Striking and economics

I’m always confused when I hear the economists are against strikes. After all, it is perfectly sensible to place strikes in the bargaining relationship between employees and employers.

I think the confusion stems from the fact that many economists also say that there is a definite limit to strike action – as if it is set up by a significantly powerful union it merely represents the action of a monopoly against a weaker consumer (in this case the firm). As we know that market power leads to suboptimal outcomes, the case of a strong union and a weak firm will lead to a suboptimal outcome – namely too little production, because too much of the surplus is extracted by the seller (labour).

However, this does not imply that economists are completely against the option of striking being available.

If we have a monopsony firm and averagely organised labour, then the ability to strike helps improve the workers bargaining power – even if strikes never occur.

Why? Well if the firm believes the threat to strike is credible, and if the cost of the striking action exceeds the cost of additional wages a firm will simply increase the wages without a strike. Furthermore, labour will only have the incentive to strike when they know that striking will lead to higher wages – which is the same set of situations. There is still a trade-off between efficiency and equity – but in this case the equity cost is sufficiently high that allowing the mere idea of strikes makes sense.

As a result, striking is something that should be allowed in the face of asymmetric bargaining power in the firms favour – shouldn’t it?

The Standard feels that current labour laws are focused to strongly against strike action. I know nothing about labour laws. What do you think?

  • goonix

    ‘Economists’ (and indeed everyone else apart from those striking) are probably more opposed to the idea of striking because it is overly antagonistic and aggressive. There’s going to be little good will in the wage bargain when one side acts in such a manner.

  • There’s nothing wrong with strikes so long as there’s no legislation preventing employers from bringing in replacement workers or firing the folks who refuse to do their jobs :>

  • Bill

    Strikes and lock outs are consequences of the zero sum game inherent to our work environment. So, in a zero sum game arena, is it desirable to have the right to strike? If you are a worker, then of course it is!

    Better still if we created an environment that dispelled with the vertical division of labour and the resultant concentration of decision making powers into the hands of managers, shareholders and individual owners.

    The laws exist in NZ to make that possible. Sadly, there is no knowledge or will on the part of workers and their organisations to bring such a state of affairs about.

  • Hi goonix,

    “There’s going to be little good will in the wage bargain when one side acts in such a manner”

    Surely this is taken into consideration when labour decides whether to strike – as a result, it is part of the cost-benefit calculation. It does not imply that the government should prevent strikes altogether.

    “There’s nothing wrong with strikes so long as there’s no legislation preventing employers from bringing in replacement workers or firing the folks who refuse to do their jobs :>”

    True – although in the second case we have to take account of potential asymmetric information 😛

    “Strikes and lock outs are consequences of the zero sum game inherent to our work environment.”

    I am not sure I agree that production is a zero sum game – would you be able to elaborate for me?

  • goonix

    Oh don’t get me wrong – I never suggested strikes should be banned. When I said I was opposed to strikes it is because I believe they are sub-optimal in that goodwill, the key ingredient in the wage negotiation, is bargained away. In essence, I think that strikes often counter the goal of those striking, particularly when you consider the dynamic setting, due to the erosion of goodwill.

    And just because an organisation decides to strike, it doesn’t mean that it’s the result of a carefully calculated decision lol (although that’s very admirable of you to think so). It’s more the fact that current institutional arrangements are unfairly weighted towards striking and other adversarial approaches (as outlined above by someone else).

  • Kimble

    “Better still if we created an environment that dispelled with the vertical division of labour and the resultant concentration of decision making powers into the hands of managers, shareholders and individual owners.”

    I get the feeling Bill will start talking about Parecon any minute now.

    What he is probably talking about here is collectivism. Each worker (supposedly) gets an equal amount of power. The decision of what to make (and how) is made by a production council. Work is divided amongst the workers so that each job requires the same amount of effort and discomfort. Each worker has a vote on their council representative. Etc.

