1

From Conflict to Cooperation

Norwegian Labor Market Institutions in the Making

Jon Reiersen*

Vestfold University College P.O. Box 2243, 3103 Tnsberg

Norway

Abstract:

The signing of the so-called Basic Agreement between the Norwegian Employers Confederation (NAF) and the Norwegian Confederation of Trade Unions (LO) in 1935 marks a turning point in the history of labor relations in Norway. The Basic Agreement produced a lasting drop in the level of strikes and lockouts, and it was an important early step towards centralized wage bargaining. What made the Basic Agreement possible? From the early 1920s to the mid 1930s Norway had one of the highest levels of industrial conflicts in Europe. Class conflicts were intense and the relationship between employers and unions was marked by widespread mistrust. What explains the transition from conflicts and mistrust to the kind of unique cooperating relationship that characterizes the Norwegian model of labor relations even today? The article asserts that the situation the parties in the labor market faced can be viewed as a coordination game, where the decision to cooperate or not is determined by the parties beliefs about each other. The article identifies critical events that transformed the parties beliefs in the years before 1935 beliefs that earlier made it difficult to overcome the situation of mistrust.

* Paper prepared for the conference A Nordic Model?, University of Flensburg, June 7 9, 2013. I thank Kalle Moene and Theo Schewe for helpful comments.

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1 Introduction

The economic model that characterizes the Nordic countries has received

a great deal of positive attention in recent years. What has been of

particular interest is the ability of the Nordic countries to secure high

economic growth and a healthy economy over long periods of time

combined with an extensive equalization of income and living conditions.

What has made this rather unusual combination of efficiency and equality

possible?

Moene and Wallerstein (1995a,b; 2006) argue that coordinated or

centralized wage bargaining has been essential in order to secure both

equality and efficiency in the Nordic countries. They show that many of

the central features often associated with the Nordic model are a direct

result of how wages traditionally have been determined in the Nordic

countries. They share with many others the view that that centralized

wage bargaining has been essential for the development of the Nordic

model.1 Moene and Wallerstein provide several arguments to justify their

claim. For instance, centralized wage bargaining produces a higher

willingness among the unions to moderate their wage demands, even

when unemployment is low. This has made it easier for the governments

in the Nordic countries to maintain full employment through their

standard policy instruments. Another important consequence of

centralized wage bargaining is wage equalization. Centralized wage

bargaining has made it possible implement so-called solidaristic wage

policy. Solidaristic wage policy is based on the idea that that the wages of

1 See also Cameron (1984), Calmfors and Driffil (1988), Moene and Wallerstein (1993), Iversen (1999), Layard, Nickell and Jackman (2005), Pontusson (2005) and Mares (2006) among many others.

3

the lowest paid should be lifted while the wages of the highest paid should

be held down and this type of wage policy has over time produced a

compression of wages and a highly egalitarian distribution of income in

the Nordic countries. Centralized wage bargaining has also made it

possible to put the export industries in front, meaning that the wage

growth in the economy as a whole is fixed to the growth of wages in the

export sector. This has produced a situation where wages throughout the

economy has been tied to the conditions in the export sector and the

competition they face on the international market. This arrangement has

been essential for the Nordic countries since they are small open

economies, heavily dependent on securing their competitiveness. In

addition centralized wage bargaining and solidaristic wage policy has

contributed to high productivity and competitiveness by stimulating the

growth of efficient and innovative enterprises. When wages are set on a

centralized level, firms with high productivity are able to get away with

moderate wage premiums, pushing up profits and investments in high-

productivity firms. At the same time, firms with low levels of productivity

are prevented from staying in business by paying low wages. Altogether

this contributes to a virtuous circle of structural change in the economy.

Based on these arguments it is fairly safe to say that centralized wage

bargaining has helped the Nordic countries in achieving a fairly efficient

allocation of resources and a relatively egalitarian distribution of income.

An issue that has been far less studied, however, is the forces that

initially contributed to the formation of centralized wage bargaining.

What made the Nordic labor market model possible? Under what

conditions were the first steps toward centralized wage bargaining taken?

