1
15 October 1998
Measures to improve wage formation in Sweden
Comments on proposals regarding mediation and conflict resolution
by
Steinar Holden
and
Karl Ove Moene
Department of Economics
University of Oslo
Abstract
This paper was prepared for the Conference on Measures to Improve Wage Formation in
Sweden, hosted by The Commission on the Strengthening of the Mediation Authority in
Sweden; Stockholm 28 September 1998. The background for the conference was a series of
concrete proposals made by employee and employer organizations intended to produce lasting
improvements in wage formation in Sweden. The paper evaluates the effect of the proposals
on wage formation and employment.
Mailing adress: Department of Economics, Box 1095 Blindern, 0317 Oslo, Norway.
Email: steinar.holden@econ.uio.no k.o.moene@econ.uio.no
2
1 Introduction
Sweden endured a strong economic crisis in the first part of the 1990s. Unemployment rose to
unprecedented levels, the public budget balance deteriorated sharply, the credibility of the
economic policy was low, with a weak currency and high interest rates. Recently, the situation
has improved considerably. The budget balance is much better, and credibility no longer
appears to be a problem. Yet the high unemployment persists. The behavior of the system of
wage formation is probably an important factor behind the sluggish unemployment, as money
wage growth remains high in spite of high unemployment.
A number of proposals have been suggested to improve wage formation in Sweden. The
proposals, as summarized by the Commission on Strengthening of the Mediation Authority in
Sweden in the invitation to this conference, are discussed below. As a background for our
comments, we briefly lay out a simple theoretical framework concerning the relationship
between wage formation and equilibrium unemployment in section 2. In section 3, we include
a rather general treatment on conflicts, mediation and arbitration. In these sections, we point
at some other issues, that are not directly related to the suggested proposal, but which, in our
view, nevertheless may be of considerable importance to the functioning of the Swedish
system of wage formation. The specific proposals are discussed in section 4. Section 5
contains our concluding remarks. The appendix includes the list of the proposals presented by
the labor market parties.
2 Wage setting and equilibrium unemployment
In recent years, economic analyses of wages, employment and unemployment are often
undertaken within a theoretical framework based on an equilibrium rate of unemployment
(Layard, Nickell and Jackman, 1991). A crucial part of this framework concerns the wage
setting. Explicit consideration is given to the situation in which wages are set, in a negotiation
between employers and employees (at firm level, or at a more aggregate level), or in some
cases unilaterally by the employer. The wage that is set depends on the economic environment
of the firms. The economic environment can be distinguished into “inside forces” like
profitability and productivity, “outside forces” like the need to recruit and retain qualified
employees, purchasing power considerations, the wages of other comparable groups of
workers, the degree of competition in the product market, etc., as well as the bargaining
power of each of the parties.
In abstract form, the outcome of the wage setting is often summarized in a wage curve,
linking the real wage to the rate of unemployment in the economy. If unemployment is low,
workers have a strong bargaining position, and high wages may be necessary to recruit the
required amount of labor, so wage setters agree on a high real wage. Conversely, if
unemployment is high, wage setters will agree on a lower real wage. The position of the wage
curve depends on all the other factors that affect wage setting. A strengthening of the
bargaining position of the workers, for example, will shift the wage curve upwards, so that the
wage setting leads to a higher wage level for any given level of unemployment.
The other crucial element in an equilibrium unemployment framework is the decision of the
firms concerning pricing and employment. In the short run, firms set prices as a markup on
production costs, where wages are a vital part. The outcome of the price setting of the firm
can be summarized in a price curve, linking the real wage that entails from the price setting to
the rate of unemployment. If higher output and employment (and thus lower unemployment)
is associated with higher production costs on the margin, the price curve is decreasing in the
employment - real wage space.
3
The equilibrium level of employment (and, for a given labor supply, thus also the equilibrium
level of unemployment), is determined by the intersection of the wage curve and the price
curve, as illustrated in Figure 1 below. Thus, in equilibrium, the level of employment and
unemployment adjust so as to ensure that the real wage outcome of the wage setting is
consistent with the real wage that is feasible from the price setting.
In the longer run, the production capital of the firm can be adjusted. If the real wage is too
high, the return to capital will be lower than investors can obtain elsewhere, and there will
not be sufficient investment to maintain the production capacity. This shifts the price
curve to the left, leading to a higher equilibrium rate of unemployment. If there are
constant returns to scale in the longer run, and the required rate of return is given by the
return investors may obtain from investments in other countries, a horizontal price curve
emerges in the long run. In this case the real wage is in the long run uniquely determined
by the price curve (that is, by the required return to capital and the level of productivity),
while the position of the wage curve only determines the equilibrium rate of
unemployment.
Real wage
Labour supply
Prices-short run
Wages
WWagWag
Prices - long run
Employment
1-u*
Figure 1: The equilibrium rate of unemployment, u*, is determined by the intersection of the
wage curve and the price curve.
In the case of Sweden, a main concern appears to be that wage pressure is too high, the wage
curve is too high in the employment - real wage space, resulting in a high level of equilibrium
unemployment. In this view, the aim of measures to improve the wage formation in Sweden
must be to dampen wage pressure, so as to reduce equilibrium unemployment.
Before turning to the discussion of which measures to use to fulfil this aim, let us briefly
mention two important qualifications. First, the dynamics of the wage and price setting are
likely to set strong downward constraints to the rate of unemployment. If unemployment is
lower than the equilibrium rate of unemployment, real and nominal wage growth is likely to
be high, and macroeconomic policy will have to be tightened to contain inflation and prevent
a deterioration of cost competitiveness.
