Employee relations

Employee Relations Industrial Conflict and the Nature of Labour Contracts

Peter Enderwick,

Article information: To cite this document: Peter Enderwick, (1983) "Industrial Conflict and the Nature of Labour Contracts", Employee Relations, Vol. 5 Issue: 2, pp.23-27, https://doi.org/10.1108/eb055009 Permanent link to this document:

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Industrial Conflict and the Nature of Labour Contracts by Peter Enderwick Department of Economics, The Queen's University of Belfast

Introduction

Whilst the analysis of industrial conflict continues to at- tract a great deal of interest[1], this attention is highly selective in its focus. The majority of studies concentrate on describing and analysing aggregate trends and pat- terns[2] or the examination of specific disputes on a case study basis[3]. Such contributions form an important ele- ment in furthering our understanding of industrial conflict but, unfortunately, serve to discourage examination of the fundamental concepts underpinning such understanding.

An acceptable theory of industrial action should be capable of subsuming and explaining at least the following three critical aspects of conflict. The first concerns the sources of conflict. More specifically, the extent to which conflict should be seen as an endemic or a latent feature of the employment relationship. The second concerns the form in which grievances are expressed. W e need to con- sider whether the various modes, e.g. go-slows, output restrictions, quitting, strikes, etc., represent alternative or complementary forms. In addition, there is the problem of clearly delineating the probable effectiveness and costs of alternative expressive forms under various conditions. Thirdly, there is a need to address the alleged problem of explaining the "rationality" of acts of industrial protest where costs exceed apparent gains[4].

The intention of this article is to contribute to our understanding of the process of industrial conflict by re- examining these fundamental tenets. The next section

presents a model of conflict founded on the incomplete nature of labour contracts. Such a model is shown to be capable of overcoming the rationality charge as well as isolating the probable forms assumed. Some implications for theory and policy are highlighted in the conclusion.

The Sources of Conflict in the Employment Relationship Nature of the Labour Contract The labour contract is notable for both its scope and im- precision. Typically, the contract covers not only the price and utilisation of labour but also the rights of both the in- dividual concerned and the position of relevant parties to the agreement such as unions and management. Addi- tional terms may specify institutional arrangements for ad- ministration, interpretation and enforcement of the agree- ment. The sources of incompleteness in the contract follow from the need to incorporate flexibility into the agreement. Because of uncertainty and the nature of un- foreseeable change, considerable flexibility is required, particularly in the definition of responsibilities, work assignment and labour utilisation.

There are a number of alternative contractual ar- rangements which may be invoked to provide such flex- ibility[5]. The first is a simple sales contract in which the parties contract for a predefined performance at a future date. The second is a contingent claims contract in which the agreement provides for a future performance, con- tingent on the occurrence of some previously defined event. Thirdly, contracts can be sequentially re-negotiated as events materialise. Finally, one party may contract to allow the other to define the desired performance required from within a previously determined and agreed range. This represents what Simon[6] terms the authority rela- tionship.

The rigidity of simple sales contracts limits their usefulness in areas where complexity and uncertainty are pervasive, as in the case with the labour relationship. The sheer com- plexity of devising contingent claims contracts is a major constraint on their use. Further problems arise in defining ex ante the appropriate adaptation in the light of a given change and agreeing on the state of the world that comes to pass. There are also difficulties and high costs incurred in the use of sequential contracting. Such an arrangement ignores worker heterogeneity and the desire of employers to retain certain types of labour. Sequential contracting ig- nores the emergence of arrangements designed to reduce labour turnover. The final institutional arrangement to be considered is the authority relationship w h i c h , whilst wide- ly adopted, appears similarly flawed. Such an arrangement provides stability of income and tenure in exchange for discretion in selecting a performance level from within some mutually agreed range. Flexibility is introduced at the price of vagueness. Problems of re-negotiation and adjust- ment exist when events compel the selection of a perfor- mance level from outside the implicit (or explicit) range previously agreed.