In Norway, an important step was taken with the signing in 1935 of the

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Basic Agreement between the Norwegian Confederation of Trade Unions

(LO) and The Norwegian Employers Confederation (NAF). The Basic

Agreement established the labor markets peak organizations right and

obligations, and it sat down rules for collective bargaining at the industry

level. The establishment of the Basic Agreement represented an

important contribution towards an extensive collaboration between two of

the main actors in the Norwegian labor market a collaboration that has

been essential for the development of centralized wage bargaining in

Norway, and for the Norwegian labor market model in general. Although

the Basic Agreement has been altered throughout the years in order to

respond to new circumstances, the agreement still plays a key role in the

regulation of the relationship between the parties of the Norwegian labor

market.

It was not, however, given that the parties of the labor market in Norway

would develop a collaboration between labor and capital that was as

extensive as the one outlined by the Basic Agreement of 1935. It is a

general view among Norwegian historians that the signing of the Basic

Agreement marks a turning point in the history of labor relations in

Norway. It produced a lasting drop in the level of industrial conflicts. The

years prior to 1935 are often referred to as the period of crisis and

struggle in Norway. Unemployment was at a record high, as was the

level of labor conflicts. During the period from 1921 to 1935, 1,100 labor

conflicts took place almost the same amount of conflicts that have taken

place in Norway in the entire postwar period (see Figures 1 and 2 below).

During the same period, 23 million work days were lost in strikes and

lockouts an extremely high number for a small country with just under

three million inhabitants (at that time). Along with Sweden, Norway had

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one of the highest levels of labor conflicts in Europe during the interwar

period. The relationship between the parties of the labor market was in no

way characterized by trust, cooperation and compromises concepts that

are emphasized today when the Nordic model is described.

Widespread conflicts and lack of trust are of course not a good starting

point for establishing cooperation. The high level of conflicts between the

unions and the employers contributed in shaping the parties beliefs about

each other beliefs that indicated that the opposite party was not

prepared to cooperate. It was not, however, only the numerous and

extensive conflicts that shaped the parties beliefs about each other. A

significant production of ideas took place that further deepened the

mutual mistrust. The employers and the labor process were interpreted by

the labor movement using Marxist-inspired concepts like conflict and

struggle. From the beginning, the labor movement built upon a

worldview in which the struggle between the working class and the

capitalists served as its basis. This was viewed as being a struggle that

would not end before the unjust class society was abolished, and a new

social order based on socialist organizations of production was

established. Within this interpretive framework, cooperation with the

employers implied a legitimization of an opposing party whose removal

was actually desired. This obviously made the strategy cooperation

difficult to think of for the unions. At the same time, it was difficult for

the employers to accept an opposite party that believed their existence

was undesirable, and in addition created injustice.

The relationship between the parties of the labor market during the

interwar period was indeed problematic, and these problems was related

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both to the struggle of how values should be distributed and to how they

perceived the other partys long-term goals. As pointed out by Moene and

Wallerstein (2006) trust, cooperation and mutual respect were in no way a

prerequisite for the Nordic model, as many international observers seem

to believe. Trust, cooperation and mutual respect should instead be

regarded as being a result of the Nordic model.2 But this begs the question

of how it was possible to make the transition from deep ideological

conflicts and open class struggle to the trusting cooperative relationship

that emerged in the Norwegian labor market during the interwar years?

What led the parties, both of which carried a historical experience of the

other as the enemy, to begin to seek out cooperation? How did LO and

NAF manage to unite behind a broad cooperative agreement in 1935 an

agreement that laid out the foundation for an even more extensive

cooperation in the period that followed?3

The central argument of this paper is that cooperation is difficult to

achieve if the parties involved have a belief that opponent is not willing to

cooperate and this was the situation in the Norwegian labor market in

the interwar period. After several years with intensive conflicts the

parties in the labor market carried with them the beliefs that the other

party was not interested in cooperation. This led both to choose conflict

as their main strategy. The outcome was conflict, which in turn confirmed

the parties beliefs that the opposite part was not interested in

cooperation. The parties were caught in a situation where distrust and

2 The relationship between the unions and the employers in the interwar period in Sweden shared many of the same features as in Norway. Sweden got their Basic Agreement in 1938. 3 Rothstein (2005) asks the same question with reference to Sweden. My analysis is heavily influenced by the way Rothstein frame the question, except that my empirical case is Norway and not Sweden.

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lack of cooperation led to reinforced distrust and lack of cooperation. But if

you have ended up in a situation like this, how do you get out of it? I

argue that during the interwar period several events took place which

contributed to a gradual change in the parties beliefs about each other.

These events where related to changes in both internal and external

factors, changes that that transformed the parties mental maps and led

them to change their main strategy.

