Strikes and Political Activism of Trade Unions: Theory and Application to Bangladesh Author(s): Jean-Paul Azam and Claire

Salmon Reviewed work(s): Source: Public Choice, Vol. 119, No. 3/4 (Jun., 2004), pp. 311-334 Published by: Springer Stable URL: http://www.jstor.org/stable/30026050 . Accessed: 26/11/2011 05:17
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Public Choice 119: 311-334, 2004. 2004 KluwerAcademicPublishers. Printed in the Netherlands.

311

Strikes and political activism of trade unions: Theory and application to Bangladesh *
AZAM' & CLAIRESALMON2 JEAN-PAUL
de IDEI, Universityof Toulouse,InstitutUniversitaire France, F-31000 Toulouse, 1ARQADE, 2 France; E-mail: azam@univ-tlsel.fr; Universityof Savoie, F-74016 Annecy,France Accepted 3 March2003 Abstract. The behaviorof Bangladeshitradeunions is characterized political activismand by momentousstrikes,called hartals there,have played a crucialpartin most political changes in this country.We offer a theoreticalframeworkfor discussing this fact, and we test empirically its main predictionby bringing out the political cycle that characterizesthe occurrenceof strikesin Bangladesh.

1. Introduction
The economic importance of trade unions in developing countries is not commensuratewith the size of their membership.In Bangladesh, the share of the active populationconcernedby unionizationwas officially estimated between 3 and 4% in 1992. However,this figure is largely irrelevantfor an evaluationof their power, as the urbanpopulationwas only about 18% of the total Bangladeshipopulationin 1995, and virtuallyno tradeunions exist in the ruralsector.Withinthe urbaniteworkingpopulation,and especially in the formal sector, the pictureis quite different.Almost 100%of the workers and employees of the public sector are unionized, while one out of six of the wage earners in the private formal sector are unionized. The jute and cotton sectors, which were nationalizedin 1971, in the wake of the struggle for independence,and then privatizedto some extent in the 1980s, are the in sector and most unionized sectors. Unions are also important the transport in variousservices. As emphasizedby Pencavel (1995), among others, unions in developing countries get their power from their privileged relationship with political parties,and in many cases with the government.The Bangladeshitradeunions are no exception, and are well known for their lobbying the government
* This paper owes much to many people met in Bangladesh during our numerousvisits whom we wish to thank collectively. We thank also Francesco Goletti for providing there, some of the data used, without implicating.Helpful comments by an anonymousreferee are gratefullyacknowledged,without implicating.

312 ratherthan acting vis-at-visthe private sector. In the public enterprises,the governmentfixes the wage schedule,and it fixes also the minimumwages for the privatesector.The governmentintervenesin most industrialdisputes, in all the sectors.In the privatesector,collective bargaining takesplace officially at the firmlevel, but the powerfulSKOP,the mainfederationof unions, deals directly with the government,and has eventually the determinantinfluence on wage settlements. The influence of unions goes beyond the standard reach of industrialrelations, and extends to the political arena.All the political parties, even the smallest ones, exert some controlover a tradeunion. The threemain political parties have their own trade union federation, which accounts for 64% of the unionized workers.The unions have played an active role in most major (hartals) that political events of this country,like the massive demonstrations GeneralErshaddown in 1990, or those whichpushedthe democraticbrought ally elected governmentof Begum KhaledaZia to resign in 1996. According to the World Bank (2001), an average of 21 full working days were lost annuallydue to hartals in the 1980s, and an averageof 47 full workingdays per year in the 1990s. This reportestimates that about 5% of GDP is lost on averagein the 1990s. Therefore,the behaviorof the Bangladeshitradeunions seems quite distant from the standardapproachto the theory of trade unions, as surveyed for example by Oswald (1985) or by Booth (1995), which emphasizes the relationshipsbetween the union and the firms that employ its members.Its analysis is thus especially interesting,as a way to broadenour conceptionof the scope of tradeunion activity,with a view to takeexplicitlyinto accountits political economy dimension.The massive demonstrations organizedby the unions, called the hartals, are aimed at affecting the governmentmuch more thanthe firms.This type of political activismof the tradeunions seems fairly widespreadin developingcountries,as well as in some developed countries, like Francefor example.One can rememberthe role of Solidarnoscin Poland for bringing communism down. In Britain, the conflict between Margaret Thatcherand the miners' union in the late 1970s was a majorpolitical event, ratherthan a simple industrialdispute. The aim of the presentpaperis to providea simple theoreticalframework for analyzing this political dimension of tradeunion activity, and to test its main implication in the case of Bangladesh. Our approachis thus drastically differentfrom the one followed by Devarajan,Ghanem,and Thierfelder (1997), who have analyzed the behaviorof tradeunions in Bangladeshand Indonesia,within the more usual frameworkwhere unions seek to affect the behaviorof the firms,ratherthan to influence the government.Rama (1997) and Rama and Tabellini(1998) also analyze models where the union affects

