Negotiated Settlements and Learning From the Arbitration Experience

In final offer arbitration the decision of the arbitrator provides the parties with information about the preferences of the arbitrator that were not available prior to the award. A union (employer) victory tells the parties the fair wage belief of the arbitrator lies above (below) the mean of the parties' final offers. With inter-arbitrator reliability and temporal stability in the characteristics of the bargaining pair, the award will alter the parties' expectations about the preferences of an arbitrator in the next bargaining round and change negotiated settlements. The evidence from Wisconsin teacher and school board negotiations supports this hypothesis. The change in the negotiated wage increase from the round prior to an award to the round after an award is about 2 percentage points greater when the union's final offer is chosen than when the employer's offer is selected. In the round following arbitration the variance in negotiated settlements also declines and the structure of negotiated settlements converges to the estimated structure of arbitrator beliefs.