    It is embarassing that there are still people in the world who think this can work.

  • goonix

    Hey, it worked for the Soviet Union (oh, wait….).

  • Bill

    Kimble.

    From first hand experience, I can say quite categorically that self managed worker’s collectives do work.

    BTW. All up meetings don’t work, which seems to be what you think I would suggest as an organising model. Neither does the use of representatives. Input to a decision to the degree it will affect you? That works. Again, knowledge from first hand experience.

    All pretty embarrassing, huh?

    Goonix. one of the first actions taken by the Bolsheviks was to disband worker and community councils.

  • Bill

    Matt

    What I want as a worker will come at the direct expense of the boss and likewise the other way round. The greater your bargaining position, the more expense you can extract from your adversary. Zero sum. You win or you lose.

  • Hi goonix,

    “I think that strikes often counter the goal of those striking, particularly when you consider the dynamic setting, due to the erosion of goodwill”

    So you are stating that the decision to strike is time inconsistent when goodwill is taken into account? I’m not really convinced – we could raise the same thing for almost any choice to justify government intervention.

    “And just because an organisation decides to strike, it doesn’t mean that it’s the result of a carefully calculated decision lol (although that’s very admirable of you to think so). It’s more the fact that current institutional arrangements are unfairly weighted towards striking and other adversarial approaches (as outlined above by someone else).”

    I would be careful dismissing the strict cost-benefit approach on the fact that decisions aren’t made in carefully calculated ways – the same criticism could be levied against individual decision making, and therefore could be used to justify unnecessary government action.

    I’m not sure we can state that current institutions promote striking above other, cheaper, options without actually discussing how the institution is formed and the incentives of the institution. I don’t see it as a fact that unions are there to promote activities that are not in anyones interest.

  • Hi Bill,

    “What I want as a worker will come at the direct expense of the boss and likewise the other way round. The greater your bargaining position, the more expense you can extract from your adversary. Zero sum. You win or you lose.”

    That is assuming that the production process is unrelated to the relationship between the worker and the employer – which it is not.

    Now, if we assumed that the wage setting relationship occurs after production (or equivalently that the participation constraint is satisfied for both parties http://en.wikipedia.org/wiki/Participation_constraint_(mechanism_design) and that there is no investment/effort required from either party), we could try to view it is a zero sum manner.

    In this case I am supporting the workers right to strike – I don’t think we disagree in this sense, however I am not convinced that workers relationships really are zero sum games – the assumptions I mentioned for it to be so are too strong.

    “From first hand experience, I can say quite categorically that self managed worker’s collectives do work”

    This isn’t really a very useful statement – we don’t have access to your “first-hand experience” and so can’t form our expectations and beliefs based on it. Furthermore, saying “it worked” doesn’t really tell us what worked, or how. Maybe if you told us more about your experience we may all be enlightened 🙂

    Furthermore, it is possible that we may all be interpreting different things when you say your labour model. However, fundamentally, the labour market is still a market where people trade with each other voluntarily – I don’t think any other frame for viewing labour makes much sense.

  • goonix

    “So you are stating that the decision to strike is time inconsistent when goodwill is taken into account?”

    Workers gain a short-term benefit from striking but potentially damage their ability to negotiate in other, less adversarial, ways in the future (that’s not to say they won’t benefit from more adversarial action in the future though). If there is badwill between the bargaining parties from striking, which I believe is almost certain, I don’t see what is far-fetched about my comment.

    “I would be careful dismissing the strict cost-benefit approach on the fact that decisions aren’t made in carefully calculated ways – the same criticism could be levied against individual decision making, and therefore could be used to justify unnecessary government action.

    “I’m not sure we can state that current institutions promote striking above other, cheaper, options without actually discussing how the institution is formed and the incentives of the institution. I don’t see it as a fact that unions are there to promote activities that are not in anyones interest.”