313 governmentpolicy. They provide a theoreticalmodel where the tradeunions lobby the governmentwith a view to get some tariffprotectionfor the firms, in orderto create a rent that they can captureby imposing a wage increase. of Then, unionized workers may get a redistribution income in their favor. Similarly,Saint-Paul(2000) analyzes the political economy of labor market institutionsas the result of redistributive pressuresbetween rich and poor, skilled and unskilled labor.In his model, the government,or politicians, are of simply the representatives the various conflicting interestspresent in the labormarket. An additionalbenefit of our approachis to provide a theory where a positive level of strikeactivity takes place in equilibrium.This easily observable phenomenon is usually absent from the standardmodels of trade unions. Although a lot of empirical studies have been done for developed countries (see Booth, 1995; Kennan,1985; Card,1990, andreferencestherein),analyzing the durationof strikes, very little work has been done in the theoretical literatureaiming at explaining the occurrenceof strikes. While the seminal paper on this topic (Ashenfelter and Johnson, 1969), and a small number of followers in the same vein (Farber,1978; Kennan, 1986), were in fact assumingthat a strike was going on, for analyzing its durationas a function of the concessions made by the firm, the most recent literaturehas taken a game-theoreticapproach(e.g., Booth and Cressy, 1990; Hayes, 1984; and Tracy, 1987), where the strikeresults from asymmetricinformationbetween the firm and the union. Mumford (1993) presents a recent survey of both on the theoreticaland the appliedliterature strikeactivity.Ourapproachalso in an imperfectinformation framework, a game betweenthe union and applies the government.However,instead of relying on asymmetricinformationfor conflict,ourmodel rests generatingthe occurrenceof the socially sub-optimal on commitmentfailure.We emphasizethe role of the imperfectcredibilityof the government,regardingits promises to adopt some policies that benefit the workers,in providingthe incentive for the union to go on strike.Unlike a large part of the literatureon strike activity, which is disconnected from we literature unions and wage determination, deal with on the more standard these two issues in a unifiedframework. Moreover,our model must be understoodas a triadicone, as discussed voter is a crucial actor in this game. by Basu (2000), as the representative We assume that the latterapplies a retrospectivevoting strategy,a la BarroFerejohn(Barro, 1973; Ferejohn,1986). Then, the failureof the government to keep the unions quiet affects negatively its chances of being re-elected. This gives the urbanworkers some leverage on the governmentthat is not availableto the rest of the population.Therefore,our analysis may be viewed as a contribution the theoryof the conflictbetweentown andcountrywhich to

314 was emphasizedby Sah and Stiglitz (1992) as a centraltheme in development theory. The next section presents the basic model, while Section 3 presents the assumed political setting. Section 4 describes the equilibriumin case of imperfect commitment.Section 5 presentsthe empiricalresults, analyzing the political cycle effects on the occurrenceof strikes. Using monthly data on strikesin Bangladesh,we show the impactof forthcomingelections on their occurrence.Section 6 concludes.

2. The basic model In this section, we analyze a variantof the standardutilitarianunion model discussed among others by Oswald (1982), assuming that there is a unique union for the whole urbanlaborforce, with no internalmigrarepresentative tion. The only additionto this model done here is the inclusion of the level of strikeactivityin the tool kit of the union. We assumethatthe lattercan decide to put up a level of S units of strike activity per worker,with a unit cost of worker,with a view to affect the behaviorof the y utils to the representative We assumethatthe lattercan spendits resourcesin two different government. ways. First, it can spend G units as employment-generating expenditures. This may be comprised both of personnel expenditures,assumed to entail a non-negativeemploymentmultiplier,and of other types of productiveexpendituresthat enhance the productivityof labor in the private sector. For etc., have a positive impact example, expenditureson basic infrastructures on employment,for a given wage rate. It can also increase tariffs, boosting sector, at the cost of a higher price employment in the import-substitution for imports (Rama, 1997). Second, it can spend the remainingresources on governmentconsumptionwhich affects its utility positively, with no positive fallout for the workers.Hence, the political activism of trade unions is here modeled as partof the conflict over the sharingof the resourcesof the governmentbetween the formerand the latter. Assume thatthe rateof employmentm is a decreasingfunctionof the wage rate w and an increasingfunction of the level of governmentemploymentG. generatingexpenditures This capturessimplythe abilityof the government to affect the level of employmentby either hiring more public agents, or by providingsome productivity-enhancing public goods, or indirectly,by boosting aggregatedemand,in a Keynesianway. Assume also thatall the workers are identical,and thus have the same probabilityof being employed, which is
determined by:

315 G) < 1.

0O<m(w,

(1)

(-) (+)
We perform this analysis within the frameworkof the monopoly union model, wherethe latterdeterminesthe wage rate,which is then takenas given by the firms, when making their hiring decisions. This assumptionis more realistic,at least in the Bangladeshicase, thanthe optimalbargainingsolution discussedby McDonaldand Solow (1981). However,we assumethatthe tradeunionmustchoose the level of the wage ratebefore the actuallevel of employment-generating public expendituresis known. Hence, the union selects the level of the wage rate w and of strike activity S on the basis of the expected level of governmentemploymentGe. may be based generatingexpenditures This expectedlevel of expenditures on explicit promises made by the government,if the latteris credible, or on the analysisby the union of the government's behavior,if it is subjectto moral hazard.We will restrictthe analysis to a rationalexpectationsequilibrium, where G = Ge. If the governmentcan commitcrediblyto any level of G, then the union regardsGe as exogenous. Let U(w) (U'(w) > 0, U"(w) < 0) be the level of utility reachedby a workerwhen employed, while earninga wage rate w. As usual in this type of models, we assume that the workergets a fixed level of utility U < U(w) when being unemployed.Then, if the lattertakes Ge as given, the utilitarian union selects the couple {w, S} that solves the following problem: maxw,sw = mU(w) + (1 - m)U - yS, st. m = m(w, Ge) andS > 0. (2) (3) (4)

