Effective Labor Relations Laws and Social Welfare

Abstract

Effective labor relations laws determine the allocation of bargaining power between the parties involved in labor disputes, and hence, influence social welfare. The right to strike, the types of legal strikes, and the right to hire replacement workers are fundamental components of labor relations laws in the public sector. Strikes by public school teachers, which are common in real-world settings, involve particularly high social costs. We theoretically study the social welfare effects of labor relations laws that permit the effective use of replacement teachers in case of strikes. These laws refer to the explicit right to hire replacement teachers and to the prohibition of intermittent strikes. We present a sequential bargaining game of incomplete information. Our model explicitly includes a law component, which captures the impact of effective labor relations laws. We conduct social welfare analysis and demonstrate that these laws reduce bargaining impasse and increase social welfare.

Keywords: Labor Relations Laws, Social Welfare, Bargaining Impasse, Replacement Teachers Laws, Intermittent Strikes Laws, Non-Cooperative Games, Asymmetric Information, Perfect Bayesian Equilibrium

JEL Classification: J58, J52, C72, D82