    I was getting at the fact that current institutional arrangements (such as the Employment Relations Act) provide more freedom for organisations to strike (relative to the previous Employment Contracts Act), and hence encourage relatively more striking action (which I believe leads to more badwill between bargaining parties, as stated earlier).

    I was not meant to imply that striking parties were necessarily acting irrationally (although reading back I can see how that could be interpreted from my statement).

  • Bill

    Matt.

    Do you mean to suggest that a worker sells her labour voluntarily? If that is what you are saying; that the labour market is composed of the willing and voluntary, then why, for example, are unemployment benefit rates at such a level as to be punitive.

    One reason people enter into the labour market is to avoid financial poverty. If the negative incentive of poverty avoidance did not exist do you really believe that individuals would voluntarily sell their labour to perform some soul destroying dead end job for example?

    Another is social expectation. It is expected that people will spend, or seek to spend, the majority of their adult life in paid employment. When you society tells you it expects you to have a job, that social expectation has a persuasive impact on individuals to the extent that any claim to voluntary participation has to be questioned. We get jobs because we are conditioned to see it as the right and proper thing to do.

    Societal pressure and fear of poverty do not make a good equation for voluntarism. I, and you, can think of a 1001 jobs that no-one in their right mind would perform on a truly voluntary basis. Furthermore, many jobs are of no benefit to society, so we must assume that they either exist to accommodate all those eager volunteers or they exist because people are compelled to work and so the potential to create meaningless jobs as a vehicle for private profit exists.

    If you genuinely want an explanation of the systems and structures that underpinned a successful workers collective, I’ll be happy to oblige. Just let me know.

  • Hi Goonix,

    “Workers gain a short-term benefit from striking but potentially damage their ability to negotiate in other, less adversarial, ways in the future”

    So there is a current benefit and a future cost – unless the person is time-inconsistent the amount of striking by an individual will be optimal. Furthermore, as long as the union’s incentives are aligned with the individuals it serves there will not be an issue here.

    As this “badwill” is the essence of the argument, we have to ask if there is really an issue here.

    Furthermore, you could state that there is a prisoners dilemma which needs to be solved – however, amongst other things that would require that the individual is better off in the non-striking case than the striking case. As long as the unions choice is consistent with the individuals preferences then this will not be the case when striking is the chosen option.

  • Hi Bill,

    “Do you mean to suggest that a worker sells her labour voluntarily?”

    Yes.

    “If that is what you are saying; that the labour market is composed of the willing and voluntary, then why, for example, are unemployment benefit rates at such a level as to be punitive.”

    The unemployment benefit is the outside option – why should it be anything more than a livable rate exactly?

    “One reason people enter into the labour market is to avoid financial poverty”

    What a subjective term – people enter the labour market to earn more than they would get on the benefit. That is still a choice, and it is still voluntary.

    “Societal pressure and fear of poverty do not make a good equation for voluntarism”

    Yes they do – there is still a choice, and people make the choice between these options.

    I am uncertain what you are trying to discuss with me here – this is a completely different issue than the issue of whether worker-employer relationships are a zero sum game.

    A voluntary relationship is one where someone has a choice – the choice may not be particularly palatable, but that does not stop the relationship being voluntary.

    To be clear, the post I wrote was on why allowing striking makes sense in this context – as workers may have insufficient bargaining power for what we presume is the fair allocation of surplus (here I’m being subjective). As a result, the “voluntary” description of the labour market I’ve provided is still consistent with your criticisms.

    Ultimately, I don’t think there is a superior frame with which to view the labour market relationship. I am unsure what frame you have in mind – which is why I was asking you to enlighten me with what you mean.

  • Kimble

    A workers collective is the sort of thing that may work in individual cases within another system which does not follow the same ideology. When the larger system does follow the same ideology the smaller system cannot survive.

    Kind of like how a commune can work writ small within a capitalist system, but the entire economy would eventually collapse if it operated as one large commune and a single commune would collapse along with it.