4
However, the wage and price setting are probably weak upward constraints on
unemployment. Even if unemployment is considerably higher that the equilibrium rate of
unemployment, the dampening effect on wage growth may be limited. Furthermore, lower
wage pressure in itself probably has weak effect on aggregate demand. Thus, one should not
overlook the possibility that unemployment over long periods is considerably higher than the
equilibrium rate of unemployment.
Evidence on the wage setting in the Swedish manufacturing sector suggest that the system of
wage formation has not changed over the period 1964-94 (Holden and Nymoen, 1998), which
may indicate that equilibrium unemployment has not increased in line with the rise in actual
unemployment in Sweden. This is consistent with the findings of Forslund (1995). However,
even if unemployment in Sweden is above its equilibrium level, the need to contain wage
growth remains; moderate wage growth will in any case facilitate a reduction in
unemployment on a more permanent basis.
A second qualification concerns a feature of the framework above, that the weaker the
bargaining position of the workers, the better: Equilibrium unemployment is lower, while in
the long run the real wage is not affected. Yet there are several reasons why one should be
reluctant to suggest institutional changes that would imply a considerable reduction in real
wages in the short and medium term. First, for efficiency reasons it is important that both
parties, firm and workers (collectively and individually) obtain sufficient return to their
investment and effort. Too low wages may have a negative impact on the investment and
efforts undertaken by workers, which then can have a negative impact on the return to
investments by the firm. Secondly, for neutral observers, it is hardly a good idea to suggest
changes that dramatically shifts the bargaining position to the parties, with strong adverse
changes for one party. Thirdly, given the historical strong position of unions in Sweden,
institutional changes with important adverse effect on workers would be unlikely to remain
unchallenged. The industrial unrest that could result would easily dominate any positive effect
on low wage costs on output and investment.
In general terms, this qualification is probably more of theoretical than practical relevance.
Most workers and unions in Sweden have a sufficiently strong bargaining position that the
main concern of neutral observers would be to reduce wage pressure, not to prevent too low
wages. Nevertheless, some groups of workers may have a very weak bargaining position. An
employer facing an upward-sloping labor supply curve may gain from setting a low wage
even if this implies that at times he may have problems of recruiting a sufficient number of
employees. In this situation an increase in the bargaining power of the workers, involving
higher wages, may in fact lead to higher employment (Manning, 1995).
In principle, the main aim of reducing wage pressure can be achieved by several types of
measures. First, and most obviously, wage pressure would in general be reduced by measures
that weaken the bargaining position of the workers. Such measures could, for example, aim at
reducing the effectiveness of strike as a instrument in the wage negotiations.
5
Secondly, wage pressure could be reduced by measures to strengthen co-ordination in the
wage setting. The underlying reason for the advantages of co-ordination in the wage setting is
the existence of negative indirect effects. Higher wages for one group of workers have an
adverse impact on the welfare of other groups of workers, through several channels (see
surveys in Moene, Wallerstein and Hoel, 1993, and Calmfors, 1993). One important channel
is that higher wages feed into higher prices, thus reducing the purchasing power of other
workers. If unions covering large groups of workers co-ordinate their wage setting, they may
want to set lower wages than each of them would have done by itself, to dampen the negative
indirect effects. Competition between unions that recruit the same type of workers may also
lead to excessive wage demands. Again, co-ordination may lead to wage restraint. There also
exist negative indirect effects of high wages between firms, as higher wages in one firm may
make it more difficult for other firms to recruit and retain labor (Hoel, 1990). Co-ordination
among employers in the wage setting may thus lead to stronger employer resistance to high
wages.
Thirdly, wage pressure can be reduced by measures that affect union preferences, or their
short run desire to achieve higher wages. One such measure could be remuneration schemes
built on profit sharing or worker owned shares. If the workers have an interest in high profits,
they may become more concerned about the long run performance of the firm, and less
aggressive in the wage setting (cf. section 3 below). Another measure would be long term
agreements between unions and firms, explicit or implicit, where the firms describe future
plans for investment, in real and human capital, while unions promise wage restraint. The
basic idea is that there may be gains to be earned by wage moderation in the short term, yet
workers are concerned that they may not obtain a share in these gains. While it may be
difficult, and possible risky, to agree on detailed, explicit long term agreements, less detailed
agreements that link the evolution of wages to, say, the future evolution of productivity and
profitability, may nevertheless turn out to be fruitful.
Note that overall wage pressure is determined by the interaction of all these elements. The
interaction may be complex, possibly leading to surprising effects of partial changes. For
example, a successful co-ordination on wage restraint may require that unions are sufficiently
powerful, and union coverage is sufficiently large. An institutional change that weakens the
bargaining power of the union, which by itself would reduce wage pressure, may involve
union power to fall below the threshold required for co-ordinated wage restraint. In this case
the overall effect may be higher wage pressure (Holden and Raaum, 1991).
During the 1980s, wage setting in Sweden became less centralized. The decentralization
involved the advantage that wages became more responsive to the economic situation in the
respective industry. Flexibility of wages may dampen fluctuations in employment. Moreover,
wages being responsive to productivity and profitability may have a positive effect on the
effort and motivation of workers. However, the decentralization also made it more difficult to
co-ordinate the wage setting. Furthermore, the decentralization of wage determination may
also have had adverse efficiency effects, by creating excessive wage differentials. A basic
economic principle of efficiency is that price differences on homogeneous goods involve
inefficiencies. Workers in different industries are to a large extent homogeneous (at least in an
ex ante perspective, i.e. for young workers), thus optimal allocation in a static sense requires
that they earn the same wage in all industries. In a growth perspective, Moene and Wallerstein
(1997) show that reducing industry wage differentials may lead to higher growth by keeping
wages down in new and more efficient plants, an idea closely related to the thoughts of Gösta
Rehn and Rudolf Meidner.