in Notice that this set up assumes that all the workersmust participate the of strike,independently theiremploymentstatus,andthusbearthe utilitycost y. This will be the case if the unions must select their {w, S} policy before the conditionresultingfrom firmsselect their workersat random.The first-order setting the derivativeof W with respectto w equal to zero can be writtenas: wU'(w) -wmw (5) m(w, Ge) U(w) - U In (5), as in the other equationsof this paper,a subscriptis used to represent the partialderivativeof the functionwith respect to the corresponding variable.Condition (5) is prettystandard(e.g., Oswald, 1985), and Figure 1 illustratesthe resulting equilibrium,in the {w, m} space, in the case where

316

w*

W m(w, G)
m

0
m* 1
Figure 1. Union equilibriumwith crediblegovernment.

G = Ge. A similardiagrammay be found in Oswald (1982). Equilibriumis found where the union balances the benefit of the increasedwage with the increasedrisk of unemploymentborne by the workers,at the tangencypoint A between the union's indifferencecurve W and the employmentrate curve m(w, G). The new element introducedin this model is the effect of Ge. Carefulexaminationof equations (2)-(5) leads to the main point of this exercise, which can be statedas: Proposition 1.If the governmentcan credibly commit to a predetermined level of employment-generatingpublic expenditures, then a no-strike equilibriumprevails. The reason for this result is that from (5) and (3) one can derive the levels of w and m as functionsof Ge only: preferred
w*
=

w*(Ge)

(6)

and m* = m*(Ge). Then, defining:

W*(Ge, S) = maxwWI(3)- (4),

(7)

(8)

317 < 0. Hence, the it is straightforwardto show that aW*/aS = -y constraint(4) must be binding in such an equilibrium. non-negativity Moreover,undervery mild conditions,one can show that:
w*(Ge)' > 0 and m*(Ge)' > 0. (9)

However,it is quite unlikely thatsuch a no-strikeequilibriumwill prevail, as the announcedlevel of employment-generating public expenditureswill not generally be credible, as we show below. Nevertheless, it is useful to characterize furtherthis equilibrium, a benchmark as againstwhich to analyze the consequencesof the government'slack of credibility.This is done in the next section.

3. The political setting We basically model the game between the governmentand the union as a conflict over the sharingof fiscal resourcesbetween employment-generating expendituresG, that the union likes, and non employment-generating public expenditures,which only affect positively the government'sutility function. The latteris assumed linear with a unitaryslope, for the sake of simplicity. Whether it remains in power or not, the governmentbears the cost of the employment-generating expendituresG. If it stays in power, the government enjoys a utility level Om- G. The positive effect of employmenton the government'sobjective function (0 > 0) simply reflects the fact that the higher the level of employment,the higheris the resultinglevel of economic activity, and thus, for a given taxing capacity,the largeris the availablebudget. The governmentlooses the benefitof this budgetif it does not remainin power. Let 0 < q < 1 be the probabilityof the governmentstaying in power. Beside exogenous factors, like the proximity of elections, etc., we assume that q is simply an increasingfunction of the level of utility reached by the "politicallyrepresentative agent"(PRA). The identityof the PRA obviously depends on the political regime. In a democracy, the PRA would be the median voter. In a non democraticregime, the PRA would probablybe a representative agent of the constituencythat supportsthe ruler(e.g., ethnic or religious group, etc.). However, Alesina and Rodrik (1994) have suggested even in the case of thatthe medianvoter assumptionis a good approximation non democraticregimes. In a full blown political economy model, the PRA shouldbe determinedendogenously,but this would be a useless complication in the presentsetting. The only relevantinformation that we need here is that the PRA, be it the median voter or some devotee of the ruler,is not likely to be a union member,as only a small fractionof the populationis concernedby

