Ability to Pay Per the Class Textbook,

Ability to Pay

Per the class textbook, the three major criterion that are often used to ascertain a firm's ability to pay a certainly level of wages to its employees are total profits, the company's intent as far as where to put profits and the ratio of labor costs to total costs. Using labor cost to total cost alone is not wise or possible in all instances because raw profit can (and often should) go to other places (or MUST go other places) and the other costs other than labor costs are no different. Differing firms have differing level of research and development expenditures, overhead and so forth and the overall percentage of profit is important as well. Even firms that rake in billions of dollars in profit per quarter are doing so using profit margins far less than ten percent. Health insurance firms and retail in general come to mind (Sloane & Whitney, 2010).

As noted in the class text as well, firms that never make a profit are not immune to demands from labor unions. Firms like Continental Airlines are an example, as cited by the book. However, one thing that stuck in the craw of many is that executives and other personnel were getting six (or even seven) figure severance packages and other payments and many would retort that a lack of profit can be due to high debt or poor spending…not a revenue/margin issue (Sloane & Whitney, 2010). Regardless, what is important to the union will obviously tend to differ from what the business feels is important. It is unwise to assume that unions are always right and reasonable because some deals are just bad for the business even if the unions love them (Reid, 2012).