The Effect of Private Information on Wage Settlements and Strike Activity

Abstract

This paper provides an empirical test of the predictions of a standard private information model of labor strike activity using firm-specific sales data and wage and strike data from 1124 collective bargaining agreements made in the U.S. manufacturing sector. The implications of the private information model are tested directly by using the error in forecasted sales as a proxy for the private information on profitability held by the firm, and the variance of the forecast error in sales as a proxy for the union’s ex ante uncertainty. In support of the model, strike incidence and unconditional duration are negatively correlated with the forecast error and positively correlated with the variance of the forecast error. Furthermore, the variance of the forecast error is systematically related to the stage of settlement of collective bargaining agreements. Contrary to the predictions of the model, there is no evidence that wages are correlated with the forecast error in sales in those bargaining agreements which involve a strike.