Negotiating with Labor Under Financial Distress
50 Pages Posted: 25 Feb 2010
Date Written: February 23, 2010
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: Suggested Citation