The bargainers’ objective functions I

To be able to predict the outcome of the bargaining process it is necessary to first specify the goals of the bargainers. One common assumption is that the bargainers desire to obtain the wage rate that maximizes their subjective expected utility. This term emphasizes that the utility to be gained from any given wage demand can never be known with certainty by either TWU Local 100 or the MTA prior to bargaining but must be predicted on the basis of subjective estimates of the benefits and costs that go with it. 

The starting points of the reaction functions show the initial wage demand of TWU Local 100 and the initial wage offer of the MTA. However one has to consider how the negotiators arrived at these particular wage demands? There are many answers one can chose from. Each bargainer demands in the negotiations that the wage maximizes its subjective expected utility. To determine this wage each bargainer must compare the expected benefits with the expected costs for each wage rate in the contract zone. This calculation for the TWU Local 100 bargainer has hypothetical values for the four variables.

The higher the TWU Local 100 wage demand the lower the probability that the MTA will accept it without a strike. TWU Local 100 bargainers utility increases slowly for a wage of 90¢ or less more rapidly by up to $1.20 and at a diminishing rate of up to $1.50 as the presumed upper limit of the contract zone. The rationale for this pattern might be the following. TWU Local 100 negotiators may feel that they have to get at least 90¢ in order to keep the membership’s wage up with the rate of inflation or the industry pattern since a wage increase below that would provide relatively little increase in utility. Utility increases at a faster pace for wage increase between 90¢ and $1.20 as the bargainers demonstrate their ability to win more from the MTA. Beyond a $1.20 increase, utility grows at a diminishing rate as TWU Local 100 bargainer’s success leads to a growing concern over negative employment effects and the threat of layoff from the MTA. However with a low wage offer the probability of striking increases. If the wage demand from TWU Local 100 is a low wage demand then that will send a message that the negative utility from the costs are also low while the TWU Local 100 wage demands escalates. However so does the duration of a strike necessary to obtain it therefore causing strike costs to rise at an increasingly rapid rate.  

The contract zone

Explicit or implicit in nearly every bargaining the concept is of a contract zone. The contract zone defines the range of wage rates within which a settlement is possible. The upper limit of the contract zone is determined by the maximum wage rate that TWU Local 100 would desire to obtain - the lower limit of the contract zone is determined by the minimum wage rate that the MTA would desire to have. Between the upper limit of TWU Local 100 and the lower limit of the MTA is where the bargaining wages will take place and where a settlement will be reached.

The next task of bargaining models is to predict the actual wage rate in the contract zone to which TWU Local 100 and the MTA agree at the end of the negotiations. Unfortunately the nature of the bargaining process is such that it is not easy to construct an estimate that is realistic. The reason is because of the strategic interaction that takes place between the bargainers. Strategic interaction arises from the dependency between the wage demands of TWU Local 100 and the MTA, the size of the MTA’s wage offer that for example influences TWU Local 100 demand which then causes the MTA to modify its offer which causes a further change in the TWU Local 100 position and so on.

Bargaining power

Power is the essence of collective bargaining. The ability of the TWU Local 100 to obtain what it wants and the ability of the MTA to resist TWU Local 100 demands depends on the relative power position of each side. It is fundamental to understand the process of wage determination in collective bargaining power and the source of power available to the TWU Local 100 and the MTA.

Bargaining power may be defined as one’s ability to induce an opponent to agree on one’s own terms. The origin of bargaining power is twofold. One determinant of bargaining power is the ability of TWU Local 100 to impose costs on the MTA if the MTA does not agree to TWU Local 100’s terms. The second determinant of TWU Local 100 bargaining power is the ability to insulate itself from retaliatory cost-imposing sanctions by MTA. This description of bargaining power suggests that one side’s ability to win its demands depends on how costly it can make disagreement for the other while minimizing its own costs. Much of collective bargaining involves jockeying back and forth between TWU Local 100 and MTA as each seeks ways either to strengthen its own sanctions against the other side or to protect itself from the cost-imposing ability of its opponent.

