Pendulum arbitration

Pendulum arbitration

Pendulum arbitration is a special mechanism of arbitration in which the arbitrator has to decide completely in favor of one or the other position on the bargaining table, but cannot split the difference between those positions. For example, in the case of collective bargaining, a trade union can be demanding an increase in wages of 7 per cent and the management can be offering 3 per cent. The arbitrator's decision can't be a compromise, but has to choose between granting a 3 or a 7 per cent increase. Of course, he must reach that decision studying in depth all the relevant variables (in this case, market wages, productivity increases, other fringe benefits, etc). The main benefit of this procedure is that if both parties know in advance that if the arbitrator is called he will have to behave in that way, they have a strong incentive to converge on their positions, reach an agreement between themselves, and not run the risk, if their demands are "too far" from the correct one, to lose completely to the other side. In regular arbitrations, since it is in human nature to split the difference between two positions, divergent behaviour is encouraged to be better positioned for the moment the arbitrator is called to decide.

Chile's Secretary of Labor and Social Security José Piñera pioneered the introduction in a national law of this mechanism. In fact, Chile's 1979 Labor Reform includes the obligation of pendulum arbitration for special cases of collective bargaining (companies where paralization would create a high damage to society, and thus workers could not use the right to strike and management could not use the right to lock out). This Chilean law also required the parties to pay the full cost of the arbitrator, another incentive to try to avoid the arbitration and reach bilateral agreements. Also this law created a register of private arbitrators (economists and lawyers with a solid reputation for expertise and fairness), and the parties must agree on the chosen arbitrator. Once they call him to settle their differences, his decision has to be followed by both parties. There is consensus among experts that this system in Chile has proved very successful. That is why it has been kept unchanged by different governments.

In July 2007, the Bachelet government decided to keep around 15 electric distribution companies subject to pendulum arbitrartion rather than risk crippling strikes in this key sector of the Chilean economy.

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