The rest of the paper is organized as follows. In the next section, I give a

short description of the Norwegian labor market during the interwar

period. The objective is to demonstrate that this period was marked by

problematic industrial relations and extensive conflicts. These conflicts

shaped the beliefs of the employers and the members of the trade union

movement beliefs that made it difficult for the parties to reduce the level

of conflict and to seek out compromises. In section 3, this idea is

formalized within a simple game theoretical framework. I argue that the

situation the parties faced has the character of a coordination game and

that the beliefs the parties carry with them are critical for the outcome of

this game. In section 4, I identify several events that were important for

the gradual change in beliefs both among the employers and in the trade

union movement. These changes in beliefs were necessary in order for the

parties to move away from conflict as their main strategy and to seek

cooperation. These cooperating efforts calumniated with the signing in

1935 of the famous Basic Agreement.

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2. Struggle, conflict and mistrust

The Norwegian labor market had been through exceptionally conflict-

filled years before an important change took place with the signing in

1935 of the Basic Agreement between LO and NAF. This is illustrated in

Figures 1 and 2. During the ten-year period between 1925 and 1935,

there were, for example, just as many work conflicts in Norway as in the

fifty-year period from 1945 to 1996. The conflicts in the interwar years

often lasted long and involved many people. This is reflected in the loss of

workdays in this period (see figure 1). In the ten-year period from 1921 to

1931, an entire 22 million workdays were lost due to strikes and lockouts.

The corresponding number for the ten-year period between 1951 and 1961

was just under two million, while during the period from 1962 to 1972,

only 400,000 workdays were lost.4

However, it was not just the relationship between the parties in the labor

market that was turbulent during the interwar years. The entire

Norwegian economy was affected by powerful up-and-down swings. In

1920, an international recession struck the Norwegian economy, with

falling prices and loss of jobs as an immediate effect. Unemployment

among union members increased from 2.3% to 17.6% from 1920 until

1921. In subsequent years, there was virtually no growth in the

Norwegian economy. In 1927, unemployment among unionized workers

was 25.4% (SSB, 1969).

4 The Basic Agreement included a so-called peace obligation that prohibited strike and lockouts after a central agreement was signed. This peace obligation helped in producing a lasting drop in the level of industrial conflicts in Norway as illustrated in figure 1 and 2.

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Figure1 Millions of workdays lost due to labor conflicts

Source: Statistics Norway

Figure 2 Number of labor conflicts

Source: Statistics Norway

1

2

3

4

5

6

7

8

1920 1930 1940 1950 1960 1970 1980 1990 2000

0

50

100

150

200

250

300

1920 1930 1940 1950 1960 1970 1980 1990 2000

10

In 1930, Norway was hit hard by the international recession following the

Wall Street crash of 1929. Production stagnated again and during the

period from 1931 to 1935, unemployment in Norway was on average at

29% among union members (SSB, 1969).

Stagnating production, high unemployment and falling prices were the

main sources behind many of the labor conflicts in Norway during the

interwar period. In particular, falling prices and demands by employers to

make cuts in nominal pay represented an essential source of conflict. With

the exception of the years from 1923 to 1925, the prices in Norway fell

continuously from 1920 until 1934 the year before the Basic Agreement

was reached.

The year 1931 was particularly filled with conflict created precisely by

the employers demand for deep cuts in wages. When LO did not comply

with this, the employers announced a big lockout. The lockout lasted for

five months, and led to the loss of 7.6 million workdays. The actual

intention of the lockout has been much debated, but LO interpreted it at

that time as being to () force the entire union movement to its knees.

(Bjrgum, 1985). The economic downturn with record high unemployment

had weakened LO. The strike funds were almost empty, something that

the employers were fully aware of. In addition, the employers were in a

politically strong position. The political right had secured a majority at

the election in 1930, and in the dominant conservative press there was a

massive agitation against the union monopoly and union tyranny.

Thus, the great lockout of 1931 was at that time interpreted as if the

employers were looking for a final confrontation with the unions

(Bjrgum, 1985).

