Why are there strikes?

The UAW at General Motors has gone on strike.  But why are there strikes at all?  John Kennan wrote (full text gated here):

There is no commonly accepted economic theory of strikes.
The main obstacle is that if one has a theory which predicts when a
strike will occur and what the outcome will be, the parties can agree
to this outcome in advance, and so avoid the costs of a strike..strikes are apparently not Pareto optimal, since a strike means that the pie
shrinks as the employer and the workers argue over how it should be
divided.  If the parties are rational, it is difficult to see why they
would fail to negotiate a Pareto optimal outcome.

Hicks suggested two possible explanations for strikes:
either the union is trying to maintain a "reputation for toughness", or
there is private information on at least one side of the bargaining
table…

The NYT claims that the union had to "draw a line in the sand."  More generally, David Card wonders whether striking workers are forcing employers to reveal how profitable they are.  The firm, if indeed it is profitable, will come back with a higher wage offer, but only if it’s hand is forced.  Otherwise the union does not know how much surplus can be grabbed because the firm will not have to reveal it.  Or can workers, using institutions and morale, somehow precommit to a resistance curve?  Such a precommitment is optimal ex ante (it reaps a greater share of the surplus by conferring a bargaining advantage) but not always best ex post because gains from trade can break down.  That is my guess in this case.

Perhaps Dave Ribar has the wisest comment:

The only "good" news (if you can call it that) is that GM’s
manufacturing workforce has shrunk so much that many fewer workers are
involved than in the earlier UAW strikes.

About 73,000 workers have gone on strike.  Here is the decline of General Motors.

Comments

But isn't the chance that the union goes on strike one of the variables that determine the Pareto optimum, and so by going on strike the union changes one of the variables in (they hope) their favor?

...i'm not sure that anything happening in europe related to labor is at all a result of the decisions of the company, nor should be attributed to them as a credit, but rather a cost of doing business *in* europe.

I had always heard that the auto companies were the most unyielding in bad years for all the obvious reasons PLUS they wanted to use non-production-time during the strike period to sell off a backlog of surplus vehicles (or create scarcity) without having to pay the cost of involuntary layoffs. In other words, the union pays the workers for the down time. A layoff costs the auto companies much more, thanks to union contracts already in place. When car demand is good, there are lots of reasons to settle by negotiation, including this. This probably doesn't explain strikes outside the auto industry, but maybe there are similar factors.

Professor Earl Thompson at UCLA had a theory that collective bargaining was a legal means to by-pass
antitrust laws. Producers could collude at the union bargaining table. The goal of a cartel is
monopoly profits derived from a coordinated reduction in output. By "hanging tough," the producers
could force the unions to strike. That reduces output, concentrated at one time rather than spread
out over the year. In this theory, producers create strikes for their benefit.

I would add that strikes end when producers agree to share monopoly profits the union.

I would further add that fresh competition destroys the cartel profits. If the union has been sharing
the cartel's profits, the union must give back its share, or the cartel will become so unprofitable that
it shrinks and ultimately vanishes. That is my explanation for what has happened to "Detroit."

What does economics say about the game of Chicken?

Ah:

From the perspective of GM it's not the dealers that benefit from the strike it's the entire company. My only question is that if we can come up with clear ways in which GM benefits from the strike this whole discussion has nothing to do with any Pareto argument. The only remaining question is, why would the UAW choose to strike?

Kennan's theory on why strikes shouldn't exist relies entirely on the existence of strikes. Strikes are actually quite rare, but are a result of asymmetrical information.

If you want to play a fun game, try explaining a strike to a child. "They just don't go to work? Why don't they get fired?" Why indeed.

Actually, I think there is more "good" news. Given the quality of American vehicles, won't we all benefit if there are fewer GM cars on the road.

Here's to a long strike!

In this coountry, Venezuela, we tenured professors were paid while we were in strikes.You had no choice but join strikers because the University was closed, almost.In 1997, the goverment supended transfer to the Universities, during the strikes.It was a national strike.After 4 months without payment ,the strike finished.It was the last one.Anyway the government paid us the months not worked.
Btw , after every strike we agrred with the initial offer of the goverment.We never won any strike.

Person,

I don't think you're quite getting it, yourself. My entire point was that if everybody was certain of the outcome, exactly what you describe would happen? What would I care for your "rep" if I knew I could beat you regardless? The outcome being essentially pre-ordained, your "rep" would be of no importance.

Introduce uncertainty about your actual capabilities and your "rep" then becomes important. Assuming I give it some credence, my calculation of who would win might be thrown off in the manner of a predator looking at a frilled lizard. At the least it introduces uncertainty. A "rep" is necessary but not sufficient; it can only exist as separate from your actual capabilities in an environment of uncertainty. Perfect information means the strongest win, period.

Why is this so easy for everyone except economists to understand?

Actually, economists understand this quite well. One of the ideas as to why strikes occur is that the union must show that it is willing to damage the company, even at a cost to itself, to get what it wants, so that future strike threats will be taken seriously.

I'm not sure if that's what Tyler means when he talks about "precommitting to a resistance curve," but it is exactly maintaining the "reputuation for toughness" that he cites.

In a world of perfect information and no uncertainty, you'd think wars would be quite rare. ... The rest of the time, a clear understanding of the two sides' capabilities, cost structures and utility curves would presumably result in an optimal solution being negotiated prior to hostilities.

You could make essentially the same remark about a football game.

Is there really an asymmetric information story here? The corporation, at least if it's publicly traded, shouldn't have any private information -- anyone can get its profits, capital reserves, etc., so it should be easy to see both how much it can afford to pay and how long it can hold out on a strike. As for the union, at least part of its starting resources are common knowledge -- the company knows how much the workers are paying in dues, how much the workers are paid, etc.

I suppose the union might have private information about how long its members can hold out without working. That might be one way to use asymmetric info.: company thinks it can break union quickly such that strike cost is less than cost of demanded raise, union disagrees...

RJ has pointed out something significant: for some people, war is quite fun. This is merely a variant of "people riot mainly for fun and profit."

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