Wage Bargaining, Inventories, and Union Legislation

This paper analyses the Rubinstein bargaining game with random alternating offers when the firm has an inventory of finished goods. If the firm can sell out of that inventory during a strike, we show that the negotiated wage is a decreasing function of the inventory stock. Conversely, if the union can form an effective picket line, which blockades firm deliveries during a strike, the negotiated wage is higher and increases with the inventory stock. Noting that the 1980 and 1982 Employment Acts changed unions' ability to form effective picket lines, the empirical section tests these theoretical predictions using a panel of firms over the period 1972-90. It was found that inventory levels did not have a significant effect on unionised firm wages prior to 1982, but have a significantly negative effect post legislation. For union firms post-legislation, and for non-union firms generally, the wage elasticity with respect to inventories is -0.1. The figures show that the mean union wage differential fell from 2.6% to 0.6% over 1974-81 and 1982-90.