318 unionizationin developingcountries.Forexample,in Bangladesh,the median voter is certainly a ruralperson. However,this does not entail that the PRA is a peasant. On the contrary,political power belongs to a large extent to a class, using roughly the same mechanismsas the ones analyzed proprietary by Bardhan(1984) for neighboringIndia. The relevanceof this analysis for Bangladeshcomes out clearly from the fieldworkpresentedby Khan (1989). This can be regardedas exogenous for the type analysisperformedhere. We assume thatthe PRA appliesthe retrospective voting rule whose properties have been analyzedby Barro(1973) and Ferejohn(1986). In the words of the latter "if the utility received at the end of the incumbent'sterm in office is high enough, he votes to returnthe incumbentto office; otherwise he removes the incumbentand gives the job to someone else." (Ferejohn, 1986: 35). Beside exogenous variables that need not be presented explicitly, we assume first that the utility level of the PRA is affected positively by the employment-generating public expenditures,because there are positive fallout of these expenditures,like greateraccess to some infrastructure, imetc. Moreover, the hiring of workers in the civil proved public services, service or in public enterprisesmay create a constituency in favor of the incumbent government,and the positive effect of G on the PRA's utility function can also capture such an effect. This assumption is realistic for developing countries, where a large part of the governmenthiring policy is aimed at "buying"some political support.Being seen unequivocally to "do somethingfor employment"is almost everywhereregardedas a positive factorfor staying in office. Second, we assume that the level of strikeactivity,with all the disruption that it entails for economic activity in general, as well as the damages to that propertythatmay resultfromthe demonstrations they often entail,affects negatively the utility level of the PRA. Let v(S, G)(vs < 0, vG > 0) be this utility function.Then, the probabilityof the governmentremainingin power is 0 < q(v(S, G)) < 1. We assume that a stochastic element in the PRA's identity or preferencesmakes q differentiable,with q' > 0 and q" < 0 in the relevantrange. However,in most of the following, we will use the shorthand notation:0 < q(S, G) < 1, with the partialderivativesof this function defined as follows: qs < 0 and qG > 0, and the second derivativesdefined conformably. The optimumof this game, from the government'spoint of view, is found when assumingthat the lattercan commit credibly to a pre-announced level of employment-generating G. Then, the government publicexpenditure plays
first, and is in the position of a Stackelberg leader. The latter solves the following problem:

319

maxGq(S, G)Om- G, s.t. m = m(w, G) and w = w*(G) and S = 0. The first-order conditionfor this problemis:

(10) (11) (12)

(13) 0[qGm+ q(mww* + mG)]= L. This condition means that the governmentshould take into account not only the positive impact of an increasein employment-generating public expenditureson its probabilityof remaining in power and on its budget via the direct employment effect, but also the negative impact on the rate of employmentdue to the increasein the wage rate. 4. The case of imperfect commitment However, the optimum outcome characterizedabove is not very likely to prevail, if the governmentdoes not have access to institutionaldevices, or other methods, that make its commitmentfully credible. This can be stated as proposition2: Proposition2. Under imperfectcredibilityof the government'scommitment, the optimumoutcome is not a Nash equilibrium. In order to prove this proposition, we need to clarify the effect of the lack of credibility. When the government is not committed credibly to a given level of employment-generatingpublic expenditures, this game cannot anymore be solved by backward induction as it was done above. Now, the union is playing first, while the governmentchooses the level of employment-generating public expenditurestaking as given the equilibrium chosen by the union. Then, the governmentsolves the following {w, S} pair problemat the second stage, given {w, S}: maxGq(S,G)Om- G s.t. m = m(w, G) This results in the following first-order condition: 0[qGm+ q mG] = 1. (16) (14) (15)

320 Comparing(16) to (13), and assuming that the second-orderconditions for these two problemsare satisfied,we find that the governmentwill spend more on employment-generating public expendituresin the Nash equilibrium without commitment than at the optimum. The mechanism at work here is simply that, given the state of the labor market,as characterizedby the optimum {w, S} pair, the governmenthas an incentive to increase ex post the level of employment-generating public expendituresin orderto increase employment and fiscal resources,and its probabilityof remainingin office. It overestimatesthe marginalutility of an increase in public expenditures, by not taking into accountthe effect on employmentvia the wage rate, as it rationallytakesthe latteras given at stage 2. However,the union takesits bestresponsefunction as given at stage 1, anticipating rationallythe government's response to its own choice of the {w, S} pair,and thus chooses the latterwith this responsein mind. conditioncan be writtenas: Moreover,the second-order < + + 0[qGGm 2qGmG q mGG] 0. This can be used for analyzingthe government'sreactionfunction: G = G*(w, S). (18) (17)

(16), and taking(17) into account,yields the following Totallydifferentiating signs of the derivativesof the government'sreactionfunction: sign aG*/aw = sign {qGmw+ q mGw} = sign aG*/aS sign {qGsm + q SmG}. (19) (20)

These resultswill be discussedandused below for characterizing equithe libriumof the game. Notice thatthese signs dependon the second derivatives mGw and qGs,which are playing here a key role. 4.1. Conditions a positive equilibriumstrikelevel for Let us now analyze stage 1 of the game, taking (18) into account. When the governmentcannot commit credibly, the union is the first mover (see the Appendix for the detailed timing). Its problem is now to maximize (2), under (3), (4), and (18). We can apply again the Kuhn and Tuckertheorem, with complementaryslacknessfor the non negativityconstraint(4). This can be used to characterizean interior solution, with S > 0. In this case, the first-order conditionrelativeto the level of strikeactivityreads:

321 (21) (U(w) - U)mGGs = y. This implies that Gs > 0. In view of (20), this can be statedformally as: Proposition3. When the governmentlacks credibility, for (i) a necessary condition S > 0 in equilibriumis qGS > -qs mG/m, which implies in particularqGs > 0. This condition can be rewrittenusing explicitly the PRA'sutility function,in terms of elasticities, as: VGsG q"v(-) VGG -vs q' v(-) mGG m

