The two-tier system of wages is usually established for one of three reasons:
- The employer wishes to better compensate more senior, ostensibly more experienced and productive workers without increasing overall wage costs.
- The employer wishes to establish a pay for performance or merit pay wage scheme that compensates more productive employees without increasing overall wage costs.
- The employer wishes to reduce overall wage costs by hiring new employees at a wage less than the wage of incumbent workers.
That can be distinguished from traditional benefit structures, which permit employees to access a benefit, such a retirement pension or sabbatical leave, after they have 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 with high rates of turnover for new hires, such as in retail, or with many high-wage, high-skilled employees about to retire.
Trade unions generally seek to reduce wage dispersion, the differences in wages between workers doing the same job. Not all unions are successful, however. A 2008 study of collective bargaining agreements in the United States found that 25% of the 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 see no wage reduction, and the number of new union members with lower wages is a substantial minority within the union and so is too small to prevent ratification. 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 they 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 like higher turnover for newer, lower-paid employees and a demoralized workforce. After 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 the problems.
- Sherman, Arthur W.; Bohlander, George W.; and Snell, Scott. Managing Human Sesources. Cincinnati, Ohio: South-Western College Pub., 1996, p. 379.
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- Holley, William H.; Jennings, Kenneth M.; and Wolters, Roger S. The Labor Relations Process. Mason, Ohio: South-Western Cengage Learning, 2009, p. 303.
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- McConnell, Campbell R.; Brue, Stanley L.; and Macpherson, David A. Contemporary Labor Economics. Boston: McGraw-Hill, 1999, p. 350.
- Saint-Paul, Gilles. Dual Labor Markets: A Macroeconomic Perspective. Cambridge, Massachusetts: MIT Press, 1996, p. 183.
- Harrison, Bennett and Bluestone, Barry. The Great U-Turn: Corporate Restructuring and the Polarizing of America. New York: Basic Books, 1990, p. 43.
- Bewley, Truman F. Why Wages Don't Fall During a Recession. Cambridge, Mass.: Harvard University Press, 2007, p. 147.
- Bewley, Truman F. Why Wages Don't Fall During a Recession. Cambridge, Mass.: Harvard University Press, 2007, p. 146.