Strikes

Theoretical Models

Relatively low strike activity in highly centralised labour markets is con-sidered as a stylised fact by many economists (Hoel et al., 1993, p. 103.

Berthold & Fehn, 1996, p. 82). (This is somewhat surprising, since that empirical evidence is poor. We will present an explorative empirical investi-gation in section 3.) Unfortunately, economic explanations of strike activity turn out to be rather involved. Therefore we have to take a swing.

For a long time it seemed to be impossible to explain the occurrence of strikes with economic models based on rational agents. Hicks recognised already in (1962) that strikes cannot occur in bargaining models based on perfect symmetric information, since rational agents can agreeex ante on the outcome resulting after a strike and thus avoid costly a harmful/costly strike.

The Nash bargaining solution excludes strikesby definition and the solution strategy to the Rubinstein game (proposed by Shaked & Sutton, 1984) shows explicitly that rational agents come to an agreement instantaneously.

Consequently, current game theoretic models of strikes are based on pri-vate information of firms/unions.¹¹⁸ Strikes serve as screening devices in or-der to extract private information (regarding profits, strike fund, willingness to strike of the work force) of the opponent. Unfortunately the predictive power of these models is restricted since minor variations of the rules can lead to significant changes of the outcomes (as in many other game theoretic models). In screening models proposals are possible only within fixed time intervals, while the length of a bargaining round is a variable of choice in sig-naling and attrition games. (see e.g. Kennan & Wilson, 1989, 1990, 1993).

Stylised facts on real world strike activity are explained only partially by the models.¹¹⁹

The models provide, however, a plausible explanation of effects of cen-tralisation in wage setting in strike activity. Central wage setters base their negotiations on aggregate (average) parameters (profits, productivity etc.) published by neutral outside parties (e.g. statistical offices). This impartial

118An exception is Fernandez & Glazer (1991). They show that strikes may result even with complete symmetric information if three actions are possible in every bargaining round: (1) agree, (2) strike (wait), and (3) prolongation of an existing agreement.

119For example, the otherwise plausible attrition models predict that profits are ‘burned down’ almost completely. This contrasts the low strike incidence and the relative low duration of strikes in reality. Furthermore the models predict a negative relation between strike duration and wages. Empirical research gives no conclusive confirmation of this.

information, available symmetrically to both parties, should reduce the in-formation asymmetry problem significantly. A problem with the argument is that negotiators are concerned mainly (a) with predicted values of these variables and (b) parameters of profit and utility functions which are not re-ported by statistical offices. Nevertheless, relevant information in centralised bargaining appears to be more symmetric.

Alternative Explanations: Self-Serving Bias and Transaction Cost Arguments

Self-Serving Bias A way out of the problem to explain strikes with ra-tional agents is simply to modify (or abandon) the rara-tionality assumption.

Everyone who participated personally in tough negotiations is likely to share the reservations against completely rational behaviour. Babcock & Loewen-stein (1997) explain strikes by self serving bias and claim support of reliable experimental evidence. They hypothesise that direct involvement in nego-tiations biases perceptions (of fairness) in favour of the own position. As a consequence, the sum of claimed shares in the whole cake (the sum in dispute) is greater than one.

In an experiment conducted by Babcock, Issacharoff, Camerer, & Lowen-stein (1993), 80 law students were assigned randomly to the role of plaintiff or defender in a virtual tort case (with whole sum in dispute equal to $100000).

Though all participants obtained identical case materials, the sum of claimed shares was greater than 100%. More surprisingly, when participants were asked to write down a guess of what a (virtual) independent judge, the bias prevailed though they were told to receive a bonus of $1 if their predic-tion was within $5000 of the actual judge’s award. Babcock, Lowenstein, &

Wang (1996) show that this bias does not disappear if the test persons were pointedexplicitly to the problem of self-serving bias. Self serving bias seems to remain significant even in high stake experiments, i.e in experiments with considerable monetary awards (Hoffman, McCabe, & Smith, 1996).

The self-serving bias argument is supported by several results from ex-periments on cognitive dissonance. According to Festinger’s (1957) theory, individuals try to reduce internal inconsistencies between action and percep-tion (or between opinions regarding different objects) by ignoring informapercep-tion challenging their behaviour/actions or irreversible decisions. In Aronson &

Mills’ (1959) impressive experiment, girl students were randomly assigned to two groups. While members of one group had to pass an unpleasant test as prerequisite for attendance of a seminar, members of the control group were admitted without restrictions. Before the seminar started (it was ‘simulated’

by the investigators but never took place), the test persons were confronted

with a tape recording of an intentionally boaring and trivial seminar session.

Only the control group members unmasked the low quality of the seminar.

Several later studies show that subjects unconsciously (but systematically) search for information reducing dissonance and suppress information increas-ing it.