(ii) a sufficientcondition for S > 0 in equilibriumis mGGs(U(w) - U) > y when evaluatedat S = 0. When expressed in terms of elasticities of the PRA's utility function, the necessary condition for S > 0 in equilibrium does not seem too restrictive, especially in the case where q" < 0 and vGs > 0 in the relevantrange. The right-handside of this condition is the elasticity of the public expenditures. employmentrateto the level of employment-generating effects that an increase The left-handside is the sum of the two second-order in these expenditureshas on the re-election probability:first, it reduces its marginalsensitivity to changes in the PRA's utility level, if the former is concave, and second, it reduces the latter's sensitivity to the occurrence of strikes. Then, this condition may be interpretedas saying that strikes will be positive in equilibrium, under imperfect commitment, when the government is quite efficient at shielding its re-election probability by Then, a high level of public expenditures. expandingemployment-generating strikeswill elicit a strongresponse in favor of employment.This is what the union is looking for. As a check on the plausibilityof the necessaryconditionstatedat proposition 3, which may seem a bit complex, let us workout a simple parameterized example. Assume that, over the relevant range, the function governing q obeys the following specification, where 7, co and a are strictly positive parameters: q=n (G-wS)a. Then it can be checked by simple calculations,using (16), thatthe necessary condition presentedat proposition3 for S > 0 may be writtenin this case as: a< 1-(q/n)1/a 1-n0m

322 if 1 > qr0m. both 0 and m are probabilities,these conditionsdo not seem As too demandingif r > 1. If q < 1, it can only hold if q < r. If 1 < r0m, then as the inequalityabove must simply be reversed,and thusbecomes irrelevant, a > 0, and > 1 holds necessarilyin this case. The intuition behind this result is simply that the union will find it worthwhileto exert pressureon the governmentto expand its employmentgeneratingexpenditures,by increasingthe level of strikeactivity,only if it is worthwhilefor the governmentto respondin such a way to such an increase. This occurs if the expansionin employment-generating expenditurescan acoffset the fall in the expectedmarginalbudgetary benefit,due to the fall tually in the probabilityof remainingin powerresultingfrom the strike. 4.2. Impacton the wage rate In orderto completethe characterization the strike-onequilibrium, now of we the level of the wage rate relative to the one that prevails when the analyze governmentdoes not lack credibility.This can be discussed on the basis of the otherfirst-order condition. -wmw mGG* wU'(w) wG*v (22) m G* m(-) U(w)- U Comparedto (5), this expression shows that the wage rate can either be higheror lower thanin the no-strikeequilibrium,dependingon the sign of the second termon the right-hand From (19), side, i.e. mainly,on the sign of G*w. we know that the latterdepends crucially on the sign of the cross derivative of the m(-) function. Moreover,the effect will depend on the elasticity of U'(w). If the latteris largerthan 1, the term on the left-handside of (22) is a decreasingfunction of w, so that the wage rate will be higher than in the > 0. From (19), this occurs if: no-strikeequilibriumif G*, (23) qGmw+q mGw> 0. This implies in particular that an increase in the government's employment-generating expenditures reduces the marginal impact of the wage rate on the rate of employment, measured positively (i.e. makes it less elastic). This set of conditions seems rather realistic for developing countries, where workerscan be expected to be strongly risk-averse,while employment-generating public expenditurescan plausiblybe assumedto reduce the elasticity of the demandfor labor, especially if they imply a lot of hiringin the civil service and in variousparastatals. of Figure 2 provides an intuitive interpretation this equilibrium.Point A is the no-strike equilibrium,as described in Figure 1. Point E is the new

323 m(w, G*(w,S)) w

LE

AI m(w, G)

m*

Figure 2. Equilibriumwith commitmentfailure.

equilibriumobtained in this section when the governmentcannot commit credibly.It is located on the m(-) curve correspondingto a higher level of public expenditures,at a point of tangencybetween employment-generating an indifferencecurve of the union and a curve describingthe response of the rate of employment to a change in w, taking into account the endogenous The impacton m* is increasein employment-generating public expenditures. as positive in Figure2, while it is in fact ambiguous.This assumes represented thatthe positive effects on employmentof the increasein public expenditures, entailed both by the increase in w and in S, offsets the negative effect of w, given G. However, we could also get the same sign of the comparativestatics of the wage ratebetween the no-strikeand the strike-onequilibriaby reversing, roughly speaking,these two sufficientconditions. Defininge = -wU"/U', we can summarizethe resultsof this comparative statics exercise with respectto the wage rate as: Proposition 4. The wage rate is higher in the strike-onequilibriumthan in the no-strikeequilibriumif [(1 - e)(U(w) - U) - 2w].[qGmw+ q mGw]< 0.

