Permanent or Transitory Demand Shocks from Labor Disputes

As I mentioned in a previous post, strikes are weapons wielded by unions that are designed to impose costs on firms and lockouts are weapons yielded by firms designed to impost costs on unions. In theory, when times are good and demand is high, the strike imposes high costs on the firm. When times are bad, the lockout can impost high costs on the union because alternative sources of income are not as readily found during such times, all else equal.

The March 2004 issue of the American Economic Review had an article by Martin Schmidt (Portland State) and David Berri (Cal State Bakersfield) (it’s a recent paper, so you either have to visit your local college library or you have to buy the paper) that examined the impact of labor strikes on the demand for sports in the NHL, NFL, and Major League Baseball. In the paper, Schmidt and Berri cite papers that show that strikes do impose costs on firms. For example, they cite a 1991 Industrial and Labor Relations Review paper by Richard De Fusco and Scott Fuess (which I have not read) that finds that, in the airline industry, strikes tend to redistribute wealth from shareholders of struck firms to shareholders of firms that are not having a labor dispute. What about sports? How do fans react when a labor dispute ensues?

Here is the conclusion to their article:

Our analysis offers historic evidence that suggests the consumers’ threat has not been credible. In general, none of the events we examined had a permanent impact upon attendance in these sports. In fact, in almost all instances attendance immediately rebounded in the year following the labor conflict. This explains why strikes and lockouts are happening with increasing frequency in professional sports. If the levels of attendance in the postconflict era are equivalent to the preconflict time period, only short-run costs are imposed upon the conflict partcipants. Given the millions at stake in each dispute, our analysis would indicate that labor conflicts that disrupt the regular season of these sports are likely to occur again in the future.

If this is the belief of the NHL, this helps explain why they are taking a hard stance.

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Author: Phil Miller

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