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SchmidtBerriAER2004 - The Impact of Labor Strikes on...

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The Impact of Labor Strikes on Consumer Demand: An Application to Professional Sports By M ARTIN B. S CHMIDT AND D AVID J. B ERRI * The primary bargaining power of organized labor is its ability to withdraw labor from the rm in the form of a strike. From the workers’ perspective, a strike is intended to impose sub- stantial costs upon the rm. Over time, as these costs accumulate, the rm develops an appreci- ation of the solidarity of labor and may eventu- ally surrender to the demands of the workers. Orley C. Ashenfelter and George E. Johnson (1969) note that the strike also serves the func- tion of informing the workers to the reality of the rm’s position. Although the union leader- ship may recognize early in negotiationsthat the rm cannot or will not meet the workers’ de- mands, the rank and le of the union often do not understand the impracticality in their posi- tion until the workers have struck and the rm fails to surrender. Whether strikes ultimately serve as a lesson to workers or rms is partially impacted by the extent to which such events impart costs upon both the rm and the industry. For example, Brian E. Becker and Craig A. Olson (1986) examined the relationship between worker strikes and changes in shareholder equity. These authors found that on average, a strike of at least 1,000 workers would reduce shareholder equity by 4.1 percent. Richard A. De Fusco and Scott M. Fuess, Jr. (1991) examined airline carriers and found that strikes tended to redistribute wealth from shareholders of those airlines which experienced a strike to shareholders of airlines that had management-labor peace. Fur- thermore, Richard McHugh (1991) investigated the impact of a labor strike on both the rm and organizations linked as purchasers or suppliers. Surprisingly, the impact of the strike was greater for the linked rm than it was for the rm directly experiencing the worker strike. Each of the aforementioned studies found that strikes impose costs on the rm. These costs generally centered on the loss of output the rm experienced during the duration of the management-labor con ict. Previous studies have largely neglected the possible extended costs associated with the reactions of the re- maining party impacted by the worker strike, the consumer. Although in many industries rms can increase inventories prior to a worker strike, this is not true in all industries. Within the airline industry, for example, labor strikes temporarily force consumers to either consume the production of other suppliers or live without the particular good or service. This outcome leads to the question we investigate: Do work stoppages permanently impact consumer de- mand when the struck rm is unable to meet demand during the labor strike? A natural setting to explore this issue is the professional sports industry. In such an indus- try, worker strikes can completely remove the output from the consumer’s consumption bas- ket. Unlike strikes in other industries, though, consumers of the output from the professional
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