Effects of centralized vs. decentralized free essay sample

Collective bargaining is a process that through negotiations establishes terms and conditions that are essential for employment. Collective bargaining facilitates coordination between unions and employers in wage setting and other aspects of industrial relations. Although collective bargaining has the general objective of supplementing or supplanting, the free market, it has not followed a uniform pattern of development in different national or industrial situations. Instead, a variety of institutional arrangements have evolved in implementing bargaining relationships between employers and employees organizations. These differences at the structural level of bargaining brought contrasting consequences in the labour market. The bargaining structure refers to the employers and unions that take part in these negotiations and are responsible for the final content of the collective agreement. The structure of bargaining is also important as it affects a broad range of aspects as: the bargaining outcomes, the roles of unions and management and the types of issues that are brought to the table. 2 There are two structures of collective bargaining that are often implemented: centralized and decentralized. Centralized bargaining refers to agreements made at the group level involving many plants and is aimed to protect the working class in industry and at the national level, while decentralized bargaining occurs when agreements refer to just one plant. On the one hand, centralized bargaining is usually associated with lower and less persistent levels of unemployment, less wage dispersion and fewer strikes, whereas decentralized bargaining is associated with higher and more persistent levels of unemployment, more wage dispersion and more strikes. In the essay I will highlight the effects that this two bargaining structures have on wages, inflation, strikes, the bargaining process, and the negotiation process and their influence on the industrial relations system as a whole. 1. Arnold R. Weber, The Structure of Collective Bargaining and Bargaining Power: Foreign Experiences, (Journal of Law and Economics 1963), 117-151. 2. Katz, Harry C. , Industrial and Labor Relations Review, (np: October 1, 1993), article. A phenomenon that is characteristic for many countries is the wage differentials. These wage differentials are those who can determine the degree of centralization of wage bargaining and also have influence on outcomes. In the centralized bargaining process the government has a great involvement, leading to the uniformity of wages, benefits, and other aspects of employment. The centralised wage bargaining is likely to yield real wage moderation and lower unemployment than decentralized bargaining structures because it internalises the negative external effect of bargaining outcomes on the unemployment rate. Also centralized bargaining arrangements moderate wage settlements, reduce work stoppages, labour costs and consequently reduce product pricing. Another benefit of the centralized structure is that it reduces wage dispersion. If firms trade off the losses from an increase in the wage bill against the gains that a higher relative wage yields in terms of higher individual effort, as postulated by the efficiency-wage hypothesis, centralised wage bargaining hinders effort by reducing inter-firm wage dispersion. Thus taking in consideration all these effects that centralized structure has on wages, I can state that centralization encourage wage equality between workers, without reducing their individual efficiency, and the main objectives of the unions that promote this structure is to improve the welfare and the job security of all workers. The centralized bargaining structure has also notable effects on inflation. This kind of structure is associated to yield lower levels of inflation, thereby moderating settlements. These centralized impacts influence the formation of a different political dynamic at work and lead to the achievement of many political objectives of the labour movement. 3. Giorgio Brunello, European Journal of Political Economy, (np: Volume 14, Issue 2, May 1998), 381-406. 4. Giorgio Brunello, 381-406. There is an interdependent interaction between the effects that centralized bargaining creates on wages and inflation. Greater centralization of wage bargaining causes each union in the coordinating group to internalize the tendency of the central bank to respond towage-bargaining centralization by reducing money growth, thereby reducing the incentive of unions to restrain their coordinated wage demands. 