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The year 1931 was also characterized by one of the most dramatic events

in modern Norwegian labor history, the so-called Battle of Menstad. The

incident started with several thousand union members demonstrating

with demands to stop what they considered to be strike-breaking at the

warehouse and offloading place, Menstad. The police were called to stop

the demonstration, but were chased away. The government therefore

decided to send in armed military forces against the workers. This

decision was made even though the government knew that five workers

had been killed by military troops called in as backups for the police in a

similar incident in dalen in Sweden, just four weeks prior to the

Menstad conflict. The Battle of Menstad garnered huge symbolic

importance (as did the dalen shootings in Sweden). For many within the

trade union movement the event served as a confirmation that the

workers interests could not be secured through cooperation with the

employers. Fundamental changes in society were needed. This standpoint

was also publicly expressed by the Labor Party, who were (and still are)

LOs closest ally. The Labor Party adopted the following statement at its

party conference in 1930: The labor movement must have complete

freedom to act toward the capitalist class and the capitalist state. The

party is therefore an opponent of every form of cooperation between classes

(). It is worth noting that this statement was written and approved

only a few years before the Basic Agreement was negotiated between LO

and NAF.

There were also several large conflicts in the years prior to 1931, conflicts

that make it difficult to explain how the parties in the labor market could

unite behind a comprehensive cooperation agreement in 1935. The years

from 1921 until 1928 were particularly turbulent. Large segments of the

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Norwegian working class had been highly radicalized after the Soviet

revolution in 1917. In this political setting, the employers main goal was

to fight down the radical opposition within LO. NAF strongly feared the

consequences of an increasingly politicized labor movement, and they

were therefore in close contact with the government to gain assurances

that the military would intervene in any illegal actions taken by unions.

The government gave this assurance. They publicly stated that they

would intervene with force and that they were well prepared for a full

confrontation with the labor movement if necessary (Knutsen, 1985).

Feeling that they had the government on their side, and with steadily

growing unemployment, the employers got on the offensive. They

demanded huge cuts in wages cuts that were impossible for the unions

to accept. In 1921, for example, seamen were faced with a demand for a

33% nominal wage cut, which despite falling prices, meant a substantial

reduction in real wages. LO was convinced that other groups of workers

would face similar demands if the seaman had to give in. Thus, they took

120 000 workers out on strike, a number that was nearly the equivalent of

LOs entire membership. However, the employers had no problems with

recruiting strikebreakers, and violent confrontations arose between the

strikers and strikebreakers in several places in Norway. The police and

soldiers were called in to protect the strikebreakers, and later the

government also passed new laws that were intended to protect the

strikebreakers. The general strike had to be broken off after several

weeks and ended with an absolute defeat for LO. Many did not get their

jobs back after the strike, and LO lost 36% of its members. The conflict led

to intensified bitterness, not just between LO and NAF, but also between

LO and the government.

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The tension between LO and NAF was maintained with more strikes and

lockouts throughout the 1920s. The source for these conflicts was in most

cases NAFs demand for substantial reductions in wages. Small local

conflicts were often expanded to wide-ranging lockouts, which severely

drained LOs strike funds. NAF hoped that the pressure would be so great

that LO would eventually capitulate and accept the cuts in wages.

However, LO demonstrated a greater ability to refuse the cuts than the

employers had initially counted on (Dahl, 1981).

In 1927, a new dimension was introduced into the relationship between

LO and NAF, and between LO and the government. NAFs lockout that

year was interrupted by a state-imposed resolution. The resolution was

clearly in the employers favor. For the first time in Norway, forced

arbitration was used to drive down the workers real wages (Dahl, 1981).

LO felt too weak to fight (that is, engage in an illegal strike) against the

resolution, which thereby determined the wages that year. The wage

settlements in 1928 were also determined by forced arbitration. Again the

employers had every reason to be satisfied. The ruling involved a wage cut

by 12%, which meant a reduction in real wages by 4% (Dahl, 1981).

However, this time the workers did not accept the ruling. A number of

illegal strikes broke out and these were just as much directed towards

the governments ruling on wage determination as they were against the

cuts in real wages. The employers expected that the authorities would

intervene in order to put a stop to the illegal strikes. However, the

antagonism, bitterness, and mistrust between the parties had intensified

to a point where the government wanted to withdraw entirely from the

wage bargaining process. They seemed to have realized that they were

practically powerless in preventing conflicts to develop. Entering the

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1930s the parties in the labor market were left more or less alone to

decide future agreements.

3. The problem with cooperation

How did the parties within the Norwegian labor market manage to move

out of a state characterized by open conflicts and distrust to a situation in

which labor peace and cooperation emerged is the dominant picture?

