Economic Report of the President

time hours also has drawbacks. For example, during a recession afirm may grant a pay raise far below the TIP standard and also layoff large numbers of low-seniority workers. Because low-seniorityworkers tend to have below-average wages, the remaining workerswill have higher wages than the original group. Consequently, thismeasure of wage change may well show that the increase in averagepay exceeded the standard even if no individual worker received sucha large raise. Conversely, when firms hire additional low-seniority,low-wage workers during expansion, the group may appear to be incompliance even if all continuing workers receive pay raises abovethe standard.This measure is also affected by changes in the skill-mix of thework force. If a firm increases the proportion of low-wage, lessskilled workers in its work force, the measure will show a calculatedwage increase less than the "true" wage increase. A decrease in theproportion of less skilled workers will show just the opposite. Becauseof these features, the measure also discriminates in favor ofgrowing firms and against declining firms, since new workers are, onaverage, likely to be paid less than those already on the payroll.More important, this measure introduces an element of uncertainty.A firm could agree with its workers to grant pay increases thatmet the standard—citing the TIP reward as an offsetting factor—andthen unexpectedly discover at the end of the year that small changesin the composition of the work force had put the group out of compliance.Firms and workers who had negotiated small pay raises inanticipation of receiving a TIP reward or avoiding a penalty mightfind themselves above the standard, while others who had ignoredthe standards could be surprised to find themselves in compliance.An unpredictable measure is not only unfair; it also will have lesseffect, since firms and workers will tend to ignore the standard ifthey cannot be sure that small pay raises will result in compliance.Data collected by the Bureau of Labor Statistics from a largesample of establishments suggest that significant changes in the compositionof a firm's work force are common. As Table 10 shows, 22percent of the workers in the motor vehicle industry were in establishmentsthat experienced an increase in their calculated straighttimehourly earnings of more than 13 percent between December1978 and December 1979. During this period the United Auto Workers'contract, which covered a majority of the workers in these establishments,provided for an increase of about 11 percent, includingcost-of-living adjustments (COLAs). Therefore, most of the establishmentswith increases in calculated average hourly earnings largerthan this must have experienced a change in the composition of theirwork force.85