5 As a result to this restrains the labour movement may agree to lower wage settlements for getting in return pensions, a better control of prices and more employment guarantees that advantage both workers and unions. â€Å"The interaction between these effects leads to a hump-shaped relationship between the centralization of wage bargaining and inflation, with inflation initially rising with greater centralization and then declining. †6 Analysing the effects that centralized bargaining has on inflation, we can definitely say that they bring a high level of certitude in the society and increase the workers welfare. Another argument that favours the implementation of centralized bargaining is the fact that it leads to fewer strikes. This aspect is due to the existence of greater similarity of wages, benefits and other terms of employment. â€Å"Such a finding, however, seems almost axiomatic, given that such structures involve many fewer sets of negotiations at any given time than decentralized ones. †7 The negotiations in centralized bargaining are conducted by skilful negotiators that are capable to settle the interests of all parties that take part at the negotiations, thereby diminishing the probability of a conflict or a strike. In a centralized structure workers are more informed and also have an easier access to Daniels, Joseph P. , Nourzad, Farrokh, VanHoose, David D. , Openness, centralized wage bargaining, and inflation, European Journal of Political Economy,(np: Dec 2006, Vol. 22 Issue 4), 970. 6. Daniels, Joseph P. , Nourzad, Farrokh, VanHoose, David D. , 970. 7. Jon Peirce, Karen Joy Bentham, Canadian Industrial Relations, (Toronto 2007), 250. In a centralized structure workers are more informed and also have an easier access to information as demand conditions and wages, thus reducing the likelihood of conflicts, strikes or wild-cat strikes. The influence that the government holds in this structure also has evident effects on strikes, because it can prevent or end them quickly. â€Å"Thus it is not centralization itself, but the shift in the locus of conflict that often accompanies it that seems to be the main reason for reduced industrial conflicts in countries with centralized structure. †8 Concluding the above effects that centralization has on strikes, we can observe that it helps to build in society better working relations and also stimulate unions and employers to find common goals that advantage both parties. The bargaining process is another component on which centralization has influence. It makes the development of this process more smoothly because it is conducted by efficient negotiators and authoritarian managers that can keep the situation under control and achieve positive results. However the big number of unions and manager fractions that are involved in the bargaining process makes it development more slow. When having a centralized bargaining process the parties involved can obtain what they want by combining the interests of both parties. â€Å"Unions need centralized bargaining process either formally, by way of a single agreement, or informally, through pattern bargaining both to standardize labour costs in an industry and to be able to inflict economic damage on employers through strike action. †9 The bargaining process leads the parties to obtain reciprocal gain in the area where they both have interests. Through the development of the bargaining processes in centralized way the unions and the employers try to increase the stability of the industrial relations and to achieve savings. The centralization of this process creates large, heterogeneous and broadly based bargaining units that are thus harder to organize. 8. Jon Peirce, Karen Joy Bentham, Canadian Industrial Relations, (Toronto 2007), 250. 9. Lawrence Mishel, The Structural Determinants of Union Bargaining Power, Industrial and Labour Relations Review, (np: Vol. 40, No. 1, Oct. 1986), 99. In conclusion, analysing the centralized bargaining process and its effects, we denote that there are positive impacts, the process is smooth, and negative impacts, it develops slower, that interfere. So we cannot say to which extent this process is advantageous to implement. The negotiation process in centralized bargaining structure is lead on industry-wide basis. In this process the parties that take part try to influence each other for achieving their purposes. Usually in this kind of centralized process is negotiated a single collective agreement across several different workplaces by the same employer and union. This centralization leads to inefficiency because it addresses to general problems that arise between the parties. â€Å"Centralized negotiations by their nature tend to encompass issues of general importance, thereby omitting issues of local concern. †10 Centralized negotiations are often harder to achieve, mainly because of the great number of members involved in the process. The complex issues that are brought at the table require a great physical and mental implication of the members, leading to possible strikes or lockouts. â€Å"Negotiations between union and management typically address a broader range of issues than most commercial contracts and the issues themselves are often more complex than those raised in the average commercial transactions. †11 The strategies that negotiators choose to implement are influenced in a great part by the goals that they tend to achieve and thus, centralized negotiations enforce parties to decide carefully what main objectives they want to negotiate. Also they have to ensure that the chosen strategy is effective and can influence the other party that expect some sort of give and take proposals that favour the process. Taking in consideration the great responsibilities, risks and influences that centralized negotiation processes imply, there is no doubt that they have important effects on industrial relationships and only experienced people can succeed to achieve positive result for the both parties without causing conflicts and maintaining a good development at he workplace. 10. Jon Peirce, Karen Joy Bentham, Canadian Industrial Relations, (Toronto 2007), 250-251. 