324 Hence, beside the case sketched above, we could also predict that the wage rate would be higher in the strike-on equilibrium than in the nostrike equilibriumif (i) the workershad a low degree of risk aversion (e < I - 2w/(U(w) - U)), and (ii) employment-generating public expenditures function. did not affect significantlythe slope of the employment-rate 5. Empirical test on Bangladeshi strike data We now turn our attention to the empirical test of the main proposition resulting from this theoreticalframework,i.e., that the incidence of strike activity should go up when the degree of credibilityof the governmentgoes down. In Salmon (1998), a similar test is performedwith the wage rates of the unionized sectors. The main empiricalissue is to find some proxies for capturingthe credibilityof the government'scommitmentnot to give in to the pressureof the unions. Ourpriorassumptionis that the credibilityof the governmentis weak just before the elections, while it is strongerafter the result is known. The governmentis tempted to have a more expansionary policy when election time is coming, as this may increase its re-election probability,while its costs in terms of inflationor budgetaryrestrictionswill only come up in the future, and might be borne by the future government, should the election turn adversely.In the terms of the theoreticalmodel of the previous sections, the proximity of election time may be viewed as a downwardshift of the q(-) function, for any value of v(-), as this reduces exogenously the cost of bringingthe governmentdown. Hence, we expect the probabilityof a strikeoccurringto be affected positively by the approachof an election. Moreover,duringthe firstpartof the periodcovered by our data, therewas a militarydictatorship, underGeneralErshad.It can be arguedthat this type of governmentis potentiallymorecrediblefor resistingthe demands of the urbancrowd than the more shaky democraticones that followed, as it is less influencedby marches and demonstrations, even if their probable impact is negative on the median voter. After all, this government seized power by a coup, without much democraticscruple. Nevertheless, General Ershad was eventually brought down by popularunrest, with massive and with an unusualnumberof marchers. repeatedmarchesand demonstrations, These were bloodless events, but involving a momentousmobilization.It is thus worthwhileto test whether his governmentwas more or less credible, in its commitmentto resist popularpressurethan the democraticallyelected ones thatfollowed. The data on strikes have been collected by Francesco Goletti in the regional press of Bangladeshbetween January1988 and December 1992, for the industrialand the transportsectors. We estimate several equations us-

325
ing these data, which are presentedat Table 2. They are based on a probit analysis, aiming at identifying the main determinantsof the probabilityof at least one strike occurringsomewherein the countryon any given month. The theoreticalanalysis presentedabove, and especially propositions 1 and 3, predictsthat strikesshould mainly be observedwhen the governmenthas a low credibility.For this purpose, we have constructeda dummy variable taking the value I when at least one strike occurredin any district in the country sometimes during a month. We have performedthese estimations for the whole sample, and then by separatingthe industrialsector from the sector.Both the necessaryand the sufficientconditionspresentedat transport proposition3 involve a potentially sector-specificderivativemG,measuring the impactof publicexpenditures the probability being employed.There on of is no reasonwhy we shouldexpect it to be the same in both the industrialand the transportsectors. The lagged values of the numberof strikes in either sector is included in the equations, in order to take care of the inertia that characterizes these series, as can be expected at the monthlyfrequency. Then come the variables related to the political cycle. Three elections took place at the national level and five elections took place at the local level during our period of observation.Table 1 lists them, distinguishedby type, and provides the numberof voters concerned by each of them. The elections are taken into accountby a dummyvariableindicatingthe three or four preceding months. We have experimentedwith differentdefinitionsof our election variable in the equations presentedat Tables 2 and 3, without affecting drasticallythe results. Our sample stops in December 1992, but we have takeninto accountthe monthsprecedingthe January1993 elections. The local elections are takingplace eitherat the 'Union Parishad'level, i.e., at the level of local governments,or at a lower level, namely the 'Upzila Parishad'. We have also included a dummy variablefor the 'hartals' (demonstrations) called at the nationallevel by the unions and the political parties. We use as control variablesthe change in the quantityof money, with a view to controlfor the impactof the businesscycle, with an expectedpositive sign, as well as the changein the informalsectorreal wage, in orderto capture the changes in the relativewage in the formal and the informalsector, while avoiding to include the real wage in the formal sector, which is likely to be endogenous.This shouldcapturethe cost of loosing ajob in the formalsector. We thus expect more strikeswhen the informalsectorwage goes up. We also take into account naturaldisasters, like cyclones and floods, unfortunately very frequentin this country.We expect them to have a negative impact on the occurrenceof strikes,as public expendituresare then quite naturallytied up for relief operations, and are unlikely to be diverted for employmentgenerating public actions, whatever the unions activity. Moreover, at such

326
Table1. List of elections in our sample period Date 10 February1988 3 March 1988 28 January1989 14-25 March 1990 27 February1991 September 1991 22 January6 February1992 30 January1993 Elections Union Parishad Parliamentary Pourashava Upzila Parishads Parliamentary Referendum Union Parishad Pourashava Numberof voters 47 millions 49,8 millions NA 45 millions 62 millions NA 49 millions NA Classification Local body election National Local body election Local body election National National Local body election Local body election

Source:BangladeshElection Commission.

times, the impact of the strikes on the PRA would not be in favor of the unions. The results are presentedin Table2. The firstthreecolumns do not separate the industrialand transport sectors. The next three columns only concern the industrialsector,while the resultsfor the transport sector are presentedin the last three columns. The fit is significantlybetterfor the industrialsector than for the transport sector.Withineach groupof threecolumns, the results differ by the definitionused for the election variable.In column (1), the included variableis a dummy which takes the value 1 duringthe four months before any election listed in Table 1. In column (2) the nationaland the local elections are distinguished,and are still indicated by a dummy taking the value 1 over the four precedingmonths.In column (3), the nationaland local elections are again separated,but now indicated by a dummy for the three preceding months only. The results suggest that only the national elections matter at this level of analysis, whether they are indicatedby the three or four precedingmonths. The results for the industrialsector are presentedin the next three columns, which show qualitativelysimilarresults than in the preceding three columns. All the estimatedcoefficients, which measurethe marginaleffects of the explanatoryvariables, are largerin size, but of the same sign and level of significance, except for one. Now, we find that the distinctionbetween local and nationalelections does not matter.Hence, the impact of the electoral periods is positive and significantfor the industrial sector are noticeablydiffersector, as predicted,The results for the transport ent. In particular, elections are eitherinsignificant,or have the wrong sign the when measuredas the four monthsprecedingthe nationalelections. This is a