Some concepts from game theory will help to illustrate that stepping out

of conflict is not an easy task, even when the parties is well aware that

they have much to gain by establishing an agreement without going to

conflict.

Assume for simplicity that LO and NAF have two strategies available;

conflict (C) and cooperation (CO). The matrix in Figure 3 specifies the

payoff for the two parties for the different strategy combinations, where

> > > (and the payoff for LO on the left in each square). The

game illustrated in Figure 3 is an Assurance game, or a Coordination

game as it is also sometimes labeled. This game has two Nash equilibria

in pure strategies: CO/CO and C/C. If LO chooses CO, it is best for NAF

to choose CO. If NAF chooses C, it is best for LO to choose C. The same is

true if we consider the situation from NAFs perspective. The game does

not say anything about which equilibrium the parties actually end up in,

and this is true even though both parties prefer CO/CO to C/C. If both

parties initially believe that the other player will choose C, both will chose

C, and the equilibrium CO/CO will be out of reach.

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Figure 3 The Assurance Game

The Assurance game formalizes a typical situation where the rational

thing to do is context dependent. That is, it can be rational to cooperate

but it can also be rational not to cooperate. The choice of strategy depends

on how the players perceive the probability that the other(s) will

cooperate or not. The Assurance game also illustrates that it can be very

difficult for the parties to move out of the equilibrium C/C when the

parties find themselves in that situation. As Figure 3 shows, there is a

clear risk associated with choosing CO. In choosing CO, when the other

player chooses C, the first player will receive the lowest payoff . The

dilemma for both players is thus that CO gives the opportunity of

receiving the highest payoff , but also a possibility of receiving the lowest

payoff . In other words, in choosing C, a player safeguards itself against

the worst outcome. In order for the parties to be willing to choose CO, they

must have a clear understanding (an assurance) that the opposite party

will also choose CO. Viewed in the light of the Assurance game it is

therefore not difficult to explain why LO and NAF, as soon as they found

themselves in a situation characterized by constantly open conflicts, acted

NAF

LO

Cooperation Conflict

,Cooperation

Conflict

,

, ,

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in a way that reproduced that same situation. The parties belief of reality

was that the opposite party had no intention of cooperating, beliefs that

were formed by several years of conflict. Holding this belief it made no

sense for them to choose the strategy cooperation.

This reasoning can be made more explicit by defining as player As belief

about the probability that B will cooperate. Cooperation gives an expected

payoff of +(1 ), while conflict gives an expected payoff of +

(1 ). Player A chooses cooperation if +(1 ) > + (1 ),

which gives

(1) >

+

(1) says that if A perceives the probability that B will cooperate as less

than , A will choose conflict. Alternatively put, A will only cooperate if A

trust that B will reciprocate cooperation, where the parties trust is

reflected in the belief they have about the probability that the other side

will cooperate. The situation is also illustrated in Figure 4. The extensive

labor conflicts in the 1920s and 30s were costly for both the employers and

the employees. Still, none of the parties had any incentive to refrain from

threatening with continued conflict in order to get their demands met as

long as the opposite party used the same strategy. As noted, refraining

from conflict would easily imply getting a worse outcome than they could

have otherwise managed to push through ( instead of ). However, when

both parties threaten with conflict, such conflicts are also constantly going

to arise, since the threat of conflict is only credible over time if a party

actually chooses to carry out what it has threatened.

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Figure 4 The willingness to cooperate depends on the level of trust

The extensive labor conflicts in the 1920s and 30s were costly for both the

employers and the employees. Still, none of the parties had any incentive

to refrain from threatening with continued conflict in order to get their

demands met as long as the opposite party used the same strategy. As

noted, refraining from conflict would easily imply getting a worse outcome

than they could have otherwise managed to push through ( instead of ).

However, when both parties threaten with conflict, such conflicts are also

constantly going to arise, since the threat of conflict is only credible over

time if a party actually chooses to carry out what it has threatened.

If we relate this reasoning to Figure 4, we can say that in the interwar

period in Norway the parties in the labor market carried with them beliefs

about the probability of the opposite party to cooperate that lied to the left

of the critical point . Conflict thereby became a self-reinforcing process,

where the players beliefs shaped the players actions, which in turn

affected the players beliefs, etc. The parties had beliefs telling them that

the other party was not prepared for cooperation. This led both to choose

conflict. The outcome was conflict, which in turn confirmed the parties

beliefs. LO and NAF were trapped in a situation where distrust and a lack

p 0 1 p *

Conflict Cooperation

Mistrust breeds mistrust

?