The single most important source of bargaining power for TWU Local 100 is the threat of a strike while for the MTA it is the ability to resist a strike. A Strike imposes costs on both sides since the MTA management loses its credibility, confidence of New Yorkers as a state agency while we in the TWU lose earnings from work. The relative bargaining power of the MTA in relation to TWU Local 100 hinges on whether the costs of a strike fall more heavily on the MTA management or the TWU Local 100 members.

Questions - 1. How does bargaining power effect the size of the wage increase that TWU Local 100 is able to win from the MTA? What factors increase the TWU Local bargaining power? What factors increase the MTA? 2. What factors influence the size of the TWU Local 100 and MTA initial wage demands in bargaining? How might a skilled negotiator be able to change the other side’s demands to be more in his or her own favor? 

Alternative methods of dispute resolution III

The final form of third-party intervention in labor negotiations is binding arbitration. Under a system of binding arbitration a neutral third party listens to both sides of the dispute and then issues a decision that the parties are committed to accept. Binding arbitration is the most intrusive form of third-party intervention because it allows an outsider to dictate the terms of the settlement.

There are several forms of binding arbitration. Interest arbitration is the use of arbitration to determine the terms and conditions of a new contract, while rights arbitration on the other hand is used to adjudicate grievances or disputes over the interpretation or application of the terms of an existing contract. The use of binding arbitration to settle grievance disputes is quite common and is one of the most distinctive features of collective bargaining. Virtually every collective bargaining agreement provides for a grievance process where workers can seek redress against an owner, company or management decisions or policies that are thought to violate the contract. Most grievance procedures involve a series of hearings culminating in binding arbitration if the dispute cannot be resolved at an earlier stage. The major impetus behind the widespread adoption of rights arbitration is the desire of both the employees and the employers to replace the strike with an alternative form of dispute resolution that is less disruptive to the day-to-day employment relationship and that imposes lower costs on both sides.

In the private sector interest arbitration is much rarer. When it comes to negotiation of a new contract, few unions or companies are willing to give up their right to strike or to place their futures in the hands of an outside arbitrator.

Interest arbitration is much more common in public sector bargaining primarily because many public sector workers do not have the right to strike and an alternative form of dispute resolution is necessary. The positive side of interest arbitration is that it permits bilateralism between the employees and employers in public sector negotiations without the threat of a strike. Interest arbitration also has several negative aspects. It is often alleged that interest arbitration has a chilling effect on the motivation of the employer and the employees to bargain and make concessions. Without the prospective costs of a strike neither side loses as much by being intransigent. Also if both sides anticipate that the arbitrator will split the difference between their respective positions, they have a strong incentive to exaggerate their final positions in order to win a more favorable settlement. Interest arbitration may also lead to what is known as a narcotic effect in bargaining. The narcotic effect refers to the possibility that once the bargainers have used arbitration they may automatically resort to arbitration in subsequent negotiations rather than reach a settlement on their own. The bargainers may for example find it easier to rely on a third party to resolve their dispute rather than undertake the hard work and political risks within their own organizations of fashioning an agreement. A final negative impact at least from the perspective of public officials and taxpayers of interest arbitration is that it seems to result in higher wages and benefits for workers relative to negotiated settlements.

These negative side effects of interest arbitration have led to the development of final offer arbitration. Under final offer arbitration the arbitrator chooses the final offer of one side or the other as the settlement. The hope is that the ‘all or nothing’ nature of the award will provide a strong incentive to both sides to moderate their positions and reach a settlement on their own - it also leaves a stronger residue of bad feelings between the employees and the management because it produces a clear winner and loser.

Alternative methods of dispute resolution II

The next higher level of third-party intervention in bargaining is fact-finding. Fact-finding is most frequently used in the public sector and often begins when mediation has failed to bring about a settlement in negotiations. Under fact finding procedures, a neutral third party enters the negotiations and prepares a report that outlines the conditions surrounding the dispute and the positions of the parties. Fact-finding often goes beyond mere determination of the facts, because in many instances the fact finder is also empowered to prepare a set of recommendations as a suggested basis for a settlement of the dispute.