An acceptable theory of conflict must recognise that disagreement may occur not only in the determination of agreements, but also in their application and interpreta- tion. Furthermore, the preference for collective negotia- tion, often accompanied by union organisation, increases

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the probability of conflict being manifested in a collective form, e.g. the strike. More individualistic modes of grievance expression, quitting, poor time-keeping, etc., may be observed at the interpretation and operation of agreements. Finally, the variety of motives for retaining labour and regulating long-term contracts foster the substitution of internally administrated procedures for market-oriented transactions. Such internalisation en- courages the development of adjustment by bargaining as opposed to quitting modes[7]. A number of theories of the employment relationship have been proposed and an evaluation of these helps to clarify the sources of conflict.

Theories of the Employment Relationship A n early insight into the nature of the employment rela- tionship is provided by the work of Coase[8] w h o argues that firms exist because there are situations in which market transactions costs exceed the cost of consum- mating exchanges internally. These economies of inter- nalisation accrue primarily because of transaction cost economies; there are savings in information acquisition costs, particularly of relevant prices, and because of the e m p l o y m e n t relationship, an incomplete contract displaces the incurrence of negotiation and adjustment costs of a series of former complete (external) contracts. Hence, according to Coase, there are potential economies in moving from sequential contracting to an authority rela- tionship. One weakness of this analysis is its failure to ex- plain why the employment relationship is nearly always ac- companied by hierarchical organisation. This is not a trivial point, as some theorists see hierarchy as being both a necessary and sufficient cause of the emergence of con- flict[9]. Subsequent theories have sought to explain the reasons for the general co-existence of the t w o .

One such explanation is that of Alchian and Demsetz[10]. They see the emergence within the firm of hierarchical organisation as being a response to the problem of manag- ing labour. Such problems centre on the need both to monitor and reward effort, and hierarchical organisation facilitates the monitoring process. In addition, to minimise the need to monitor " m o n i t o r s " , motivational incentives can be provided in which monitors constitute residual claimants on the enterprises' income. Such a distinction in both size and source of income represents a basis for a hierarchical ordering of employees.

A very different explanation of the emergence of centralis- ed hierarchical organisation of production is found in the writings of economists such as Marglin and Stone[11]. These writers argue that whilst hierarchical and centralised organisation are not unique to the capitalist mode of pro- duction, its features under capitalism are distinct. More

specifically, the extensive division of labour is thought to stem not only from technical superiority but from a need for the entrepreneur to ensure for himself an essential role in the productive process. With the separation and specialisation of tasks and a restriction of the market, a need for an integrating intermediary arises. Similarly, hierarchical and centralised organisation of production enables a substitution of the employer's preferences on labour utilisation and capital accumulation for those of his employees. Whilst this approach accepts that efficiency gains may accrue from hierarchical organisation, through increased supervision, a reduction in illegal appropriation and fuller exploitation of innovation, such organisation is still seen as a source of private and social cost. To the ex- tent that such efficiency gains are involuntary, the private disutility is likely to outweigh productive gains. Further- more, where hierarchy is seen as a positive tool of capitalist control, a conflictual relationship may be evident[12]. Thus, to this school, conflict may be an endemic feature of the principal organisational form of society.

Recent treatments of this problem have focused on the role of transactions costs[13]. The relationships of interest concern tasks which are non-homogeneous. The general problem such tasks create is that of small numbers ex- change as transactions are negotiated and executed. These problems are compounded in uncertain and com- plex situations when one recognises the existence of bounded rationality[14] and the possibilities for oppor- tunistic behaviour in the light of information im- pactedness[15]. The latter two terms require some clarification. Opportunistic behaviour extends the concept of self-interest to encompass the use of guile. Such behaviour arises primarily with partial or distorted informa- tion disclosure and misrepresentation of intentions. Infor- mation impactedness is a derivative condition arising from the conjunction of uncertainty, bounded rationality and opportunism. It refers to differences in understanding and perception that arise because of idiosyncracies in ex- perience and knowledge. This variation between in- dividuals cannot be costlessly reduced and provides a source of differential advantage.

The modern corporation has gone beyond the simple authority relationship in an attempt to overcome these limitations. The emergent form is the employment relation- ship within an internal labour market (ILM)[16]. A n ILM ex- ists when the allocation and pricing of labour occurs primarily within the organisation, but incumbents are dif- ferentiated from labour in the external market. Such an ar- rangement offers considerable advantages. The rigidity of the authority relationship is reduced when individual con- tracts are replaced by a general collective agreement. Fur- thermore, peer group involvement increases the likelihood of a constructive response to change. The substitution of a collective agreement for a series of individual contracts stresses the importance of organisational interests over in- dividual concerns and reduces the incentives for oppor- tunistic behaviour. The assignment of wage rates to tasks as opposed to individuals serves to increase flexibility.