6
The wage formation system in the Nordic countries is characterized by wage setting at several
levels, with local adjustments to agreements at more aggregate levels. In theory, such multilevel bargaining may combine the co-ordination effect of a centralized system with the
flexibility of a decentralized. However, this compromise requires that local adjustments are
fairly limited, otherwise the total wage may easily become too large. In particular, a multilevel bargaining system may lead to excessive wages in periods of low inflation and low
productivity growth. A binding money wage floor at the central level (no cut in money wages)
may lead to too high real wages if the local wage drift is considerable (Holden 1991, 1998a;
Calmfors, 1993).
A further issue is the possible relationship between the equilibrium rate of unemployment and
the monetary regime. Large wage setters, as in Sweden, are likely to take into account the
effect of their wage setting on the overall economy. In a regime with completely fixed
exchange rate, a wage rise leads to a deterioration of cost competitiveness, as well as higher
consumer prices. In the inflation target regime in Sweden, wage setters that are confident that
the inflation target will be reached, may neglect the effect of a wage rise on consumer prices.
On the other hand, a wage increase may be countered by a rise in interest rates. Which
regimes that induces the higher wage pressure, and thus the higher equilibrium rate of
unemployment, depends among other things on the effect of a rise in the interest rate on the
exchange rate and the domestic level of demand (Holden, 1998c).
3 Conflicts, Mediation and Arbitration
The Hicks paradox and asymmetric information
Modern game theoretic approaches to negotiations are built on the Godfather principle (“I
gave him an offer he couldn’t refuse”, Rubinstein, 1982, Shaked and Sutton, 1984). A
rejection of an offer causing a delay involves a cost to both parties. The party that makes the
offer exploits this, by demanding exactly the agreement that makes the opponent accepting
the offer, rather than inducing the costs of delay. Thus, threats are important for the outcome,
but they are never carried out as long as both sides have common information. This is in fact
a restatement of what was earlier called the Hicks paradox (Hicks, 1963), which says: If both
sides of the bargaining table are rational and able to predict the outcome of a strike or lockout,
they would tend to agree without a costly conflict. Accordingly conflicts must be essentially
random, caused by mistakes, as long as both sides have common knowledge of the relevant
information.
Yet, empirically strikes and lock-outs seem to follow a predicable pattern (Kennan, 1986)
where conflicts at least in some countries are pro cyclical and where there is an overall strong
negative correlation between industrial conflicts and the degree of centralization of bargaining
measured by man-days lost per worker. (Hibbs, 1978, Ingham, 1974). In fact, Sweden and
Norway were among the world’s most strike- and lockout -prone countries during the interwar years before collective bargaining were centralized. In the post war period of centralized
bargaining, however, the frequency of industrial conflicts in the two countries was until
recently among the lowest in the world.
One reason why industrial conflicts may arise between rational bargainers is the existence of
private information. When information is asymmetrically distributed, it is difficult to utilize
the Godfather principle efficiently. When players struggle to obtain the largest possible share,
it may be impossible to avoid costly conflicts (see the survey of private information theories
of strikes in Kennan and Wilson, 1993).
7
To illustrate the basic idea in a simple way, suppose a firm is hit by a decline in demand just
before a local wage negotiation. If the decline is common knowledge, the union will adjust its
expectations accordingly and it will not be more difficult than usual to reach an agreement
without conflict. However, if the information were private to the firm, would the union
believe the firm when it notifies that conditions have worsened? After all, irrespective of
demand is rising or falling, the firm always has an incentive to be pessimistic in its messages
to the union. Knowing this the union easily discounts any message from the firm. One
mechanism whereby firms may credibly communicate a worsening of conditions is to endure
a strike. Intuitively, if conditions are well, the firm would prefer paying the higher wage, it is
only when conditions are bad that the firm prefers the strike.
The asymmetric information explanation may provide one explanation for why strikes are
more frequent under decentralized wage setting. Decentralization of wage setting may in itself
provide negotiators with more information, but information may be more private and
asymmetrically distributed (Moene, Wallerstein and Hoel, 1993) At the enterprise level there
is a clear asymmetry in the information available to the employer and a local union. At the
industry level the union can more easily do its own studies of the demand for the industry’s
output. Thus the asymmetry of information is likely to be less severe than at the enterprise
level. At the national level both sides have access to more or less the same information about
the aggregate economy, and the existence of any asymmetry of information seems even less
likely.
An additional type of conflicts arising from asymmetric information, is a sort that may be
called demonstration conflicts. These are conflicts that stem from negotiators’ willingness to
make short run sacrifices (a conflict) in order to gain in future wage negotiations. The gain
may arise from an established reputation as a tough bargainer and a committed leader capable
of organizing strikes (or lockouts). Having established a reputation, one obtains a beneficial
agreement the next year without resorting to a conflict.
