The two-tier system of wages is usually established for one of three reasons: 1) The employer wishes to better compensate more senior, ostensibly more experienced and productive workers without increasing overall wage costs; 2) The employer wishes to establish a pay for performance or merit pay wage scheme that compensates more productive employees without increasing overall wage costs; or 3) The employer wishes to reduce overall wage costs by hiring new employees at a wage less than that of incumbent workers.
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. This is distinguishable from traditional benefit structures, which often do not permit an employee to access a benefit (such a retirement pension or sabbatical leave) without having first achieved certain time-in-position levels.
Two-tier systems became more common in most industrialized economies in the late 1980s. They are particularly attractive to companies which have high rates of turnover among new hires (such as retail) or companies which have large numbers of high-wage, high-skilled older workers due to retire soon.
Trade unions generally seek to reduce wage dispersion (the differences in wages between workers doing the same job). Not all unions are successful at this. A 2008 study of collective bargaining agreements in the United States found that 25 percent of union contracts surveyed included a two-tier wage system. 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. Existing union members will see no wage reduction, and the number of new union members with lower wages is a substantial minority within the union and subsequently unable to negatively affect ratification votes. Unions also find two-tier wage systems attractive because they encourage the employer to hire more workers. 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 which provide wage and benefit increases to new hires to bring them up to party with existing workers if the company meets specified financial goals.
Some studies have found problems with two-tier systems. Some negative effects which have been found include: Higher turnover among newer, lower-paid employees; a demoralized workforce. Given enough time, a two-tier wage system can permanently lower wages in an entire industry. Lowering productivity expectations for new hires seems to alleviate some of these problems.
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- Harrison, Bennett and Bluestone, Barry. The Great U-Turn: Corporate Restructuring and the Polarizing of America. New York: Basic Books, 1990, p. 43.
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- Bewley, Truman F. Why Wages Don't Fall During a Recession. Cambridge, Mass.: Harvard University Press, 2007, p. 146.