Bargainers learning function II

Aspiration level theory provides several important insights into both the resistance and concession curves and the actual practice of collective bargaining. The first has to do with the process of concession as well as the convergence of the reaction functions. We pointed earlier that often TWU Local 100 and MTA enter the negotiations with overly optimistic expectations of what they will be able to win - TWU Local 100 (or at least hopes) that the MTA will concede faster than it actually does while the MTA hopes for moderate or ‘responsible (net-zero wage increases)’ demands from TWU Local 100. The result in this case is that neither side gives in as much as the other expects and as the aspiration theory predicts the two sides mutually lower their estimates of what is attainable resulting in concessions and a movement along the resistance and concession curves toward the point of agreement.

A second insight provided by the aspiration level theory concerns the best use of bluffing in labor negotiations (does not happen in diplomacy or finance). Now lets look at the usual purpose of bluffing which is to give the negotiator some room to make concessions or to shift the opponents estimates in a way favorable to the bargainer.

Bluffing can also work to a bargainers disadvantage however since at some point the bluff (if it is truly a bluff) will have to be given away as a concession and the larger the concession is the more the other side is motivated to toughen its demands.

Aspiration level theory also explains the incremental way TWU Local 100 negotiators move toward a settlement. One might imagine an exasperated MTA negotiator saying to his or her TWU Local 100 counterpart ‘Let’s quit kidding around. You and I both know were going to settle for a raise of 25¢ so lets get it over with. That’s my offer!’ Unfortunately for the MTA negotiator ‘coming clean’ like that usually does not result in a settlement but in an escalation of TWU Local 100 demand. The MTA immediate offer of 25¢ (even though there is a huge gap to $1.50 which the membership desires) wont cease until the TWU Local 100 negotiator acquiesces. This example points out what is perhaps one of the most difficult tasks facing a TWU Local 100 negotiator - how to make concessions without the other side reading it as a sign of weakness.

Bargainers learning function I

To predict the actual time path of wage demands it is necessary to specify in the mathematical representation of the reaction functions the exact of the bargainers uses in modifying their position. This decision rule is the bargainer’s learning function. The learning function of each bargainer states how its wage demand will change given a particular change in the opponent’s demand. The learning function captures the crucial process of strategic interaction in the bargaining.

Can we develop a mathematical equation for this learning phase? Maybe, however it is not easy to develop one due to the nature of the back and forth between the bargainers. Principally because the analysis becomes too complicated. The basic idea that underlies the learning function can be easily explained however to capture the dynamic interaction between TWU Local 100 and MTA bargainers one approach can be based on the learning function on what is called aspiration level theory. According to this theory people have goals or aspirations that they seek to obtain. Studies in psychology have shown that a person’s aspirations behave in a predictable way rising with greater than expected success and failing with less than expected success. In calculating the most favorable wage demands both TWU Local 100 and MTA negotiators implicitly estimate what the other side’s demand will be and how fast the opponent will concede during the negotiations. Lets assume for example that TWU Local 100 negotiator based on his or her subjective estimate of the MTA negotiator’s initial offer will be zero (0) an hour and that this offer will then be increased to 15¢ in the second round. What happens to TWU Local 100 wage demand if the MTA offers only 15¢ an hour?

The failure of the MTA wage offer to meet TWU Local 100 negotiators expectations should cause a reevaluation of TWU Local 100 demand. TWU Local 100 negotiator might conclude that he or she had overestimated the MTA vulnerability to strike costs or underestimated that the MTA bargainer had attached to the stated objective of holding down labor costs. If TWU Local 100 becomes convinced that the MTA position is not a bluff but is in fact the MTA firm actual bargaining position then the aspirations level theory predicts that the TWU Local 100 negotiator would respond by lowering the TWU Local 100 demand from its initial position. Had the MTA initial wage offer been more than TWU Local 100 anticipated the opposite result would be predicted TWU Local 100 bargainer would raise his or her expectations of what was attainable and would concede less than originally planned.

Contract Demand Meeting

The contract demand meeting at the Sheraton hotel was a success. The turnout was great. John E. Samuelsen president of TWU Local 100 speech was a traditional one. In addition what was said was what the management should hear. What was said from the management side was in a conciliatory tone which was a great move from the new MTA chairman Joseph Lhota. 

Raise of wage

To increase the MTA estimate of the strike costs that New York City will bear we demand that John E Samuelsen president of TWU Local 100 adopt a belligerent attitude in the bargaining process. We also recommend that he should take a strike vote among the membership. If in the event that he speaks to the press we prefer the following statement, ‘if we don’t get our demands, there’ll be a strike!’.

He should tell the MTA that the subjective estimates of the costs that TWU Local 100 would incur from a strike would be minuscule. Specifically by publicizing how large our strike fund or the amount of savings the membership has built up. We are aware that they may try to manipulate our estimate, however we know we are due for a raise.

