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Worker treatment found to affect product quality
Labor grievances can find tangible expression in tires, tractors, and collars, Haas researcher learns

| 17 November 2004

Employees disgruntled over wages can harm firms financially and may even pose a threat to public safety if their irritation translates into poor workmanship and defective products, says Alexandre Mas, an assistant professor in the Haas School of Business. Mas, who bases his work on several years of research into labor unrest and worker performance, joined the Haas Economic Analysis and Policy group this fall.

The case of Bridgestone/Firestone, which refused to negotiate flexibly with its workers’ union in several plants between 1994 and 1996, was particularly dramatic, Mas discovered. By analyzing consumer complaints, claims for compensation for property damage or personal injuries, and engineering test data, Mas and co-author Alan Krueger determined that the quality of the tires produced in one of the plants involved in the labor dispute was significantly lower than that of tires produced in plants unaffected by the strife. Defective tires from the affected plant resulted in 70 automobile deaths, a highly negative media response, the recall of 14 million tires, and a loss in company stock value of $9 billion in four months.

Mas teased out similar dynamics in cases of arbitration between police unions and city governments in New Jersey. “When arbitrators voted against union contracts in favor of those proposed by the city, arrest rates declined by 10 percent, meaning that police were not working as hard,” he says. “Such conditions can have a significant impact on crime.”

Finally, Mas studied the effect of ongoing contract disputes between the United Auto Workers union and Caterpillar, the world’s largest manufacturer of construction machinery, between 1991 and 1998. Examining resale prices of Caterpillar equipment during this period, he found that equipment produced in the U.S. during the labor dispute sold at auction for 4 percent less than equipment produced prior to 1991 and after 1998 — even though similar non-American models did not experience this change in prices.

“The resale price of a machine reflects how well it will run, so this decline indicates that equipment made during this period was of poorer quality than equipment made before the contract problems started,” Mas explains. By carefully ruling out other potential explanations for the dip, he determined that domestic employees simply were building inferior equipment as a result of their discontent with the company. Although the situation did not financially affect Caterpillar directly, he notes, the 4-percent differential was equivalent to a quarter of a billion dollars in lost service flows resulting from less-reliable equipment.