In light of the University of New Brunswick’s (UNB) strike, I present a model for common information signaling between unions and firms during wage bargaining.
In order for a sustainable hiring of labour to take place, wages must fall in between a certain window. The lower end is defined by the value a worker places on his own time and effort. The employee’s value to the company, i.e. his marginal product, is on the higher end. Paying employees the actual value of their marginal product would imply that profits are near zero. Similarly, paying employees close to their own lower limit encourages them to quit.
During wage negotiations, unions and firms engage in a great deal of signaling. They make claims about their willingness to work or the financial situation of the company in order to define clearly the negotiation window. An employee’s willingness to work is usually a combination of his job satisfaction, coupled with the wage he receives. To this extent, workers, or their unions, have an incentive to claim that their minimum acceptable wage is high, even if it is not. This is a form of information signaling to the firm regarding the willingness of employees to work under the given circumstances.
From the firm’s perspective, the ability to provide wage increases for its employees depends on how the marginal product of each worker relates to their wages. This correlates closely with the firm’s profit margin. In other words, a positive profit margin typically indicates a gap between wages paid and the cumulative marginal product of the company’s workforce, therefore indicating that there is room for negotiating a wage increase.
To complicate things, both sides have an incentive to conceal their true position, so they rarely trust one another’s information. The firm assumes that the union is exaggerating working conditions and job satisfaction, while the union assumes that the firm underreports their financial health and profitability. This is the rationale behind strikes and lockouts.
The basic idea behind strikes and lockouts is that it forces each party to reveal their position and preferences. Strikes delay production, reducing both revenue and remuneration. Therefore, the mindset of the union is as follows: “If you really need to resist wage increases, then you should prove your position by hurting yourself first.” Similarly, a firm-induced lockout signals that, “If wage increases are really that important to you, you are probably willing to be locked out to secure them.” This back-and-forth signaling reveals their true preferences, which both parties observe via workers’ continued willingness, or unwillingness, to strike, in addition to the firm’s continued commitment to a lockout.
When both parties acquire enough information, their true negotiation windows become clear and they can reach a conclusion. In the case of the UNB strike, the negotiation window appears quite large, with the Association of University of New Brunswick Teachers (AUNBT) requesting a 26 per cent wage increase, among other demands. At the same time, UNB claims that it is in rough financial shape, suggesting that there a divide between both parties–the negotiation window is quite large. Concordantly, this standoff may take longer than expected to draw out the true preferences of both the AUNBT and UNB.
Mike Craig is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute