Striking and economics
Posted September 3, 2008on:
I’m always confused when I hear the economists are against strikes. After all, it is perfectly sensible to place strikes in the bargaining relationship between employees and employers.
I think the confusion stems from the fact that many economists also say that there is a definite limit to strike action – as if it is set up by a significantly powerful union it merely represents the action of a monopoly against a weaker consumer (in this case the firm). As we know that market power leads to suboptimal outcomes, the case of a strong union and a weak firm will lead to a suboptimal outcome – namely too little production, because too much of the surplus is extracted by the seller (labour).
However, this does not imply that economists are completely against the option of striking being available.
If we have a monopsony firm and averagely organised labour, then the ability to strike helps improve the workers bargaining power – even if strikes never occur.
Why? Well if the firm believes the threat to strike is credible, and if the cost of the striking action exceeds the cost of additional wages a firm will simply increase the wages without a strike. Furthermore, labour will only have the incentive to strike when they know that striking will lead to higher wages – which is the same set of situations. There is still a trade-off between efficiency and equity – but in this case the equity cost is sufficiently high that allowing the mere idea of strikes makes sense.
As a result, striking is something that should be allowed in the face of asymmetric bargaining power in the firms favour – shouldn’t it?