The incentive structure of the ILM serves to facilitate effi- cient internal transactions. A promotional/reward system, based on seniority, fosters co-operation and the sharing of task-specific knowledge. Screening can be achieved at a

Conflict c a n arise not only in t h e d e t e r m i n a t i o n of a g r e e m e n t s b u t also in their applicati on a n d interpretation

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lower cost and risk when entry occurs at lower level posi- tions. Such an arrangement also discourages labour tur- nover since the loss of seniority and other pecuniary rights serve to reduce the mobility of incumbents. The viability of the system is enhanced when self-monitoring is encourag- ed and internal methods of conflict resolution are set up.

Completion of the Labour Contract and Levels of Conflict Completion of the labour contract occurs in the actual pro- cess of work. It is here that an acceptable effort-value bargain[17] is struck. On the input side, effort will be in- fluenced by factors such as custom and both product and labour market forces. Supervision and incentive payment schemes constitute the management side of this "bargain- ing process". Clearly, such bargaining is a continuous pro- cess[18].

Bargaining at the shopfloor level represents the implemen- tation and interpretation of a previously negotiated agree- ment. The forging of that agreement represents a second locus of conflict, that occurring within the collective bargaining process. It is the formalised bargaining at this level which lays down the structure and partial content of the employment relationship. There is a third locus of con- flict, the political arena. At this level, collective lobbying and representation may yield labour legislation which, in turn, provides bounds to the bargaining range at the se- cond stage. Thus, for example, safety and hours-of-work legislation serve to circumscribe the zone of potential agreement.

It is important to recognise that bargaining within this schema is neither sequential nor monocausal. In fact, negotiation at all three stages is likely to be both simultaneous and continuous. Continuous negotiation at the collective bargaining stage may occur in the informal sense of information exchange and the perception of changing preferences and circumstances. Neither is the process monocausal in the sense that the bargaining framework is progressively narrowed as bargaining pro- ceeds down to the shopfloor. Difficulties and ambiguities at the lower levels feed back to bring changes in both the structure of the agreement and in the political arena.

The expression of conflict and use of sanctions tends to vary with the locus of conflict. This variation reflects dif- ferences in both the bargaining parties and the probable effectiveness of sanctions. In the political arena, disagreements and frustrations are reflected in the use of the political strike and the disciplining of sponsored elected representatives. Whilst such disputes are excluded from official statistics, they nevertheless constitute a part of the conflict generated within the work society. Such conflict is particularly likely where state policy impinges directly on the pecuniary content of agreements, e.g. incomes policy, or the bargaining power of one or more parties, e.g. anti- union legislation. Such action appears most effective in defending a position rather than furthering one's aims[19]. An important feature of such conflict is the self-imposed limits on its extent and duration. Since the considerable ramifications and inherent dynamism of such action can threaten even those propagating it, such action is general- ly pre-planned and carefully controlled[20].

At the level of the collective agreement, the archetype sanction is the threat and use of the strike weapon. Here, the threat of a collective dispute represents a bargaining tactic designed to impose costs on the management side. The converse tactic is the now little used lock-out. A strike which does emerge at this stage is likely to be official, i.e. carries the approval of the union organisation, and may be constitutional (occurring after the application of agreed settlement procedures). The collective sanction is likely to be the most effective within a process of collective and for- malised negotiation. However, this does not preclude the use of other tactics. In particular, the complexity of collec- tive negotiation necessitates the emergence of profes- sional and usually hierarchical organisation. Such organisation, with its potential for generating a divergence of internal interests, may be in itself a further source of conflict. Such conflict may be expressed in collective f o r m , the wildcat or unofficial dispute, or in the form of in- dividual expression, perhaps by quitting. Mechanisms do exist for the containment and resolution of conflict at this level, the most important of these being the use of third- party intervention, whether through adjudication, concilia- tion or arbitration.