A possible conclusion from these theories with respect to the relation between centralisation and strike activity is that specialisation and profes-sionality of the negotiators my reduce self serving bias. Furthermore, motions should play a lower role for the negotiators since they are less directly affected by the outcomes (their wages are not fixed by the negotiations).¹²⁰

The Transaction Cost Argument It is surprising that a very simple and quite intuitive argument, applying not only to strikes but to efficiency of centralisation in general, does not appear in the literature.¹²¹ Ifsimilar wage setting problems appear in several firms, it is efficient to solve the problem once instead of repeating the bargaining problem in every firm. Economists are used to stress gains of designing custom solutions to special needs. The argument, however, applies only if the gains of ‘made-to-measure’ solutions pay for their costs. In face of the observation that wage setting is an ex-tremely complex task in reality and market forces are rather weak because of small numbers problems and the high importance of human capital, it appears to be worthwhile for many firms to adopt wages set in other firms instead of bearing the costs of plant level bargaining. This argument is implicit in statements of managers pursuing the strategy to obey collective wage agreements exactly or to pay above standard wages in order to ‘keep unions out of the plant’. An testable implication of the argument is that centralisation implies concentration of strike activity in large firms, or (more general) that strike activity is more evenly distributed over firms in decen-tralised labour markets. To the best of our knowledge this issue has never been addressed in empirical research.¹²²

Social Peace

Strikes are an eye-catching aspect of bargaining conflicts. There exist, how-ever, several other implications of conflicts, for example on productivity.

These are sometimes subsumed under the label ‘social peace’.

120However, Eisenberg’s (1994) poll, addressed to professional lawyers and judges, shows that also professional negotiators are not immune against self serving bias.

121Ekkehart Schlicht stressed this argument repeatedly.

122Our attempt to conduct an empirical study on this matter was frustrated by the fact that firm level strike and union density data are not available in Germany.

Practical persons refer sometimes to this broader notion of ‘peace’ when they point to conflict-reducing effects of centralisation in wage setting. The simple argument is that cooperation (and productivity) at the plant level is affected negatively if management and workers have to solve distributional conflicts personally. Rare marginal notes in the economic literature appear not very valuable. Instead the reveal a lack of competence to make simple semantic differentiations.¹²³ Also a search in the psychological literature ended without success. Therefore we have to close this section with the confession that we know almost nothing about the issue.

Empirical Relevance

The lack of direct evidence on the relation between centralisation and strike incidence is surprising in face of the large number of empirical contributions to the centralisation debate in general. The only exceptions from this seem to be Cameron (1984) and Schnabel (1993). Cameron finds positive (bivari-ate) correlations between strike activity (measured as lost days due to strikes per year and thousand workers) and the macroeconomic indicators inflation, unemployment and growth rates of earning. Schnabel (1993) obtains signifi-cant negative rank correlations between strike activity and the centralisation indicators of Calmfors & Driffill (1988) and Bruno & Sachs (1985) for a cross section data set of OECD countries.

Two further contributions provide rather indirect evidence. Lesch (2002) computes bivariate correlations between strike incidence and an index of in-stitutional regulations on bargaining (peace clauses, compulsory arbitration, statutory work councils, legal admissibility of lockouts and general strikes) but fails to detect significant effects, and Ochel & Selwitschka (2003) point to a decreasing trend in strike activity for OECD countries.

In order to close this gap, we will report results from some explorative re-gressions explaining strike activity in section 3. The presentation was shifted to that section since it requires some concepts and definitions explained in

123Freter (1998) sketches a caricature of the argument in order to defeat it. “Die Sonderordnung des Arbeitsmarktes wird ausserdem damit begr¨undet, dass erst eine

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uberbetriebliche Regulierung den sozialen Frieden im Sinne der Abwesenheit von Ar-beitsk¨ampfen als positiven Standortfaktor gew¨ahrleiste. Die These unterstellt großen Teilen der Bev¨olkerung eine latente Bereitschaft zur Unfriedlichkeit, die durch Kartel-lierung des Arbeitsmarktes gez¨ugelt werden m¨usse und k¨onne. Bei funktionierendem Wettbewerb gibt es keinen Anreiz f¨ur irgendeine Art der unfriedlichen Austragung von Interessensgegens¨atzen... Da dem gr¨oßten Teil des deutschen Volkes dar¨uber hinaus die behauptete Tendenz zur Gewaltbereitschaft wohl nicht immanent ist, kann die These, eine umfassende Arbeitsmarktregulierung sei n¨otig um den sozialen Frieden zu sichern, als widerlegt gelten.

the following sections. The simple central result can, however be anticipated here. Also our empirical investigation shows that strike activity is signif-icantly lower in countries with more centralised bargaining. However, the results are not very robust with respect to the choice of the functional form of the regression relation.