327 puzzlingresult,which mightbe a reflectionof the fact thatwhen the othersare on strike,they need more transport services to go and participatein marches and demonstrations. would probablybe accused of breakingthe strike They if they were stoppingtheiractivity at these times. Althoughthe militarydictatorship periodwitnessed a lower level of strike than the subsequentdemocraticone, this does not seem to be due activity to a higher level of credibility for this government.The coefficient for this dummy variable is never significant in any of the columns. The impact of national demonstrationsis positive and significantfor the industrialsector, and the sum of the two, while it is negative for the transportsector, but not significantly so. This is a surprisingresult, unless it captures the fact that services are requiredwhen large demonstrations organized are transportation in Dhaka, the capital city, providingthe transporter with an incentive to remain active at that time. However,it is not significant.The impactof natural disastersconforms with the theory in the industrialsector, as strike activity subsideswhen they occur,as unions cannothope in this case to get an expansion in employment-generating expenditures.However, it is not significant in the transport sector. The signs of the other control variablesdo not reject the model either. Increases in the quantity of money impact positively on the occurrenceof strikes, as the unions probablyseek to grab a share of the resultingexpected boost in economic activity for their members. A similar impact occurs when the real wage in the informal sector goes up, reducing the expected cost of loosing one's job in the formalsector. Table3 presentsanotherset of resultsobtainedby takingelection time into accountdifferently.Now, a separatedummy variableis enteredfor each preceding monthbeforethe elections. Only the estimatedcoefficientsconcerning the political variablesis presentedin this table, for the sake of simplicity.In the first three columns, the national and local elections are not separated, while they are in the next four ones. The only new result broughtabout by this change is thatwe can see thatit is mainly threeor four monthsbefore the elections that strike activity is significantlyaffected. It suggests that unions want to leave some time to the governmentto respondto the strikes. The markeddifference in results between the two sectors may be due to some extent to the differences in structurethat characterizetheir firms. In the industrialsector, there are some large firms, including state-ownedones, and the governmentis involved in the bargainingbetween the firms and the unions. Wage bargainingis organizedin a tripartite way in this sector,while sector.The garmentsector,for the governmentstays away from the transport example, attractsa lot of attentionfrom the government,as it is viewed as Azam and the most importantsteppingstone on the way to industrialization.

328

(9) Probit

sector 5.322*** 0.263** 11.898 0.103 0.585*** Transport (2.33) (2.81) (0.27) (3.48) (2.17) (-1.51) (-0.24) -0.245 -0.040

(8) Probit it (7) Prob

sector 5.487*** 0.449*** 0.307** 12.304*** Transport (2.35) (3.07) (-0.97) (2.93) (2.27) (-0.52) (-0.46) -0.264 -0.085 -0.078

-0.002 (-0.01)

sector 5.090*** 0.427*** 0.276** 11.902*** -0.175 -0.123 Transport (2.21) (2.90) (0.32) (2.77) (2.12) (-1.05) (-0.72) -0.101

(6) Probit

sector 0.155** 7.316"** 6.637*** 0.417*** 0.826*** Industrial (3.01) (2.86) (-3.23) (2.99) (2.40) (-0.52) (4.06) -0.969*** -0.053

(5) Probit

.758*** .88).732*** .82) .24) .62) sector .67).231*** .92).448*** .39).018 .816*** 7 (2 0 Industrial (2 6 (2 -0 (-2 0 (2 0.167*** (0 0 (3 512"**318***918***496***168***02124) 894*** 75) 70) 06) 52) 32) 97) sector 7. Industrial (2. 7. (2. -0. (-3. 0. (2. 0. (2. 0. (0. 0. (3.

.241** 0 (2.01)

(4) Probit

(3) sectors Probit 3.275*** 2.238*** (2.64) 0.139*** 0.078** 0.088* 0.057 0.302*** (3.01) -0.227*** (3.49) (2.47) (-1.04) (3.25) (1.75) (1.53) -0.045 All (-3.15) (2) sectors Probit 3.391** 2.422*** (2.61) 0.147*** 0.078** (3.03) -0.047 0.314*** -0.281"** (3.61) (2.53) (-1.04) (3.17) All (-3.63) (1) sectors Probit 3.779*** 2.403*** (2.67) 0.167*** 0.084*** 0.347*** (2.91) -0.266*** (3.29 (2.74) (-0.80) (2.98) -0.036 All (-2.96)

National elections elections All elections Regional in results. in

Estimation 2. Table

sector sector defined strikes strikes before informal quantity wage of of the the Political dictatorship period in real in disaster months transport industrial money number 3 number the sector of the Demonstration as election Change Change Natural Log Log Military Election National

329

(9) Probit

sector -0.892*** -0.238 Transport (-2.66) (-1.12)

