Negotiating with Labor Under Financial Distress

50 Pages Posted: 25 Feb 2010

See all articles by Efraim Benmelech

Efraim Benmelech

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

Nittai Bergman

Tel Aviv University; National Bureau of Economic Research (NBER)

Ricardo Enriquez

Harvard University

Multiple version iconThere are 2 versions of this paper

Date Written: February 23, 2010

Abstract

We analyze how firms strategically renegotiate labor contracts to extract concessions from labor. While anecdotal evidence suggests that firms tend to renegotiate down wages in times of financial distress, there is no empirical evidence that documents such renegotiation, its determinants, and its magnitude. This paper attempts to fill this gap. Using a unique data set of airlines that includes detailed information on wages and pension plans we document an empirical link between airline financial distress, pension underfunding, and wage concessions. We show that airlines in financial distress obtain wage concession from employees whose pension plans are underfunded. As part of our identification strategy, we exploit the fact that pension plans in the U.S are partially insured by the Pension Benefit Guaranty Corporation (PBGC). Using variation in the degree of pension coverage provided by the PBGC, we show that employees’ outside option in bargaining is crucial in determining the degree of wage concessions during labor contract renegotiation. Our empirical evidence highlights the strategic use of pension underfunding by firms and the resultant wage cuts which employees endure as a result.

Keywords: Labor, Finance, Pension, Negotiations

JEL Classification: G32, G33

Suggested Citation

Benmelech, Efraim and Bergman, Nittai and Enriquez, Ricardo, Negotiating with Labor Under Financial Distress (February 23, 2010). AFA 2011 Denver Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1558096 or http://dx.doi.org/10.2139/ssrn.1558096

Efraim Benmelech (Contact Author)

Northwestern University - Kellogg School of Management ( email )

Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nittai Bergman

Tel Aviv University

Ramat Aviv
Tel-Aviv, 6997801
Israel

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ricardo Enriquez

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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