    (I reckon the commune doesnt actually work that well, but the success of the capitalist system helps keep it afloat.)

    Unfortunately, this is why these ideas keep popping up. Someone tries something “new” that works in their particular case, and assumes that it would work for everyone.

    PS. Going back to a topic from a little while ago (and an issue that will never disappear) Bill cannot distinguish an unhappy choice from having no choice at all. This is another symptom of peoples misunderstanding of economics and economists.

  • “Unfortunately, this is why these ideas keep popping up. Someone tries something “new” that works in their particular case, and assumes that it would work for everyone.”

    I guess thats what happens when people don’t try to understand “why” something might be working – I find that irritating as well 🙂

    “cannot distinguish an unhappy choice from having no choice at all”

    Interesting. As every choice except the “best” choice is effectively an “unhappy” choice (as the economic cost exceeds the economic benefit) this would imply that these sorts of people always believe there is no choice – and that no actions are voluntary. Seems like a difficult way to try and analyse peoples choices 🙂

  • Kimble

    “As every choice except the “best” choice is effectively an “unhappy” choice (as the economic cost exceeds the economic benefit) this would imply that these sorts of people always believe there is no choice – and that no actions are voluntary.”

    tsk tsk tsk

    Are you assuming that those people have the same definition of “unhappy” as you do? 🙂

    PS. If you want an entertaining read go and google Parecon.

  • “tsk tsk tsk

    Are you assuming that those people have the same definition of “unhappy” as you do? 🙂 ”

    True 😛

    So Parecon is a book aye – over the first few pages the argument seems to be “things are as good as the ‘ideal’ world could be – therefore “capitalism” is not the best way to structure society”. Hmmm.

  • Kimble

    http://orion.it.luc.edu/~dschwei/parecon.htm

    You may have had to search for a while to find this critique.

    Heh, “Nonsense on Stilts”.

  • Is this the criticism you are talking about:

    http://www.zmag.org/znet/viewArticle/4348

    😛

  • Krelin Naidoo

    Strikes seem like a good idea generally in countries where there is adequate employment levels (al least satisfactory) and accountable trade unions. In South Africa (my home) on the other hand, we have governments that run the country with trade unions (the tripartite alliance) causing deadlock and a generally unstable system of governance.

    Inflation also needs to be taken into account

  • “Inflation also needs to be taken into account”

    Indeed that is very true – the stronger unions are, the easier it is to suffer from a “wage-price spiral”. However, if we are in a situation where the central bank is already credible, this should not be a big issue – except for the fact that it may reduce the Bank’s ability to smooth shocks in the economy.

    As a result, the true trade-off is between the wage bargaining power of unions and current employees, and the variability in output and employment in the economy. A very interesting thing to think about!

  • Kimble

    “Is this the criticism you are talking about:”

    Yeah thats it too. That criticism carries more weight, I think, because the guy who wrote it shares the overall beliefs of Parecons creator.

  • “Yeah thats it too. That criticism carries more weight, I think, because the guy who wrote it shares the overall beliefs of Parecons creator.”

    Although it sounds like he is trying to sell a competing utopian idea. The difficulty I find with a lot of these type of discussion on society is that they lose site of the incentives and behaviour of the individuals – the very people that form the society. Ahhh well, c’est la vie

  • Kimble

    “they lose site of the incentives and behaviour of the individuals”

    And this often gets dismissed as nothing more than a pessimistic view of human nature.

  • ““they lose site of the incentives and behaviour of the individuals”

    And this often gets dismissed as nothing more than a pessimistic view of human nature.”

    Wow, I can’t believe how bad my spelling is when I don’t read through things!!

    Still yes, agreed – I also enjoy being called “unrealistic” when I don’t agree with their specific view of how the world works.

    Ultimately, I believe that lots of people think most other people are stupid – but they don’t see the interesting contradiction such a view causes when they move outside themselves and realise that a lot of other people feel the same way.