If asymmetries of information are central to industrial conflicts, there are at least two
important roles for mediation. One role is to facilitate the flow of information between the
parties. As argued above, the parties may bias their information to affect the bargaining
outcome; as both parties know that this may occur, a sense of mistrust may easily prevail. A
mediator may mitigate this problem by easing the flow of more objective information between
the parties. A second role of mediation concerns the parties’ expectations concerning the
consequences of a conflict. Both parties may easily have overly optimistic beliefs concerning
the outcome of a conflict. This may prevent an agreement, because the parties may both
believe that they will obtain a better outcome after a conflict. By private consultations
mediators may be able to identify such self-serving inconsistencies. The key is to obtain a
shared belief of the chances of winning, and of the expected damage of a conflict, in which
case the parties may agree on a split of the expected gain of avoiding the conflict.
8
Competing commitment
Asymmetric information is only part of the reason why threats of conflicts sometimes are
carried out. A different mechanism is the use of commitment. If a negotiator succeeds in
convincing the opponent that he will never retreat from a demand favoring himself, the
opponent cannot do better than accepting this demand, even if it involves an unequal sharing
of the gains from trade. Making public statements that he will stand firm is one way of
making a commitment; another is to mobilize members on overoptimistic aspirations. The
point is to increase the costs of giving in, maybe to such an extent that one is completely
committed to carry out the threats. The problem, however, is that what one does the other can
try to do as well. If both commit themselves to stand firm, a conflict that nobody wants may
result (Schelling, 1961, Johansen, 1979).
Potential conflicts that may result from competing commitments like this are not easily
avoided by mediation alone. However, in some cases a mediator may make it easier to back
down on previous announcements, because it is possible to put the blame on the mediator.
Clearly, arbitration is a much more efficient tool in this respect, as costly conflicts can be
stopped without a loss of credibility on either side.
Reciprocity
Reciprocity constitutes another basic motivational drive that has important implications for
the frequency of industrial conflicts. Reciprocity is both positive (we are kind to people who
are kind to us), and negative (an eye for and eye, a tooth for a tooth) (Fehr and Gächter,
1997). The difference between negative reciprocity and pure self interested behavior is that
homo reciprocans are more willing to incur costs themselves in order to take revenge. There is
ample evidence for this kind of behavior in experimental economics.
In bargaining situations reciprocity may produce good industrial relations with very few
conflicts (positive reciprocity) even under asymmetric information. Yet, such a situation may
be only locally stable. A new situation, for instance caused by changes in unemployment or in
the bargaining system, that workers feel is unfair, may trigger retaliation (negative
reciprocity) even in cases where the Godfather principle would produce no conflicts at all.
Conflicts caused by reciprocal behavior are not so easily solved by mediation. Arbitration can,
of course, suppress specific actions such as strikes and lock-outs. Yet there may be important
trade offs among expressions of industrial conflict (Hebdon and Stern, 1998) that are
particularly relevant for homo reciprocans. When one mechanism for industrial conflict is
suppressed, the resort to other mechanisms may easily rise.
Empirical investigations show that when the right to strike has been restricted, work hours lost
by accidents, absenteeism and high turnover rates rise significantly instead (Turner, Clark and
Roberts, 1967). It is also well known that work-to-rule is a substitute for open strikes. Data on
public sector workers in Canada show that grievance arbitration rates are higher among
workers who are restricted in their right to strike (Hebdon and Stern, 1998).
When forms of conflicts are close substitutes, one may easily overestimate the gains from
compulsory arbitration that aims at reducing the frequency of one or a few conflict forms.
Moreover, there may also be interconnections over time in the sense that arbitration today
may cause more conflicts (and a need for arbitration) in the future. Costs associated with
workers’ voice (a strike) should be compared to costly exit and less cooperation (Hirschman,
1970; Freeman and Medoff, 1984).
9
Have employers lost the edge?
Employers and employers’ associations complain that the costs of strikes have gone up
recently. There are many reasons why this may be the case. Specialized production lines with
a high degree of interdependence are more sensitive to local work stoppages; pressure to
economize on storing costs weakens the buffers against variations in production levels; new
routines with just in time deliveries have low flexibility towards interruptions;
internationalization implies that customers more easily can switch to other suppliers in case of
delays and so on.
What is less recognized, however, are the implications of rising costs of work stoppages for
employers’ willingness to use lock-out as a threat. If strikes are more costly, so are lock-outs.
It may even be argued that lock-outs are more costly to employers than strikes since foreign
customers may find delays caused by employer induced industrial actions less acceptable than
those caused by strikes. In addition, employer solidarity in coordinating conflicts appears to
be weaker than it used to be, and certainly significantly weaker than the solidarity among
workers on strike. If all this is true, lock outs are less efficient threats now than before and
employers may in fact have lost their most important weapon in wage bargaining.
While employers use to have the edge in the inter-war period in the sense that they could and
did easily drain unions’ strike founds by comprehensive lock-outs, this seems no longer
feasible. The big lock-outs in Sweden 1980 and in Norway 1986 both failed (Stokke, 1998)
and it is easy to understand why employers now seem to demand more governmental
intervention in conflict resolution.
Yet, it may be a mistake not to consider additional means to reduce conflicts. According to all
the theories we have considered the chance of industrial conflicts may be reduced by
mechanisms that provide more sharing of the expected damage of a conflict among the two
sides. An agreed upon bonus to the union for having no strikes over a certain period of time
may be advantageous, but difficult to enforce. However, all types of profit sharing schemes,
including worker owned shares, can do the same job automatically. When workers own shares
in the company they work, parts of the costs of a strike are born by themselves as an expected
decline in share values (Grout, 1988; Ognedal, 1992). In particular, if consequences of a
conflict are expected to be more long term than before, as many employers claim, worker
owned shares might be an appropriate means to reduce the frequency of conflicts. It is
understandable, however, given the recent controversies around the wage earner founds in
Sweden, that the possible conflict reducing role of worker owned shared is not so much
emphasized in the present debate. Yet, worker owned shares do not have to be a collective
arrangement and can be completely decentralized.