The widest variety of sanctions appears at the shopfloor level of negotiation. Here, conflict arises between union and management on the official level and between work group and management — and work group and union — on the unofficial level. Conflict between management and union at this level finds expression in both the official and unofficial dispute, the work to rule, enforcement of the closed shop and restrictive practices. On the employer's side, there may be a refusal to recognise unions, a preference for by-passing the official system or a substituting of company unions. Conflict involving the work group may take the form of output limitations and go-slows and, in the extreme, collective sabotage and the sit-in. Individual expressions of discontent range from the " v o i c e " options of absenteeism and indiscipline to the " e x i t " response of quitting[21]. The choice of sanction will reflect the cost-effectiveness of the options and the issues of contention. There are likely to be institutional ar- rangements at the plant level for the regulation of conflict, the most popular being the grievance procedure[22]. The effectiveness of this procedure depends, to some extent, on the way grievances are manifested. Our contractual ex- planation of the sources and forms of conflict is summaris- ed in Figure 1.

Figure 1 distinguishes between underlying and immediate causes of conflict, and the locus and forms of conflict. At the most fundamental level, the basic cause of industrial conflict is the incompleteness of the labour contract. Bargaining constitutes the process of filling out these terms in operational detail. The probability of conflict and differences in levels of conflict over time and between dif- ferent groups is affected by the conditioning factors of which the most general are the relative costs of action, the opportunities for action and the relative effectiveness of in- stitutional procedures for constructively channelling and containing conflict. The various levels of specification of labour utilisation generate the immediate causes of conflict and the likely form such conflict will take. The actual form observed will depend on the issue (and its locus), the par- ties involved and the relative cost-effectiveness of the par- ticular forms. The prevalence of institutional arrangements

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such as the ILM and collective representation of employees mean that " v o i c e " options constitute an impor- tant form of grievance expression and are a major force prompting settlement of differences.

Summary and Conclusions The theme of this article is that industrial conflict arises in the specification and interpretation of the labour contract. The locus of conflict varies from the shopfloor to the political arena via the collective bargaining process. At successively lower stages of completion, from political arena to workplace, difficulty increases with the potential for disagreement probably greatest on the shopfloor. The mode of expression of conflict is also likely to vary with the locus of conflict, the greatest variety of tactics being found on the shopfloor. The particular choice of tactic depends on the nature of the issue, the conflictual parties and the expected cost-effectiveness of the possible modes.

This approach generates a number of important implica- tions for both the theory of, and policy responses t o , in- dustrial conflict.

Firstly, our analysis allows one to side-step the irrationality charge frequently levelled against strike action. Given that knowledge is rarely perfect and that acquisition of addi- tional information involves positive costs, bargaining is likely to take place under conditions of incomplete knowledge. The rationality charge becomes redundant where a breakdown in negotiations occurs because parties do not wish to incur the costs of acquiring additional infor- mation. Given each party's expectations of the likely behaviour of the other, this may be a "rational" choice. One is not forced to adopt ad hoc or unrealistic assump- tions of systematic miscalculation[23], uniquely shaped preference functions[24] or cartelisation motives[25] in ex- plaining the use of the strike weapon.

Secondly, the incomplete contracts approach provides a more general framework for examining the causes of con- flict. Explanations need not be grounded on assumptions

of a basically antagonistic employment relationship where the interests of the principal parties (employees, managers, employers, etc) are fundamentally op- posed[26]. Under such a conception, conflict is to be ex- pected and under existing organisational patterns is in a sense "normal"[27]. Increasing attention has been brought to bear on the possibility of eliminating, or radical- ly reducing, the use of the strike weapon by far-reaching changes in the management and ownership of industry. If the conflictual view of management and employees as bargaining adversaries can be displaced, the traditional role of the strike will be substantially diminished, according to this view. T w o major alternatives have emerged. The first envisages increased employee representation in deci- sion making[28], the second, the transference of property rights to allow worker-ownership[29]. Both these sugges- tions have been subject to stringent and far-reaching criticisms[30]. For our purposes, the relevant considera- tion is the likely effect of changes on industrial conflict. It is by no means obvious that such conflict would be eliminated, particularly since the problem of incompletely specified labour contracts remains. Rather more likely is conflict manifestation in an alternative form, say between workers and consumers. Increased wage shares could be obtained by raising prices and one cannot exclude the possibility of worker/producer cartels replacing labour cartels.