58 -0.375** (-1.97) 58 -0.509** (-2.31) 58

0.38 -24.61

(8) Probit it (7) Prob

sector Transport

0.32 -27.18 0.33 -26.56

10%. at

sector Transport

-0.219 -0.330 (-1.07) (-1.35) 58 -0.445** (-2.56)

significant *: 5%; at

(6) Probit

0.389** 0.228** sector (2.33) (2.07) Industrial

0.54 -17.57

(5) Probit

sector Industrial

.65) .527*** -0 (-2

58 .70 .54 0 -17 58 94 53 0. -17. 58

significant **: 1%; at

(4) Probit

sector Industrial

88) 69) 250* 583*** 0. (1. -0. (-2.

significant (3) sectors Probit All (2) sectors 118** 0. (2.07) (1.06) 0.044 Probit All (1) sectors Probit All -0.112** (-2.45) 58 -0.117** (-2.52) 58 0.56 -15.23 ***:

0.56 -15.28 heteroscedasticity; for

0.050 (0.97) (-1.97) -0.145**

0.55 -15.59

corrected elections All elections Regional National elections T-ratios defined effects. Continued. 2. Table period election months 4 as before Election R2 likelihood observations Marginal Intercept Number Pseudo Log Notes. of

330 Shahabuddin (1999) describe the efforts made by the Bangladeshi government to attractthe remittancesof the emigrantworkersin the oil-producing countries, and to recycle them for financingthe developmentof this sector. The transport sector is dominatedby small privatefirms,and the government does not get involved in the bargainingbetween the firms and the unions. It thus seems politically less sensitive than the industrialsector.This fits quite well with our results showing that strikesin this sector seem less politically motivated.

6. Conclusion The empirical tests performed in this paper with the strike data from Bangladeshdo not reject the main predictionof this paper,namely that the level of strikeactivity can be explainedto some extent by political considerations. The results are generally better for the industrialsector than for the transportsector. During the months preceding an election, the government looses its credibilityin its commitmentnot to expandemployment-generating with a view to increaseits chancesof remainingin power. publicexpenditures This triggersan increase in strike activity,at least in the industrialsector, as unions try to make the best of the expected boost in the demand for labor. This was also truewhen the militarydictatorship was in power.These results are suggestive thatthe political dimensionof tradeunion activity is probably an important variableto take into accountfor understanding theirbehaviorin developingcountries,at least as far as the industrialsector is concerned.It is probablyalso a dimensionworthinvestigatingin variousdevelopedcountries. This predictionresultsfrom a simple game-theoretic model with imperfect in which the governmentcannotcommitcrediblyto a given level information, of employment-generating public expenditures.This model predicts that, were the governmentfully credible,no strikewould takeplace in equilibrium. However,the lack of commitmentprovidesan incentivefor the unions to bet on an increasein employment-generating which the govpublic expenditures, ernmentis then inducedto deliverin orderto defendits chances of remaining in power. Hence, under certain conditions spelt out in the paper,a positive level of strike activity occurs in equilibrium.Such a predictionis not very common in the theoreticalliterature,which focuses most of the time on the relationshipbetween the unions and the firm,while we have emphasizedhere the game that is taking place between the trade union and the government, taking due account of the thirdplayer, the median voter or other politically representative agent.

331

Their 1. 399***302*** 902***849*** 022047047040 397***314*** 863***826*** demonstration +0. +0. +0. +0. National political +0. +0. +0. +0. -0. -0. -0. -0. Table in as

069068045047 dictatorship-0. -0. -0. -0. Military

093082077053 -0. -0. -0. -0.

144158196245 -0. -0. -0. -0.

variables same the

092048057044 elections Regional +0. +0. +0. +0.

181"* 228** 413* 011238 172 233* 249** +0. +0. +0. +0. +0. +0. -0. -0.

also include

variables National elections Political

156** 088* 067 118** 250002076389** a a 687** 892*** -0. -0. +0. +0. -0. -0. +0. +0. -0. -0.

equations

estimated strikes of The 304***265*** 875***816*** 069084078123 317***347*** 842***894*** National political demonstration +0. +0. +0. +0. probability the 036038020036 on dictatorship-0. -0. -0. -0. Military variables political elections All the of effects 098** 069* 052 050 +0. +0. +0. +0. 176149241** 250* 333170002219 +0. +0. +0. +0. +0. +0. -0. -0. +0. +0. +0. +0. -0. -0. -0. -0. variables. 10%. failures. political at the the of perfectly *significant effects 5%; at predicted marginal here. they the

0570422 021 018 0. -0. -0. -0.

028047085175 -0. -0. -0. -0.

Marginal 3. Table

**significant because presented election election election election election election election election election election presents1%; election election not at are strikes before before before before before before strikes before before table omitted before before before before strikes month months month months month months months months months months months months 1 2 1 2 All 1 2 3 4 Industrial 3 4 Transport3 4 This variables Notes.a: ***Significant coefficients

332 References
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334 Appendix:Timingof the game

Figure A. 1 presents the timing of the game described in the paper when the governmentcannot commit credibly to an announcedlevel of employment-generating public expenditure.

time

Union selects

{w, S}

Government selects G

Firms select m

PRA selects q

A. 1. Thetimeline.