In the US a tax subsidy is used to motivate the adoption of Employee Ownership Plans
(ESOP) making share transfers mutual advantageous at the firm level. Since there are now
more workers in the US who are members of ESOPs than of unions, the impact of ESOPs on
industrial conflicts deserves attention. Cramton, Mehran and Tracy (1997) provide evidence
that unionized firms in the US that adopt ESOPs, experience a significant drop in the
frequency of strikes following the adoption date (however, the frequency of holdouts has
increased). Before the introduction of ESOP there were no major difference in terms of
frequency of conflicts between adopting and non-adopting firms.
10
4 Comments to the listed proposals
-
Act Early in Negotiations; Delay Potential Industrial Action; Extended Notice Period
These three suggestions have in common that they are aimed at ensuring that the parties have
more time to reach an agreement. In principle, this should increase the likelihood that the
parties reach an agreement. On the other hand, experience indicates that negotiations often
take the available time, and that the progress is faster when a deadline is imminent. In
particular, mediation may be more efficient close to a deadline, cf. e.g. Hiltrop (1989:258).
A related objective is that the suggestions may make it more difficult for a party to elude
serious negotiations; for example, if one party is determined to show strength by initiating a
work stoppage. The last two suggestions, delay potential industrial action and extended notice
period, may in some situations reduce the threat value of an industrial action, as it provides
the opponent with more time to prepare. A potentially more important motivation for the
measures is that they may provide more time for co-ordination in the wage setting of different
bargaining areas.
While all three measures may be expected to improve the wage formation system, the effect is
likely to be weak. None of the measures may prevent a group with a strong bargaining
position from exploiting its strength, and obtaining a favorable agreement.
-
Schedule Negotiations (all new agreements reached on a common date)
If it possible to co-ordinate the wage setting, so that wage setters take into consideration the
negative externalities, a common date for all agreements may have important advantages.
First, common contract periods facilitate comparison across wage groups, which probably
make co-ordination easier to achieve. Secondly, common contract periods make wage setting
more flexible. If a shock to economy takes place, all wages can be adjusted at the same time.
Thus, one avoids the wage stickiness that is induced by Taylor (1979) type overlapping wage
contracts.
However, if co-ordination fails, so that the outcome of each wage bargain is viewed in
isolation, a common date for new agreements is likely to lead to higher wages. The reason is
that wages are strategic complements (in the sense of Bulow, Geanakoplos and Klemperer,
1985): the higher the wage of one group, the higher the wage of other groups. Thus, if wage
agreements are reached at different dates, wage setters that move first may want to set a lower
wage, to dampen the wage of the groups that follow afterwards (Lau, 1996). In particular, this
will be the case if there is a re-opening clause in the first agreement, giving the union the right
to new negotiations if subsequent agreements involve higher wage growth. With simultaneous
wage setting, a union cannot affect the wage of other groups without co-ordination, thus this
reason for wage moderation does not exist.
The choice between simultaneous and sequential wage setting also involves some other
aspects. First, different wage setters usually have different target wages. A possible advantage
with sequential wage setting is that if the wage setters with the lowest target wage move first,
this may have a moderating effect on the overall outcome. In Norway, wage setting usually
takes place first in the traded sector. This makes it more likely that the wage growth is in
accordance with the wage growth of our trade partners.
11
Secondly, the choice between simultaneous and sequential wage setting may affect relative
wages. Common contract periods facilitate comparison, and this usually strengthens demands
for egalitarian wages. In other words, low income groups may benefit from common contract
periods, while high income groups may prefer different contract periods, so as to make
comparisons less transparent (cf. Stokke, 1998, page 497).
Thirdly, a practical problem with simultaneous wage setting is that it may involve capacity
problems in the mediation. If many settlements are to be determined at the same time, coordination may be easy to achieve in theory; in practice it may turn out to be much more
difficult. This may suggest that sequential wage setting, where some large groups are first,
and other follow suit, is more favorable to co-ordination.
-
Collective Decision Making
In bargaining situations, it is not always an advantage to be big. To the contrary, some small
groups of workers have the best of both worlds: They are few, so the costs of higher wages
are small, yet they are powerful in the sense that they can inflict large costs on their employer
(Hersoug, 1983). There are strong economic reasons to contain the wage pressure of such
groups. First, reducing the wage pressure of such groups reduces overall wage pressure,
which again would lower the equilibrium rate of unemployment (cf. Figure 1). Second, an
underlying reason for the strong position of these groups is often product market
imperfections, which are exacerbated by the higher wages, and thereby causing additional
efficiency loss. Third, the higher wages of strong groups increase overall wage dispersion.
“Combined proposal” is one possible instrument that can be used to contain small, strong
groups.
The use of “combined proposal” can also be seen as a measure to achieve co-ordinated wage
restraint. A frequent problem in the co-ordination on wage restraint is that some groups of
workers may attempt to outwait the others, for then to obtain a higher wage afterwards, thus
“free-riding” on the restraint of the others. Clearly, the risk that some groups may succeed
with this strategy may constitute an important hindrance to achieving co-ordination in the first
place. However, the free-riding strategy can be prevented if the groups that try are included as
parts in a “combined proposal”, together with other, larger groups of workers.
Admittedly, the descriptions of the use of “combined proposal” above are somewhat
idealistic. In some cases, combined proposals may be met with strong resistance, as they may
be viewed as unfair and undemocratic. Thus, the scope for this measure is probably fairly
limited.
