A Bargaining Analysis of American Labor Law and the Search for Bargaining Equity and Industrial Peace

96 Pages Posted: 28 Apr 2005


Since the 1930s, the fundamental tenet of American labor law has been the government should foster employee organization and regulate industrial relations to promote equity in bargaining between employers and employees and to promote industrial peace. Those who enacted our basic labor laws, as well as the majority of the legal scholars who have since commented on those laws, believed unions necessary for workers to achieve the benefits of industrial democracy and a larger share of industry's profit.

Moreover, these same legislators and scholars believed that the government stewardship of labor relations should go beyond the mere removal of barriers to organization, to the active regulation of industrial relations conflicts with respect to organizing, collective bargaining, and enforcing collective agreements. Elections, the requirement of bargaining in good faith, and arbitration were advanced to replace the parties' cruder methods of resolving such conflicts. Without this extensive tutelage of labor-management relations, the legislators and legal scholars believed that conflicts in labor relations would escalate into strife and economic warfare and that many workers would be denied the benefits of dealing with their employers on equal terms.

The traditional economic analysis of unions and collective bargaining calls into question this fundamental tenet and thus the basis for much of American labor law. Proponents of this analysis argue that individual bargaining will secure for each worker all of the benefits to which she is entitled in accordance with her productivity. Unions achieve higher wages and benefits for employees by establishing a labor cartel, to which the employer responds by raising prices, cutting output, substituting capital for labor, and laying-off workers. Although the union may gain benefits for some workers, these benefits come only at the expense of consumers, other workers, and economic efficiency. Thus, the traditional economic analysis suggests that, rather than fostering unions and collective bargaining, the government should undertake measures to extirpate them. Far from promoting equity in bargaining between employers and employees, unions promote workers to a superior bargaining position – that of a labor cartel – and cause inefficiency and inequitable redistributions of income among similarly situated workers. Moreover, under this analysis, no sound basis exists for the government's efforts to regulate industrial relations to promote industrial peace.

In this article, I present an alternative economic analysis of unions and collective bargaining that utilizes recent advances in labor economics and some simple applications of game theory to address the deficiencies of the traditional monopoly model. First, I assume that the primary sources of union benefits are employer rents, quasi-rents, and productivity increases associated with unionism. These rents and productivity increases constitute the cooperative surplus that the parties divide through collective bargaining. Individual bargaining will not secure for employees a share of this surplus. The workers must organize and bargain collectively to raise themselves to a position of rough equality relative to the employer and gain a share of the surplus.

Second, in examining the problem of dividing the cooperative surplus, I assume that the parties bargain in a Coasean fashion to achieve a Pareto optimal solution that maximizes the value of the cooperative surplus to the parties. If one assumes such optimal bargaining, then one can show that the parties will agree to a contract that specifies a level of employment exceeding that given by the employer's labor demand curve. Combining this assumption of optimal bargaining with my previous assumption concerning the primary sources of union wage increases, I argue that employees' gains from organization come largely at the expense of their employers, rather than other employees or consumers, and that the productivity gains associated with unionism may outweigh any attendant inefficiency. It is therefore equitable, and perhaps wealth maximizing, for the government to encourage employee organization.

Finally, I argue that in conflicts over the division of the cooperative surplus, including organizing, collective negotiations, and enforcement of the collective agreement, both sides have incentives to act strategically, wasting a portion of the cooperative surplus in hopes of capturing a larger share of the surplus for themselves. Such strategic activities include discriminatory discharges, recognition strikes, intransigence in bargaining, and strikes or lockouts to enforce a given interpretation of the collective agreement. Moreover, because parties are often rewarded in these activities based on their recalcitrance relative to the other party, the costs of these conflicts are positional externalities that tend to escalate in the absence of government regulation. To illustrate these arguments, I present a simple game representing collective negotiations, which demonstrates that strategic behavior may be individually rational for each party to undertake, but collectively irrational, because it results in strikes that waste the cooperative surplus. Thus, it makes sense for the government to structure the conduct of organizing, collective negotiations, and enforcement of the collective agreement to prohibit or discourage strategic behavior and minimize waste of the cooperative surplus.

Keywords: Labor Law, Collective Bargaining, Industrial Peace, Law and Economics, Game Theory

JEL Classification: C70, C72, C78, J50, J51, J52, J53, J58, K23, K31

Suggested Citation

Dau-Schmidt, Kenneth Glenn, A Bargaining Analysis of American Labor Law and the Search for Bargaining Equity and Industrial Peace. Available at SSRN: https://ssrn.com/abstract=712741

Kenneth Glenn Dau-Schmidt (Contact Author)

Indiana University, Maurer School of Law ( email )

211 S. Indiana Avenue
Bloomington, IN 47405
United States
812-855-0697 (Phone)
812-855-0555 (Fax)

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