Proponents of fact-finding argue that it facilitates a settlement of collective bargaining disputes in three ways. First, fact-finding can resolve important disagreements between TWU Local 100 and MTA over the truthfulness of the information with which each side buttresses its demands. Second, the fact-finder’s recommendations can serve as a focal point around which a settlement can be reached. Finally and perhaps most importantly, it argued that fact-finding subjects the bargainer’s demands to public scrutiny therefore inducing both sides to adopt more moderate positions than they would if the negotiations remained behind closed doors. Despite these claims in its favor, evidence suggests that at least in the public sector fact-finding has declined in its effectiveness as a means of dispute resolution. The major reason seems to be that fact-finding does not, contrary to its proponents’ claims, arouse enough public pressure to move the parties to a settlement.

Alternative methods of dispute resolution I

Mediation is the most common form of third-party intervention in collective bargaining and also the least intrusive. Mediation is a procedure in which a neutral party joins the negotiation to assist the TWU Local 100 and MTA in reaching an agreement. The mediator has no power to impose a settlement on the parties. Rather the mediator facilitates the bargaining process by serving as a go-between in the negotiations.

The central purpose of the mediator is to help the parties reach agreement since the mediator cannot impose sanctions or costs on the negotiators. The major influence the mediator can have on the speed with which an agreement is reached is by improving the flow of communication between the bargainers and suggesting possible areas of compromise. Mediation will usually be more effective in some types of disputes than others. For example in a labor negotiation where one party has boxed itself into a ‘must strike’ position through inexperienced or clumsy bargaining a skillful mediator can suggest a compromise that allows an effective face saving retreat. Another important service the mediation can perform is facilitating concession. As noted earlier each negotiator must be careful not to convey weakness to the other side by ‘coming clean’ too soon. A mediator can therefore suggest x as a point of settlement when neither parties would have dared to put it on the table themselves.

In other disputes/situations mediation may be relatively ineffective in bringing about settlement. This is particularly true when matters of principle are involved or when the costs of disagreement are too low to induce the parties to compromise. 

Bargaining process

Unfortunately the nature of the bargaining process is such that it is quite difficult to construct models that are realistic or analytical, the reason is because of the strategic interaction that takes place between the bargainers. Strategy interaction arises from the interdependency between the wage demands of TWU Local 100 and the MTA. 

One issue rises here which is the MTA’s wage offer, can we assume that it would not influence our demand? Which then causes the MTA to modify its offer, which may cause a further change in our position and so on. However we know what we had previously which can be used as a bench mark.

Lets take a single approach of the TWU Local 100 - MTA bargaining in order to see what reaction functions for the MTA and the TWU Local 100. This reaction functions are a pair of mathematical equations that predicts the wage demand of each bargainers over the x rounds of the negotiations.

Lets assume the equation contains two major parts - an objective function which states what it is that the bargainers are trying to maximize and a learning function which states how the bargainers alter their wage demands given what they have learned from their opponent’s most recent bargaining move. In many fields whether in automobile, real estate or even some kind of service always one bargains to what he or she feels comfortable with. If you are an automobile purchaser you would prefer to purchase that automobile as cheaply as possible while the dealer wants to maximize his profits. These equations are solved to yield the predicted time path of the bargaining demands of the TWU Local 100 and the MTA and the wage rate that the two sides will eventually agree on.

Questions - 1. Occupations A and B are identical except occupation B requires people to work at night. Assume that some people prefer night jobs, but that others do not. Will the wage in occupation B be higher, lower, or equal to that in A? 2. Consider the following statement: ‘As long as even one person dies from an assault incident there is not enough safety at the workplace.’ Evaluate this statement from an economic point of view. Critics charge that human life cannot be assigned a dollar value and benefits of additional safety cannot and should not be balanced against costs as advocated by economists. What do you think about this argument? 3. Only 2 percent of airline pilots are women and only 2 percent of dental hygienists are men. What reason can you give to account for this pattern?