate the best of the best.