12
-
The Members’ Vote
The suggestion of a ballot on conciliation offers before parties involved have the right to take
industrial action relies on a perception that interest organizations elect leaders who are more
militant than their members. This may be the case in some circumstances (some unions in UK
have that reputation). In most countries, however, union leaders seem not be more but less
militant than their members. The experience in Norway, for example, is that employers
conceive union leaders to be less militant than the rank and file (Stokke, 1998, p. 393).
Compared to union members union leaders may more clearly see the costs of conflicts, the
need to maintain international competitiveness and a sound macro economy. In Norway, a
sign of responsibility is that union leaders may end up as deputy ministers or personnel
managers. We would be surprised if the pattern in Sweden is significantly different from the
neighboring countries in this respect. If this is true, union leaders are not likely to call a strike
unless they are sure that they have majority support. Under these conditions a requirement of
members’ vote before industrial action is not likely to have much of an effect.
There is, however, an interesting, but so far rather inconclusive literature that speculate on
possible effects of pre strike ballots on union-employer behavior following the 1984 Trade
Union Act in the UK (see Manning, 1992, and the literature referred therein). The law made
the holding of a majority vote among the union members involved compulsory before a strike
can be called. The goals were to make unions more representative of their members and to
reduce the incidence of strikes. What emerges from the literature is that the effects of ballots
may be more complex than one first tends to believe. Legislators might have thought that the
pre strike ballot should simply provide more information about the true preferences of union
members. But a ballot can’t prevent coordination among union members who have reasons to
do so. For example, a ballot that shows just a little more than fifty per cent in support of a
strike signals weakness compared to a ballot that shows hundred per cent strike support.
Knowing this, union members may cast their votes so that the opponent should not think they
are weak. This may again distort employers’ wage offers and so on. In some respects the
situation is similar to voting over negotiated or mediated settlements. By voting no union
members may receive a raise on top of the mediated settlement. In fact, the outcome of
Norwegian ballots over wage settlements is perceived to be among the most uncertain aspects
of the wage negotiations. There have been several suggestions to remove the ballot (Stokke,
1998), but it has turned out to be difficult to take away a well-established right.
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Other Methods to Resolve Disputes
Dispute resolution procedures affect not only wage outcomes settled by arbitration, but also
how frequently arbitration is used, as well as the expected outcome of wage settlements
reached by negotiations. When the parties know that a dispute will be solved by compulsory
arbitration the bargaining environment changes significantly. The fall back positions if no
voluntary agreement is obtained, are determined by the perceived outcome from arbitration.
Several cases can be distinguished:
(i) If the outcome of arbitration is exogenous and can be predicted with certainty, no
difference can arise between negotiated and arbitrated wage settlements since either side
can choose arbitration by rejecting the opponent’s proposal (Crawford, 1981).
13
(ii)
More realistically, if there is uncertainty about the arbitrator’s preferred award, the
situation becomes more complicated. If both sides are risk averse and arbitrator’s behavior
is not affected by final offers, both sides may hesitate to let the case be settled by an
unpredictable arbitrator. Thus an increase in the uncertainty surrounding arbitrators’ award
may increase the likelihood of reaching an agreement before arbitration. Babcock and
Taylor (1996) use experimental data on decisions made by arbitrators in hypothetical
situations to calculate a measure of uncertainty of each arbitrator. Matching these data with
field data on wage negotiations by the same arbitrators, they find that greater
unpredictability about arbitration outcomes lowers the chances of impasse. Yet, the
negotiated wage may be affected. Depending on the degree of risk aversion, the negotiated
wage may differ both from the expected outcome of arbitration and from the wage that
would have been negotiated with no dispute legislation (Faber and Katz, 1979).
(iii) If arbitrators typically split the difference between the final offers of the two sides,
impasses become more likely as final offers tend to diverge in order to affect the arbitrated
wage. Whether arbitrators split the difference or in fact choose their preferred settlements
is less important than what the parties expect arbitrators to do. In any case it is important to
design dispute legislation to prevent that parties think they can gain by sticking to extreme
demands.
(iv) Final offer arbitration is one way to design mechanisms that make strategic divergence
in the negotiations less tempting. When arbitrators have to choose one of the two final
offers, nothing can be gained by putting forward extreme demands. The outcome depends
on how accurately negotiators can predict the preferred settlements of the arbitrator. Again,
if both sides can predict the arbitrator’s ideal point, final offers easily converge to this
settlement and no arbitration need to take place. Uncertainty about the arbitrator’s ideal
point, however, tend to widen the gap between the final offers. As a result less predicable
arbitrators can now increase the likelihood of an impasse.
In some cases, the parties may prefer that the case be settled by arbitration. If one or both of
the parties have made strong demands in public, perhaps in an attempt to commit so as to
improve their bargaining position, it may be difficult to back down. In such situations, the
previous commitments of the parties may prevent a mutually beneficial agreement from being
reached. However, a solution through arbitration may make it possible to circumvent the
problem, as the parties may continue to claim that they would stick to the original demands.
The “blame” is put on the arbitrator, so the parties “save face”.
The face saving effect of arbitration, making it possible to recede from previous demands, is a
useful and important effect of arbitration (and to a weaker extent also of mediation).
However, an associated problem is that the parties may be less eager to negotiate an
agreement themselves, because they prefer a subsequent solution by arbitration (the “chilling”
effect, see e.g. Ponak and Falkenberg, 1989). In some cases, the parties may become
dependent on a solution by arbitration (the “narcotic” effect).