The MTA negotiator for example may bring to the table a mass of charts and diagrams to show TWU Local 100 how precarious the MTA financial position is or why TWU Local 100’s large demands will result in layoffs. Part of this is a useful exchange of information so that TWU Local 100 knows the MTA’s true position many times. However it also has large elements of bluffing as the MTA deliberately exaggerates the negative consequences of a particular wage increase in order to win a less expensive settlement. TWU Local 100 must play the same game by trying to persuade management that a wage increase will cost less than it thinks because of better worker morale and increased productivity.

The bargainers’ objective functions IV

A fourth insight is that strike costs narrow the range of disagreement  between the MTA and TWU Local 100 and make an agreement more likely. If strike costs were zero then TWU Local 100’s best wage demand would be the upper limit of the contract zone and the MTA would be the lower limit of the contract zone. However we know the cost of strike is not zero and it will never be that. Further we know the cost will be imposed on the New York City economy. Thus the strike cost has to be increased in value then that will force the bargainers to compromise more in order to reach a pre strike settlement. The larger the prospective strike costs then the narrower will be the distance separating the TWU Local 100 resistance curve and the MTA concession curve.

Finally is the important role of negotiating tactics in the bargaining process. Both the MTA’s and TWU Local 100 most favorable wage demands are based on what they think the benefits and costs of a particular wage demand are. During the bargaining each side uses a variety of tactics designed to change the opponents’s subjective estimates of these benefits and costs so as to obtain a more favorable settlement. 

The bargainers’ objective functions III

A second important feature of the bargaining process helps to explain the gradual convergence that takes place between the TWU Local 100 resistance curve and the MTA’s concession curve. At each round of negotiations the bargainers have to reestimate their objective functions and their best wage demands. It is likely that if a strike is utilized as a bluffing technique then as the deadline approaches the bargainers’ estimate of both the probability of a strike and the amount of strike costs will increase as they face the reality of a shutdown. The wage demands of TWU Local 100 and the MTA will also converge as the strike deadline forces them to concede bargaining of secondary importance in order to resolve the issues that are major stumbling blocks towards an agreement. As the bargaining process continues therefore both the TWU Local 100 and MTA are forced to reevaluate their most favorable bargaining demands as their subjective estimates of the benefits and costs change over the negotiations. Each point on the resistance and concession curves is thus the best wage demand that comes out of this dynamic to make the best of each bargainer’s objective function.

A third insight concerns the fundamental importance of the right to strike in collective bargaining. As many of you are aware the Taylor law has denied us the right to strike - that is the yardstick of a strike in its ability to impose costs on the New York City economy which the mayor of New York City has to answer for. However that indirect cost does not pass on to the MTA. Therefore based on that the MTA is severely restricted and the MTA has little incentive to bargain with TWU Local 100 or compromise to reach an agreement. In addition to those executives in the MTA that do not reside in New York City or utilize public transportation they are out of touch with the average New Yorker’s desires for premier mass transportation. They do not answer directly to the mayor of New York City based on the above. Without the threat of a strike or some other cost imposing sanctions on New York City economy the MTA best wage offer in this case is the lower limit of the contract zone.

The bargainers’ objective functions II

To maximize utility TWU Local 100 negotiators should raise the wage demand as long as the marginal increase is an expected utility from the higher wage and exceeds the marginal decrease in expected utility from strike costs. The best wage demand is $1.50 per hour for TWU Local 100 as an initial demand and would determine the starting point for its concessions curve such to land at 99¢.

The MTA bargainers have made the same sort of calculations. The desire to win as low a wage increase as possible must be balanced against probable strike costs necessary to obtain it. Starting from the upper limit of the contract zone the MTA negotiator would compare the additional benefit from a lower wage against the additional strike costs that would be likely to go with it. As the negotiator considers lower and lower wage offers at some point - say when the wage increase falls below that granted by a private sector - the additional utility from yet a lower wage begins to diminish while expected strike costs become quite large. By equating marginal benefit and marginal cost the MTA bargainer would arrive at a most favorable wage demand as the starting point for the MTA’s resistance curve.

Clearly there are important points about the bargaining process. First at the beginning of bargaining a relatively wide distance separates the wage demands of the two sides. There are several factors that account for this - one is that the threat of a strike still lays in the distance and psychologically the bargainers tend to discount the amount of strike costs they would incur. Therefore this reduces the value in each bargainer’s functions leading the TWU Local 100 to demand a relatively high wage and the MTA to offer a relatively low wage. Second at the beginning of the negotiations one or both sides may have an over confidence of expectations about how much the other side will give into without a strike leading to inflated estimates of the variables in each bargainer’s too large demands. This tendency of inflated demands at the beginning of bargaining reflects in part the knowledge of skilled negotiators that it is easier to come down in one’s demands if they are too high than it is to increase one’s demands from too low an initial position. A third reason for the wide distance separating the reaction functions is that at the beginning of bargaining both sides typically engage in demand exaggeration or bluffing. Bluffing is part of the bargaining tactic used by labor negotiations in which one side attempts to alter the other party’s subjective estimates of the benefits and costs of a particular wage in a way that yields a more favorable settlement.