Thirdly, our analysis identifies a constructive role for dispute costs. Such costs are seen primarily as a maintenance price for the agreement and interpretation of employment contracts. The costs imposed by conflict pro- vide incentives for the parties to seek mutually acceptable bargaining solutions. Where agreement cannot be achiev- ed amicably, the combined, i.e. both direct parties, costs of conflict serve to prompt settlement. For dispute costs to perform this role effectively, two conditions must be fulfill- ed. The first is that costs must be of a sufficient magnitude to provide incentives to settlement. Secondly, efficient distribution of such costs requires that the major portion of them are borne by the parties directly involved, i.e.

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employer and employees, and not by outsiders or third parties[31]. Viewing conflict costs in this way highlights their positive role in a context of informational imperfec- tions and discourages the view that such costs merely represent a welfare burden to society. For example, the elimination of strike losses by outlawing the strike weapon would not represent a net gain to society. Such gains would have to be offset against the costs of an alternative procedure for reconciling bargaining interests.

Fourthly, the incomplete contracts paradigm leads to a re- jection of the view of the complete institutionalisation or "withering away" of the strike[32]. Indeed, our approach indicates that strike action may be an efficient mode of grievance expression. If the various forms of conflict manifestation represent, to some extent, alternatives[33], there is a case, on efficiency grounds, for preferring a mode where costs are both sufficient and readily iden- tifiable. There is evidence that for these reasons many employers prefer strikes to other forms of industrial ac- tion[34]. The forms of bargaining structures widely adopted tend to favour the strike weapon[35].

The policy implications of our approach encompass the adoption of procedures which reduce uncertainty. Such policies could include attempts to moderate the content and frequency of negotiation, the advocation of increased information disclosure and provision for third party in- tervention, particularly in the form of mediation and con- ciliation. The use of secret ballots before stoppages are undertaken is compatible with attempts to foster stability in bargaining relations. Their use highlights the possibility of breakdowns occurring not only in the interpretation of events and the assigning of expectations, but also in the translation of employees' views into representatives' demands. Such misunderstandings are likely to be positively related to size of organisation, a multi-plant structure, the existence of multi-unionism or fragmented work groups and the remoteness of employee representa- tion. An increased use of written or formal agreements within the plant or with respect to disputes procedures would bring a considerably greater degree of certainty to labour-management relations[36]. While such procedures are fairly widely adopted by larger firms[37], a preference for more informal means of containing conflict underlie the development of internal labour markets. The advantage of such arrangements is the greater degree of flexibility they bring. Such considerations are likely to be of continuing importance in the future as the pressures of product and market competition increase.

References 1. Smith, C.T.B., Clifton, R., Makeham, P., Creigh, S.W. and Burn,

R.V., Strikes in Britain, Department of Employment Manpower Paper No. 15, 1978.

2. Silver, M., "Recent British Strike Trends: A Factual Analysis", British Journal of Industrial Relations. Vol. 11 No. 1, 1973; Ed- wards, P.K., "Britain's Changing Strike Problem", Industrial Rela- tions Journal, Vol. 13 No. 2, Summer 1982.

3. Edwards, P.K. and Scullion, H., "The Local Organisation of a Na- tional Dispute: The British 1979 Engineering Strike", Industrial Relations Journal, Vol. 13 No. 1, Spring 1982.

4. For empirical estimates see Eaton, B.C., "The Worker and the Profitability of the Strike", Industrial and Labor Relations Review, Vol. 26 No. 1, October 1972; Gennard, J . , "The Financial Costs and Returns of Strikes", British Journal of Industrial Relations, Vol. 20 No. 2, July 1982.

5. Williamson, O.E., Markets and Hierarchies; Analysis and Anti- Trust Implications, The Free Press, 1975.

6. Simon, H.A., Models of Man, Wiley, 1957. 7. Enderwick, P., "Collective Bargaining and Strikes: An Exit-Voice

Analysis", International Journal of Manpower, Vol. 3 No. 1, 1982. 8. Coase, R., "The Nature of the Firm", Economica, Winter 1937. 9. Marglin, S., "What Do Bosses Do? The Origins and Functions of

Hierarchy in Capitalist Production", Review of Radical Political Economics, Vol. 6, Summer 1974.