A potential weakness of arbitration is evident when collective bargaining is over other issues,
as well as wages. In such cases arbitration outcomes may not have realized all feasible mutual
gains as arbitrators cannot know how the two sides value the various trade-offs involved. To
realize mutual gains that may remain, one might consider to open up for post arbitration
negotiations with the arbitrated settlement as the fall back position. An argument against this
idea is that changes that are preferred by both parties in the relevant case may have
problematic consequences for other bargaining areas or any other third party to the deal.
14
As the above discussion shows it is not easy to establish robust predictions about the overall
effects of the availability, usage and design of compulsory arbitration. Since dispute costs,
however, are lower with compulsory arbitration than with no restrictions on the right to strike
or lock-out, there is a potential gain from arbitration. Empirical research by Currie and
McConnell (1991) on a panel of Canadian public sector contracts suggests that “wages are
higher under compulsory arbitration than under other legal structures”. Olson and Rau (1997)
explore how the parties adjust their expectations according to the choice of final offer of the
arbitrator in previous awards. As might be expected, the wage in subsequent negotiations
becomes higher when arbitrators pick the union’s final offer and vice versa. They conclude
that settlements in the long run conformed to the arbitrator’s views of fairness.
There may, however, be disagreements on whether arbitration produces a bias in the wage
structure in the sense that arbitrators choose awards that are persistently closer to one of the
party’s final offers. Ashenfelter and Bloom (1984) offer evidence from Canada that union
offers are more often chosen simply because they are more reasonable. In Norway, a country
where compulsory arbitration is more frequent than in most other countries, those who
complain insist on a bias in favor of employers.
Compulsory arbitration is a powerful and controversial measure. However, by itself it cannot
be expected to have strong effect on wage formation. The reason is that it is problematic to
use compulsory arbitration frequently against large groups, with considerable dampening
effect on the wage of the groups. Yet compulsory arbitration may have a strong effect on the
wage formation if it can be used to sustain co-ordinated wage restraint. Without compulsory
arbitration, it may be impossible to prevent strong groups from free riding on the restraint of
others. This may prevent co-ordination on wage restraint from being achieved in the first
place. If compulsory arbitration is used against groups that attempt to obtain more than other
groups, it may facilitate a successful co-ordination on wage moderation.
Final offer arbitration may be successful in reducing work stoppages, without causing a strong
“chilling” effect on the parties’ ability to reach an agreement themselves. However, final offer
arbitration is probably less suited to sustain coordination on wage restraint. The reason is that
to sustain cooperation, bargaining areas that come afterwards must to a large extent follow the
pattern of the previous agreements. In a standard arbitration scheme, this need not be a
problem. The general pattern of compulsory arbitration in Norway is illuminating. Employers’
final offers normally incorporate increases equal to those given in already settled wage
agreements. The resolution put forward by the mediator is closer to employers’ final offers,
because the mediator copies the terms of other agreements. With few exceptions the awards of
arbitration are almost identical to the sketch of the mediator, thus it works to sustain the
cooperation.
In contrast, in a final offer arbitration scheme, the arbitrator cannot always choose the
employer’s final offer. One reason is that this would be considered unfair. Another is that the
employer, if his offer were more likely to be chosen, might try to exploit this by reducing his
offer, even if this increases the risk that the union’s offer is chosen instead. The risk of final
offer arbitration as a means of stabilizing wage setting is illustrated by the experience of
arbitration in the major baseball league in the US. On this, Feuille (1994) observes that “This
final-offer procedure is loved by the players and hated by the owners, for it has played an
integral role in the dizzying escalation of baseball players’ salaries”.
15
A problematic aspect of the proposal is that the mediator is the one to decide which case to be
put to arbitration. One concern with this is the mix of roles, the same person is both a
mediator and a judge. For example, the arbitration outcome that is chosen is likely to affect
the confidence of the parties to the mediator in subsequent mediations. If the arbitrator is
concerned about his/her future confidence among the parties, this may affect the arbitration
outcome. Another concern is that compulsory arbitration may be perceived as less legitimate
if it is determined by a bureaucrat, rather than by law by the parliament (in practice usually by
the government), as in Norway.
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Sympathy Actions
Sympathy actions may be problematic in the sense that they may hit groups that have nothing
to do with the issue of dispute. However, sympathy actions may also be considered as a
mutual insurance scheme inherent in worker (or employer) solidarity. Although sympathy
actions are not used frequently, to remove the right to sympathy actions may nevertheless be
met with serious objections and conflicts. One reason why workers may protest is that
sympathy actions in special cases may be important to rescue jobs that are to be moved or
closed. When plants are considered closed or moved its workforce have very little to threaten
with if anything at all. It is no point for them to go on a strike since a permanent work
stoppage is exactly what the employer wants. Yet other workers whose jobs are safe can
threaten to strike in their support and these threats may have an impact. Without the
possibility of sympathy actions workers influence on employment may go down.
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The Principle of Proportionality
In Sweden, the parties have more freedom in their choice of industrial action, and more
flexibility as to the timing of the industrial action, than in the neighboring countries Denmark
and Norway (Stokke, 1998, page 518). This is likely to affect the bargaining outcome in
several ways. According to conventional bargaining theories (cf. e.g. Osborne and Rubinstein,
1990), the bargaining outcome depends on the relative costs of a conflict. If the union has the
opportunity to choose an industrial action that inflicts large costs on the employer, while
being less costly to the union, this will greatly improve the bargaining position of the union.