11. Jon Peirce, Karen Joy Bentham, 251. Another bargaining structure that has important effects on different aspects of the industrial relations is the decentralized structure. If speaking about the effects of the decentralized structure with regard to wages, than we can observe that this structure generally leads to greater dispersion between higher and lower-paid workers and greater union, non-union wage differentials. †12 In a decentralized collective bargaining the wages are established by each firm thus, the financial decentralized wage gains lead to unemployment. This increase in unemployment creates a very difficult social situation, because finding a job for unemployed people is much harder. â€Å"Wallerstein (1999), reports that â€Å"a lasting move from highly centralized bargaining to a system of industry-level bargaining would raise the predicted wage differential by 50 percent, while a shift in the level at which wages are set from plant-level to industry-level would reduce wage differentials by 30%. †13 Also decentralization brings more wage flexibility and leads to a greater wage dispersion. The existence of this flexibility in the decentralized collective bargaining can be as well manifested through the diversity of specific goals and tactics that are embraced by the individual unions and employers. Unlike centralized structure, in the decentralized structure each union is free to establish its own goals without a great involvement of the government. In this bargaining structure the employer organizations are not usually engaged in alliances or economic blocs, being rather followers of more individual prospects. Assuming all this, we realize that the decentralized collective bargaining structure has more detrimental effects over the wages and the labour market, creating evident distinctions between different classes of workers and thus leading to social conflicts, competitiveness and reduced individual efficiency. 12. Charlotta Groth and Asa Johansson, European Economic Review (np: Volume 48, Issue 6, December 2004), 1349-1365. 13. Golden, Miriam A. and Londregan, John B. , American Journal of Political Science,(np: Vol. 50, Issue 1, Jan 2006), p208-213. The inflation in decentralized bargaining has higher levels and yields negative effects on the labour market. This consequently leads to reinforced lower outcomes and to a bad material situation of the working class. â€Å"A movement to a more decentralized collective bargaining structure would create more inflation while an increase in the weight of the national industry agreements would reduce the rate of inflation. †14 The existence of high levels of inflation will have direct impact on workers benefits, reducing them and thus depriving employees from having tax reforms, vacation benefits, higher pensions or better price control. The wage setting has important effects on the inflation level, as in decentralized bargaining there is a bigger demand of wage increase. â€Å"Inflation initially rises when an increased share of firms have wage setters that coordinate their wage setting activities but then declines with ever increasing centralization of wage bargaining. †15 Where decentralized bargaining structure exists, workers don’t have the willing to accept lower wages in exchange of more benefits, neither want to renounce in an easy manner to their goals. Assuming these effects, we denote that inflation causes big disadvantages for unions as well as for employers, and slackens the development of good relations between them. Unlike in the centralized bargaining where strikes are few, in the decentralized bargaining we have more strikes. This effect is due primarily because of great wage differentials, and dispersion. When the bargaining process takes places between single-employer, single-establishment, single-union, employees don’t have much access to information and don’t benefit of different terms of employment. The fact that government don’t have a great implication in this bargaining process, allow the employer to get rid of the union easier. 14. Jesus Ferreiro, Decentralized versus centralized collective bargaining: is the collective bargaining structure in Spain efficient? , Journal of Post Keynesian Economics, (Armonk: Vol. 26, Iss. 4, 2004), 695. 15. Daniels, Joseph P. , Nourzad, Farrokh, VanHoose, David D. , Openness, centralized wage bargaining, and inflation, European Journal of Political Economy,( np: Dec 2006, Vol. 22 Issue 4), 979. As the structure is decentralized is easy for the employer to force concessions, and the costs of strikes are not so big. â€Å"A strike is more costly to firms whose production processes are labour intensive. †16 If the production processes relies more on capital and are automated, the employers can continue at least partial production process. Making a global analysis on the effects that decentralized bargaining has on strikes, we can assert that they aggravate the relations between union and employers by making harder the finding of a common denominator that could please both parties. The strikes have a long duration and this harm the working process. The bargaining process in the decentralized structure occurs in small, community based, homogenous bargaining units that are easy to organize and to manage. Decentralized negotiations often occur between a single employer and a single union, thereby resulting in a great number of collective agreements that cover relatively few workers. 