How to avoid strikes
July 10th, 2009 | Published in Economics idea | 17 Comments
Yesterday I wrote about how I think strikes are counterproductive. If we don’t want strikes, a better way for settling contract disputes is needed.
We already have ways of avoiding strikes for essential services such as police and fire protection. These groups aren’t permitted to strike by law. If agreement on a contract can’t be reached, there are many different methods of arbitration that can be used to arrive at a fair contract.
One of my favorites is called “Final offer.” In this method, the union and management submit final offers to the arbitrator. The arbitrator then chooses which offer is most reasonable and it becomes the new contract. This forces both sides to think very hard about what is important to them and to be reasonable.
I would like to see contract arbitration become much more common. Ideally, I’d ban strikes altogether and use arbitration of one form or another to resolve all contract disputes.
July 10th, 2009 at 10:51 am (#)
One of the real reasons strikes happen is that it is a show of strength. Union management (now isn’t that a peculiar label?) believes it has the upper hand and can bring the employer to it’s knees with a strike, thus softening it up for future bargaining advantage. I’ve seen it happen first hand, and I’m firmly convinced that is the root cause of the failure of GM and Chrysler.
July 13th, 2009 at 9:20 am (#)
ClydeB
I think workers deserve a fair deal. In the 19th century, businessmen took advantage of their workers, paying them pittance to work in dangerous conditions. This was a bad situation. Unions had a role to play in stopping this kind of exploitation.
I agree that, today, it seems unions have too much power in some situations.
July 13th, 2009 at 10:50 am (#)
I agree, history has many extreme examples. In my personal experience both in bargained for and direct employer-employee negotiations, the presence of the third party is harmful to the motivated and skilled worker. I’d never again consider a situation that had union representation.
Things change over time, the balance of power swings both ways and sometime it is the employer who has the hammer and forces a strike situation just to let the folks know.
High inventory levels, shrinking markets, competetion and excessive government regulations are all elements in the decision making process.
Everyone deserves a fair deal, not just the workers. Customers sometimes are harmed by a strike situation.
I believe that there should be a fair labor rate for a particular job. Once the worker has become proficient at doing that job he or she should be paid the top rate. I don’t, however, think that there should be increases beyond that rate just because the worker continues to do the job, as most bargained for situations seem to require.
Of course, some jobs are creative in nature and it is concievable that it can never be ‘learned’ to the point of having reached the top in proficiency. On the other hand, some jobs can be learned in an hour or two and there should be no scaled pay. Entry rate is top rate. Need more money, get a different job or demonstrate how the present job can be done better or more efficiently. In other words, earn the increase.
July 13th, 2009 at 11:20 am (#)
ClydeB
I agree that paying for seniority is a bad idea. Often people who have been working in the same place for a long time aren’t that productive. They can lose motivation after doing the same thing for too long. They also are more likely to resist change because they are accustomed to the way things are currently done.
I think the biggest problem is finding a fair wage. I haven’t heard of any objective method for arriving at a fair wage. The only solution that I can see is for government or some other group to provide guidance of some sort. Somehow we have to decide what it is that people are getting paid for. Hopefully it will be something that is measurable.
July 13th, 2009 at 11:36 am (#)
I would argue that government is the absolute last resort in determining what a wage should be. Giving people who, for the most part, have never in their live had to earn a living that kind of power is unthinkable to my way of thinking.
The market place is the only reliable guage for determining prices, wages included, since after all, wages are the price of labor.
In a closed community it should be possible to eliminate wages and cost of goods and services entirely, while in the global economy we currently must endure prices are determined to a great extent by how much governments are willing to subsidize the various workforces.
Our atrocious trade deficit is a prime example. We, the US, are subdizing the workforce in several highly overpopulated countries at the expense of our own people. No more glaring example, of the damage government involvement does, exists than this one.
July 13th, 2009 at 11:45 am (#)
ClydeB
The problem I have is that markets don’t get wages right either. It all comes down to market power, and market power depends on lots of arbitrary things. If there aren’t unions, management has too much power. If there are unions, it seems workers have too much power. The outcome is driven by how the institutions are set up.
The ideal solution would have workers paid based on their marginal productivity. In practice, marginal productivity seems to have little impact on wages.
I don’t know what the answer is.
July 14th, 2009 at 4:11 pm (#)
Stephen,
Could you elaborate on why markets don’t get wages right either?
From you main page, I understood your point that wages have a tendency to escalate, which is not good if you want to eliminate inflation (which you do).
Do you see other inherent problems with letting the market set the wages, or is it just that it might/will lead to inflation?
Eric
July 14th, 2009 at 4:23 pm (#)
While I understand that unions were/are required in certain circumstances, it seems to me that the “normal” order of business should be on an individual basis, rather than a group basis.
If a company has a position available, they can offer it to the best-suited person. If that person doesn’t think the compensation, responsibilities, or environment are suitable, he or she doesn’t have to accept. If no one is willing to accept the position, the company will have to improve the offering until someone will accept it. This seems to allow market forces to act on the value of the position and the availability of people to do it.
There are a lot of jobs in which it is difficult to determine the “value” of the job, in particular public-sector jobs like teachers. However, for pure private-sector jobs in stable economies, I don’t see why unions are needed and I don’t see why the resulting salaries aren’t good approximations of the value of the job.
Eric
July 14th, 2009 at 5:18 pm (#)
Eric.
If by getting wages right, you mean that people get paid their marginal product, I think it is clear that we routinely get them wrong. Here’s why.