10. Alchian, A.A. and Demsetz, H., "Production, Information Costs and Economic Organisation", American Economic Review, Vol. 62, December 1972.

11. Stone, K., "The Origins of Job Structures in the Steel Industry", in Edwards, R.C., Reich, M. and Gordon, D.M., Labor Market Segmentation, Lexington Books, 1975.

12. Williamson, O.E., "The Organisation of Work: A Comparative In- stitutional Assessment", Journal of Economic Behaviour and Organisation, Vol. 1 No. 1, 1980.

13. Williamson, 1975 and 1980, op. cit.; Williamson, O.E., Wachter, M. and Harris, J.F., "Understanding the Employment Relation: The Analysis of Idiosyncratic Exchange", Bell Journal of Economics, Vol. 6 No. 1, 1975.

14. Simon, H.A., Administrative Behaviour, Macmillan, 1961. 15. Williamson, 1975, op. cit. 16. Doeringer, P. and Piore, M., Internal Labor Markets and Man-

power Analysis, D.C. Heath and Company, 1971. 17. Baldamus, W., Efficiency and Effort, Tavistock, 1961. 18. Barbash, J . , "Collective Bargaining and the Theory of Conflict",

Relations Industrielles, Vol. 34 No. 4, 1979. 19. Crouch, C , "The Changing Role of the State in Industrial Rela-

tions", in Western Europe", in Crouch, C. and Pizzorno, A. (Eds.), The Resurgence of Class Conflict in Western Europe since 1968, Macmillan, 1978.

20. Deppe, R., Herding, R. and Hoss, D., "The Relationship between Trade Union Action and Political Parties", in Crouch, C. and Piz- zorno, A. (Eds.), The Resurgence of Class Conflict in Western Europe since 1968, Macmillan, 1978.

21. Enderwick, op. cit. 22. Brown, W. (Ed.), 777e Changing Contours of British Industrial

Relations, Basil Blackwell, 1981. 23. Ashenfelter, O. and Johnson, G.E., "Bargaining Theory, Trade

Unions and Industrial Strike Activity", American Economic Review, Vol. 59 No. 1, March 1969.

24. Swint, J.M. and Nelson, W.B., "Self-motivated Bargaining and Rational Strikes: A Multiparty Model and its Implications for In- dustrial Strike Activity", Southern Economic Journal, Vol. 47 No. 2, October 1980.

25. Thompson, E.A., "On Labor's Right to Strike", Economic Inquiry, Vol. 18 No. 4, October 1980.

26. Hyman, R., Industrial Relations: A Marxist Introduction, Mac- millan, 1975.

27. Dubois, P., "New Forms of Industrial Conflict 1960-1974", in Crouch, C. and Pizzorno, A., (Eds.), The Resurgence of Class Conflict in Western Europe since 1968, Macmillan, 1978.

28. Bullock Report, Report of the Committee of Inquiry on Industrial Democracy, Cmnd. 6706, HMSO, 1977.

29. Jay, P., Employment, Inflation and Politics, Institute of Economic Affairs, Occasional Paper 46, 1976.

30. Chiplin, B. and Coyne, J . , Can Workers Manage?, Institute of Economic Affairs, Hobart Paper 77, 1977.

31. Enderwick, P., "Strike Costs and Public Policy", Journal of Public Policy, Vol. 2 No. 4, October 1982.

32. Ross, A.M. and Hartman, P.T., Changing Patterns of Industrial Conflict, Wiley, 1960.

33. There is some evidence that at least strikes and quits should be seen as alternatives. For a recent discussion see Kelly, J . and Nicholson, N., "Strikes and Other Forms of Industrial Action", In- dustrial Relations Journal, Vol. 11 No. 5, November/December 1980.

34. Knowles, K.G.J.C, "Strike-Proneness and its Determinants", American Journal of Sociology, Vol. 60, 1954; Wolkinson, B.W. and Cohen, A., "Use of Work Sanctions in Israeli Labour Disputes", British Journal of Industrial Relations, Vol. 20 No. 2, July 1982.

35. Clegg, H.A., Trade Unionism under Collective Bargaining, Basil Blackwell, 1976.

36. Stieber, J . , "Unauthorised Strikes under the American and British Industrial Relations Systems", British Journal of Industrial Rela- tions, Vol. 6, 1968.

37. Brown, op. cit.

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