Sample Case Study Paper on Two-tier Wage System

Automobile industries in the United States are applying the two-tier wage system to reduce the cost of labor. A two-tier wage system is a payment system in which newly hired workers are paid less than the existing workers. The new employees are called tier II workers and the already existing employees are called tier I workers. By paying tier II workers a lesser salary, the average labor cost is reduced and hence the company becomes more competitive (Gerhart, Milkovich and Newman, 2010, p.242)

Most of the industries in the United States dealing with automobiles are likely to use the two-tier system to a larger percentage because it enables them to save substantial amounts of labor costs. The case study of general motors indicates that the company saves averagely of $72 million annually (Gerhart, Newman and Milkovich, 2010, p.243).

The system is considered appropriate by most automakers because it enables a company to attract more workers at a lower rate of pay. This is because if more already existing workers leave and more new workers are hired, then the average labor cost is greatly reduced.

However, the system is likely to bring about several challenges to the companies and labor unions in the long run. One of the major challenges brought about by the system is employees’ turnover. This is brought about by the fact that at some point employees will start feeling dissatisfied by their pay since the rates are extremely low and as a result will choose to leave the company. This employee turnover will reduce the savings that the company is getting from low labor costs because the company will be forced to do continuous training for the newly hired workers. The system also brings about lack of workers solidarity and unity among workers as the less paid workers feel cheated. This is because they do the same amount of work and they are paid less and as a result workers in one company are not united. This lack of unity in workers can interfere with the productivity of the company especially where functions are intertwined because of a lack of proper coordination between workers. It also causes lack of workers solidarity in that workers tend to blame the labor unions for not negotiating better rates instead of directly blaming their bosses for the unfair pay.

In general, the system brings about income disparity. According to the case of General Motors workers, the non-General Motors workers are paid less than both tier I and tier II workers. This in turn reduces the labor cost. Mr.Marchionne does not agree with this method of payment because he does not agree with the income disparity between the rich and poor. He believes that the income gap between the poor and the rich should be minimized.

There has been a lot of debate on whether to eliminate the system or not, but the system is not likely to disappear in the near future. This is because the pressures to keep it has got more weight than the pressure to eliminate even though the reasons to eliminate are several than the reasons to keep it. The major reasons to eliminate include:

  1. Lower wage rate as more existing workers retire because the rate becomes lower and lower.
  2. Unfairness in salary payment. The system violates the rule of equal payment for equal work done
  3. Increase in employee turnover.

The main reason for keeping this system is the threat of layoffs of workers, and manufacturers threatening to move production to other location with low cost of labor.

In conclusion, the system is likely to continue operating to enable manufacturers enjoy competitiveness in low labor cost and as a result of pressure to keep the system, the labor unions are forced to negotiate around the system.


Gerhart, B., Milkovich, G., & Newman, J. (2010). Compensation (11th ed.). McGraw Hill Irwin.