First, it isn’t clear what the marginal productivity of a worker is. If it is what the loss would be in productivity if they weren’t there, there are problems. When people work in teams to achieve results, a missing member can make the team totally dysfunctional. A hockey team without a goalie isn’t much use. Trying to apportion the results of a team to individual members is tricky.
At a deeper level, I don’t think humans are very good at estimating value. We are okay with big differences; houses are more valuable than pencils. The finer details I think are mostly lost.
If wages aren’t connected to value in some fundamental sense, what are they connected to? I think the answer is nothing.
Wages are determined by a myriad of forces. Bargaining power is important. History is important.
The problem is that there is no objective right answer. If there isn’t an overall guiding principle for setting wages, sub-goals become important. I’m interested in equality. I believe the wages set by markets are unreasonably unequal.
July 14th, 2009 at 6:06 pm (#)
Stephen,
We’re getting a little off topic here, but what the heck.
Can you think up a job or an individual for which it IS possible to determine the value or marginal productivity? Let’s simplify it.
Let’s say a spend a year writing a book that costs me $5 to publish per copy and sells for $10 per copy (profit of $5 per book sold). If 100,000 people buy the book, presumably they each valued it at $10 or more. I would have made a profit of $500,000, which would be equivalent to my salary for the year to write the book. Would this be a “fair” salary?
How about a professional sports player? Michael Jordan was paid quite a lot. But he increased the value to people watching the NBA – lots of people who wouldn’t otherwise have watched would watch just to see him. He also increased the revenue and assets of the owners of the Chigago Bulls. I assume that the benefit he brought to the sport and to his team was shared amongst the relevant interested parties: Jordan himself, the Bulls’ owners, the other NBA teams (because he raised their profile as well), and the fans themselves because they got a product of higher value.
How about a teenager mowing lawns around his neighborhood? If he charges $10 per cut and cuts ten lawns per day, he makes $100 per day. If people think $10 is too much, they will either do it themselves, let their grass grow long, or try to negotiate a lower price. Is his $100 per day fair? Next, what if he doubles his productivity? It’s the same value to each person, but if he could cut twenty lawns per day, his salary would double.
July 14th, 2009 at 8:21 pm (#)
Stephen,
I think you exposed the flaw in your premise. The notion of “equality” playing a part in determining the value of a job.
Equality is a social issue, not economic. Ideally we reach a socially acceptable level of fairness in our efforts to price a job, but the expectation of equality has no basis for support in the competetive arena of business.
The modern definition of equality in the workplace is reaching the lowest common denominator. Productive folks will not tolerate it, investors will not invest and the discerning customer will shum the product of such an enterprise.
July 15th, 2009 at 9:31 am (#)
Eric
There are a couple of interesting ideas in your comments. I think that in some situations it is possible to measure marginal output. Your example of the teenager mowing lawns is a good one. I still think it is tough to determine the value of the lawn cutting service though. I’m going to have to think more about exactly why I don’t think we can value things well. There will probably be more posts on value to come.
Your examples of writers and professional basketball players is interesting. Suppose the price did reflect marginal productivity and value accurately. There is still a big problem of fairness. Book writing and professional sports are scalable professions where one person can meet the needs of a huge audience. In professions like these, many people chase the big payouts. Most fail and do very poorly. What bothers me is that to find the Michael Jordon, we need masses of people to develop their skills before the talent becomes apparent. While Michael Jordon is the one who delivers the value, I don’t know if it makes sense to make him the big winner. I’ll think more about this and probably post more about it.
July 15th, 2009 at 9:40 am (#)
ClydeB
I agree that meeting the needs of the customer is what’s important. My problem is that I don’t think people are very good at assessing value. Customers want what they buy to be well made and to meet its intended purpose. The relative value of different well made items is difficult to determine.
What I want is to find a way to pay people fairly to produce well made products reasonably efficiently. If people need the product, they pay the cost of the materials and labor used to produce it.
July 15th, 2009 at 10:03 pm (#)
We can trust a free market to arrive at a price at which things will get done. The bidding goes up until there are enough folks willing to accept that level of pay. What a free market can not determine is whether th pay level is too high. No one typically lowers pay rates just to test the market.
The selling price of goods is a whole different ball game. It is here that reason goes away and as you have stated, we don’t have a reliable way to establish true value. Many items command a higher price for the label than the actual good. Basketball shoes with the ‘right’ logo bring a premium price, for instance.
This condition doesn’t last for long, since this is the meat of competetion. An item or product line that commands a premium price is a fantatic target.
This may very well be the best measure of true price determination – competetion.
July 16th, 2009 at 9:18 am (#)
ClydeB
So we are at the crux of the problem I think. Competition is supposed to bring down excessively high prices. Does it manage to do so?
I think the answer is no. It is very difficult to compete with well established brands. Coke has managed to sell its colas at a premium for decades. There are cheaper generic brands. They don’t seem to make much of a dent in Coke’s market.
July 16th, 2009 at 9:35 am (#)
You are correct in that Coke continues to sell at a premium, but only to those who want Coke. That is a tremendous boon to all of the alternative manufacturers. It maintains a price margin that allows them to do enough volume that will sustain business. Pepsi benefits from Coke pricing and of the four groceries in our area, the range of competetive colas is sufficient to satisfy most thirsts without ever considering Coke.
Along the same line of logic, for several years the joint factory in Calif. owned by GM and Toyota, produced the exact same car for each label. The Toyota consistently commanded a $2000 premium price over the GM labelled car. People will pay for percieved difference, even if it is only a perception.
July 16th, 2009 at 9:55 am (#)
ClydeB
I hadn’t heard the Toyota-GM example before. That’s fascinating. I wonder if people realize they are paying more for exactly the same thing they could get elsewhere.