17 In such structure the parties can bargain based on their own circumstances, thus the development of the process is quicker. Unlike in centralized bargaining where the Employer has full control on the process, in the decentralized one, the employer doesn’t want to surrender control. The bargaining process implies comprehensive change, openness, professionalism and the spending of time and resources, for having finally positive achievements. Single–employer, single-union bargaining are efficient because of the little numbers of people that take part in it and have the possibility to express their desire. Even if many of them have different occupation but work in the same establishment people think that they have enough in common to bargain together. Studying the above information, we are able to say that the decentralized bargaining process is one in which employees can express themselves in a more freely way and can require from their employers more benefits that centralized worker. 16. Jon Peirce, Karen Joy Bentham, Canadian Industrial Relations, (Toronto 2007), 263. 17. Jon Peirce, Karen Joy Bentham, 245. The negotiation process that is a component of the bargaining process, is also affected by the decentralized structure. To some extent it resembles the bargaining process through the great number of collective agreements and the fact that it occurs between single-employer, single-union. A great advantage that decentralized negotiations have is the fact that they encompass not only issues of general importance but also local issues, thus leading to better internal relationships at the workplace. â€Å"Unions must negotiate contracts which cover the relevant workforce either directly, as in industry wide agreements, or indirectly through strong settlement patterns among companies. †18 This action removes the wages of the relevant work force from competition. In the negotiation process, both unions and management negotiators represent different parties involved in the labour process that share diverse opinions and are often implied in conflicts. The union-management negotiation are conducted by representatives of the parties; thus, the negotiators must emerge with a settlement acceptable not just to their bargaining team but to their principals, who were not involved in the actual negotiations but who have the ultimate say as to whether the tentative agreement is accepted or rejected. 19 So we can denote from the. Above information that the negotiation process in the decentralized structure is essential for having a benefic development of the internal as well as external relations between union, managers, employees and employers. It helps to find a consensus and also through this process the parties involved try to respect the rights of the opponent but also meet their obligations thus, we can state that in decentralized structure the negotiation process is more productive and efficient. 18. Lawrence Mishel, The Structural Determinants of Union Bargaining Power, Industrial and Labour Relations Review, (np: Vol. 40, No. 1, Oct. 1986), 94. Jon Peirce, Karen Joy Bentham, Canadian Industrial Relations, (Toronto 2007), 252. Finally, after enumerating and explaining the effects that both centralized and decentralized bargaining structures have on wages, inflation, strikes, the bargaining process and the negotiation process, we can accentuate that they are primordial elements in the domain of industrial relations. We have seen that centralized bargaining has good influences on wage dispersion and wage differentials as it reduces them and leads to equality, whereas decentralized bargaining increases them and creates inequality and competitiveness between workers. Unlike in decentralized bargaining, in centralized structures inflation and strikes they also have reduced levels thus, contributes to the development of a stable society and a good economic level in it. The bargaining and the negotiation processes have a great effectiveness in decentralized structures than in the centralized ones, because they deal with a broader range of local issues and have a quicker development. Although these two structures have different effects on society, we cannot say that they don’t interact in some circumstances, and that the implementation of only one of them can lead to total welfare in the society. Analyzing all these, we realized the great importance that collective bargaining has for unionized workers, offering them the possibility to work in good conditions and to have many employment benefits. â€Å"Unionized workers enjoy a significantly greater voice in the workplace, thanks mainly to the grievance process. †20 Even if this system is far from being perfect, at the present time it’s the best for the determination of pay and working conditions. While the adversarial nature of the process and the length and complexity of most collective agreements are regrettable, they are likely inevitable so long as management continues to resist unions fiercely, and as long as bargaining remains highly decentralized, thus forcing most conflict to be worked out at the bargaining table rather than in the political arena. 21 20. Jon Peirce, Karen Joy Bentham, Canadian Industrial Relations, (Toronto 2007), 265. 21. Jon Peirce, Karen Joy Bentham, 265.