Bargaining Power & its Determinants

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1 Bargaining Power & its Determinants Relative versus Total Bargaining Power and Determinants of Relative and Total Bargaining Power Santanu Sarkar XLRI Jamshedpur

2 Collective Bargaining Basics Bargaining Power Environment is particularly influential through the effects it exerts on the bargaining power held by labour & management. 2 aspects of bargaining power come into play, the total & relative power of labour & management Total power concerns the total profits (or economic rents) that are available to labour & management: greater is the total power, the more profit that are available for labour & management to divide up (Size of the Pie) integrative bargaining Relative power has to do with the relative strength of labour & management ability of either side to gain a larger share of a given amount of profit (Maximizing pay off) distributive bargaining

3 CB Basics Determinants of Bargaining Power Determinants of the total bargaining power of labour & management 1. Degree of competition facing the employer: competition faced from both domestic & international competitors few competitors greater profits & thus have more resources for labour & management to divide up (long horizon / greater pie) high industry concentration & monopolistic profit model leads to easier CB 2. The state of economy affect the level of demand (sales) & profits Interest of labour & management with regard to total power are in common as both sides prefer less competition & a strong economy Determinants of the relative bargaining power of labour & management 1. Union s waiting cost / default factor cost / failure cost: abilities to withdraw their labour, usually through a strike 2. Union s ability to sustain strike, working to rule, or blue flu [large scale absenteeism] (Waiting cost) strikes once undertaken are more likely to succeed the greater the costs of the strike to the employer 3. Employer s waiting cost / default factor cost / failure cost / resistance ability: ability to withstand a strike 4. SIMPLE MEASURE: amount of STRIKE LEVERAGE each party holds (decided by what costs a strike would impose on each party & what alternative income sources there are available to each party to offset any income losses induced by a strike BATNA )

4 Microeconomic influences on total bargaining power Competitive conditions exert on a firm Greater the market power of a firm (less competition / high industry concentration CR / HHI) greater will be the profits earned by the firm Greater profits, more resources for the parties to divide based on their relative power With regard to the total bargaining power, labour & management have common interests with both sides preferring that the firm posses market power Explains why unions join with management of a firm & push for government regulations that enhance the market power of a firm (restrictive trade / import policies, restricted FDI/FII in specific sectors to limit the competitions from across the border) Eg. United Steel Workers (US) joined with a number of steel companies to lobby the U.S. federal government to restrict & impose higher tariffs on the importation of foreign steel

5 Microeconomic influences on relative bargaining power Strike Leverage & Elasticity of Demand for Labour (Wage-employment Trade off) 1. STRIKE LEVERAGE a) Management s s strike leverage more the employer is willing & able to sustain a strike, more likely the workers will be to settle a strike before attaining all the union s goals i. Effects of a strike on production 1 st indicator of workers bargaining power is the degree to which the strike has impaired production / service (availability of labour substitutes: craft workers ahead of production workers in bargaining success of craft unions in US/Europe) ii. iii. Effects of a strike on sales if the halt in production does not lead to a reduction in sales (high inventories / availability of alternative production sites [depends largely on centralized bargaining / common union in all sites & inter/intra union solidarity]) Effects of a strike on profits if the halt in production & sales does not lead essentially to a serious decline in profits (substantial savings / alternative income sources can easily absorb the cost of strike) (high ongoing capital / interest expenses will have harder time withstanding a loss of income causes by a strike) Eg. (a) construction workers, can temporarily halt costly construction projects, have so much bargaining power Eg. (b) in contrast, firms facing a strike that also shuts down all the competitors operation have an easier time withstanding strikes because their lost sales & profits may be largely postponed rather than permanently forgone

6 b) Union s s strike leverage determined by the ability & willingness of the labour to stay out on strike i. Alternative sources of worker income workers that offer ample strike benefits can better afford to stay out on strike than can those in other unions (striking workers can readily find temporary / part-time work that supplements any union strike benefits role of law) (when they have accumulated substantial savings / assets) ii. Worker solidarity attitude of union members during strike (workers feelings of solidarity with one another influence whether picket lines will be honoured, & any pent-up frustrations will influence workers willingness to stay out on strike) strike being a highly emotional undertaking 2. WAGE-EMPLOYMENT EMPLOYMENT TRADE-OFF Strike leverage determines whether workers are able to press for a higher wage settlement / other more advantageous contractual provisions Eg. higher wages often bring cuts in employment & thus union may choose not to raise wages as much as they could Eg. Unionized apparel workers received only modest wage increases in their CB agreements in recent years because they feared that any higher wage payments would cause apparel firms to more aggressively shift production offshore or to outsource production domestically to non union plants than they would otherwise

7 WAGE-EMPLOYMENT EMPLOYMENT TRADE-OFF Marshall s s 4 basic conditions: why wage increase leads to large reductions in employment in one situation & to only small reductions in employment in another is explained by Marshall s (Alfred Marshall) conditions Marshall argued that unions are most powerful when the demand for labour is highly inelastic (when increase in wages will not result in significant reductions in employment in unionized sector) 4 conditions under which the demand for union labour would be inelastic: 1. When labour cannot be easily replaced in the production process by other workers / machines 2. When the demand for the final product is price inelastic (demand is not sensitive to changes in the price of the product) 3. When the supply of non-labour factors of production is price elastic 4. When ratio of labour costs : total costs (is small)

8 Marshall s s 4 basic conditions 1. Difficulty of replacing workers Unions can try to limit the ease with which management can introduce new tech. by raising the costs of substituting other factors of production for union labour (surely with dilemma since after some time such constrains on tech. change may back fire the labour with poor rate of productivity growth thereby limiting the long-run potential for wage increases) 2. Demand for product Workers face less of an employment decline from raising wages if the demand for the product produced by these workers is not sensitive to the price of the product (sensitivity elasticity of product demand) This condition is influenced by consumer preferences (willingness of consumers to substitute other products) Eg., in resistance to the foreign imports that become more attractive to domestic consumers unions do try to influence consumer actions through Buy Union campaigns stop buying Non-Union products [HUL Union s example]

9 Marshall s s 4 basic conditions 3. Supply of other inputs Responsiveness of the price of other inputs in the production process to the demand for those inputs (elasticity of supply of other factors of production) When an employer turns to alternative inputs to economize on union labour, unions will be more able to push up wages (with less fear of employment cutbacks) if the price of other inputs rises a lot as their use increases (more elasticity of the supply curve for alternative inputs, greater is union power) 4. Labor's share of total costs Union s power increases if labour costs represent only a small proportion of the total costs (importance of being unimportant) Employer is less likely to resist union pressure if a given wage increase affects only a very small proportion of the total cost of the product DO UNIONS CARE ABOUT THE WAGE-EMPLOYMENT TRADE-OFFS? Perhaps, No! Ross claims (1) political factors, & (2) orbits of coercive comparisons [making comparisons with the wages of other workers or unions to get leeway] are the factors which matter most

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