The outcome will be higher wages than if the union did not have this choice.
It seems also reasonable that a full strike or lockout involves larger uncertainty as to the
consequences than do other, milder types of industrial action. As shown in Holden (1998b),
uncertainty associated with the outcome of a dispute weakens the party that threatens to
initiate the dispute. The idea is that the opponent may make an offer that is better for the
threatening party than to initiate the dispute. The larger the uncertainty associated with the
dispute, the lower the offer that is required to make the threatening party prefer not to initiate
the dispute.
There are thus good arguments in favor of restricting the flexibility of choice of industrial
action, as well as of the timing of industrial action. Clearly, at some occasions, restricting the
choice to full strike/lockout or no industrial action may lead to a full work stoppage rather
than a milder type of industrial action. Yet it seems likely that the overall effect is positive.
16
As stated, the principle of proportionality “intended effects of an industrial action are
reasonably proportional to the action taken and the damage caused”, is very vague. It may
provide the mediator with strong powers to intervene in situations that he/she sees as
unfortunate. Vagueness, however, is also problematic, because it opens up for a new area of
heated discussions. This may exacerbate the conflicts, because when the law is vague, both
parties may be certain that the law is on their side.
5 Concluding remarks
Some of the proposals have an impact in the intended direction, by reducing wage pressure,
but the overall effects are likely to be weak. This goes for the recommendations to Act early
in negotiations; to Delay potential industrial action; to insist on a Extended notice period.
Some of the other proposals, like The principle of proportionality, opening up for Compulsory
arbitration, and Combined decision making, are potentially much stronger measures. As these
measures, however, are more profound interventions in the wage setting, they are also likely
to be met with stronger resistance. Presumably, it will be possible to achieve acceptance for a
moderate use of these measures. Yet a moderate use of these measures is unlikely by itself to
have a significant impact on the wage formation.
Compulsory arbitration might clearly have a significant impact on wage formation. However,
the resistance against an active use of these measures may also make it more difficult for the
mediator to undertake other obligations. A comparison with Norway does not give reason to
much optimism in this respect. From a Norwegian point of view, the non-interventionist
tradition in Swedish industrial relations is very strong. Yet even in Norway it is problematic
to use compulsory arbitration to a degree that has a significant impact on wage setting. The
main effect of compulsory arbitration in Norway is probably that it in some situations
facilitates restraint in wage setting, as unions can be less concerned that other groups that
negotiate afterwards will obtain more.
The argumentation above suggests that if a significant stabilizing effect on wage moderation
is to be achieved, the proposed measures should probably be combined with other changes.
Most importantly, there is need for more co-ordination in the wage setting. The existence of
negative externalities in wage determination implies that there is room for collective benefits
if wage setters show restraint. There is a gain from co-ordination on both employers’ and
employees’ side of the bargain, as indicated by the international comparisons presented in
Layard et al. (1991).
While most of the suggested proposals, like an interventionist strategy in general, may lead to
lower wage pressure, there are also some concerns. External interventions may weaken the
self-correcting mechanisms of the system itself. For example, the parties may become
dependent on mediation, or even arbitration, as a problem-solving device. More importantly,
interventions may lead to resistance that triggers other, undesirable consequences.
17
Appendix: List of Proposals Presented by Labour Market Parties
A series of concrete measures intended to produce lasting improvements in wage formation
have been proposed by both employee and employer organisations. The most comprehensive
proposals have been provided by the Swedish Trade Union Confederation (LO) and the
Swedish Employers’ Association (SAF). A summary of all proposals presented to the
Swedish Government in spring 1997 is to be found in the Commission’s interim report,
”Medlingsinstitut & Lönestatistik” (SOU 1997:164), section 1.2. In the Commission’s
reference group, LO is represented by Hans Karlsson, and SAF by Anders Sandgren.
The concrete proposals that have been put forward can be divided into two categories. A short
summary of the proposals is presented as follows:
Increased Powers for Mediators/Conciliators
Act Early in Negotiations
Mediators/conciliators should be given powers to, in co-operation with the parties involved,
ensure that a certain timescale and order for negotiations and dispute resulutions is put in
place such that a new agreement is reached before the term of the old one runs out.
Schedule Negotiations
All new national agreements on wages and general terms of employment should be reached
on a common date. Additional measures needed to produce a sufficient degree of coordination between agreement periods should be tested.
Delay Potential Industrial Action
As soon as one party threatens industrial action, discussions must be held with a
mediator/conciliator who is able to enforce mediation and postpone or break-up industrial
action during the mediation period.
Collective Decision Making
The mediator/conciliator should be given powers to make a ”combined proposal” for several
areas and decide that they should be voted on by members of all organisations covered by the
proposal. If the ”combined proposal” is approved by the majority of members, or of
organisations involved according to the rules of voting the ”combined proposal” will be
binding upon all organisations involved.
18
The Members’ Vote
It should be possible to demand that members vote on conciliation offers before parties
involved have the right to take industrial action.
Other Methods to Resolve Disputes
Mediators/conciliators should be given the powers to make arrangements for other methods to
resolve disputes, e.g. final offer or arbitration.
Other Ways to Solve Disputes and Changed Rules for Industrial Action
Extended Notice Period
The present statutory notice period, i.e. that period before industrial action may be taken,
should be extended.
Sympathy Actions
The right to take sympathy action should be removed. Industrial action may thus only be
taken by parties directly involved in the ongoing negotiations.
The Principle of Proportionality
A provision should be introduced whereby intended effects of an industrial action are
reasonably proportional to the action taken and the damage caused.
19
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