Trust breeds trust

18

of cooperation led to reinforced distrust and lack of cooperation. This leads

us to the question of how the parties managed to move out of this state.

What directed the parties, both of which carried with them a belief about

the other as enemy, to seek out cooperation?

4. Changes in beliefs

It is possible to pin down a number of events that led the parties of the

labor market to gradually change their beliefs about each other, changes

that finally led them to agree on the famous Basic Agreement in 1935.

The fight against unemployment and the question about how the

economic crisis that characterized Norway should be met, was particularly

important. But, as illustrated in Figure 5, there were also other events

that contributed to a change in the relationship between LO and NAF,

and the beliefs they had of each other. These events will be further

discussed below.

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Figure 5 Development of trust

4.1 The partnership of the top leaders

Despite all the conflicts during the interwar period, there was clearly a

willingness among LO and NAF to cooperate and compromise. Yet this

willingness was primarily expressed though informal contacts and

meetings between the top leadership of the two organizations (Bull, 1984;

Knutsen, 1985). It has been documented that these informal meetings

affected the outcome of several of the conflicts in the 1920s (Knutsen,

1985). Still, the indirect effects of these meetings were probably more

important. They contributed to the gradual establishment of trust

between the top leadership of the two organizations.

Partnership of the leaders

Withdrawal of the government

Rationalization

Power balance

Growth of fascism

Fights against unemployment

Crisis plans

New alliances

TRUST

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An early example of contact between the leadership of LO and NAF is

related to the struggle against the syndicalist and communist opposition

groups within the union movement. With an increasingly radicalized labor

movement, the leadership of NAF took the initiative to cooperate with the

leadership of LO in the early 1920s. They wanted to support and

strengthen the position of the more moderate leaders within LO.

However, the leadership of NAF did not get support for such a

collaborative strategy within its own organization. The employers in

general thought there was no reason to show deference to LO. They were

convinced that the government would intervene resolutely on any illegal

actions on the part of unions. Even so, the event illustrates a certain

change in attitude, particularly among the leaders of the two

organizations. A new form of trust was established.

A somewhat later example of the fact that there was a willingness to

compromise throughout the conflicts is the contact that LO and NAF had

prior to the wage settlement in 1925. This was negotiations at the highest

levels between the two organizations, negotiations that took place in the

utmost secret (Knutsen, 1985). Similar negotiations also contributed to

ending the extensive and illegal construction workers strike of 1928

(Bjrgum, 1985). Yet this time, it was not a goal to keep secret the fact

that the leadership of the two organizations had reached a compromise.

For the first time, the parties publicly expressed a desire to cooperate, and

that this could be of benefit to both parties. The LO chairman officially

referred to the occasion as () a victory for both organizations.

(Knutsen, 1985: 407). A clear understanding of the benefits of dialogue,

negotiations and compromises seemed to have been developed.

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4.2 The withdrawal of the government

As noted, several arbitration rulings throughout the 1920s were clearly in

the employers favor, and these served as confirmation that the employers

had the government on their side. However, this situation changed toward

the end of the 1920s. The government seemed to be increasingly powerless

with regard to the many of the labor conflicts that were typical during this

period. In 1927-28, the conservative government gave increasingly clear

signals that they wished to withdraw from the wage bargaining process

and leave the wage settlement to the parties of the labor market. This

position was affirmed by subsequent governments. Without guarantees

from a powerful third party who could enforce a particular resolution

(often in the employers favor), it became increasingly clear that the

employers had to make a decision between continued confrontation, and

greater efforts toward cooperation. The last strategy seemed to gradually

gain internal ground among the employers.

4.3 Rationalization

The 1920s were also a time during which the question of modernization

and rationalization of the production process became increasingly more

relevant. Technological changes and the improved efficiency of the work

process forced the labor movement to take a stand to the question of

whether rationalization was a good or an evil. Would rationalization lead

to increased production with fewer jobs or is rationalization necessary in

order to make space for increased wages and the creation of jobs? Leading

actors within LO eventually got behind the last viewpoint. A belief spread

throughout the union movement that increased productivity and higher

earnings for the companies could be more effective in achieving the goals

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of work for everyone, increased wages and better work conditions, than

strikes and class-struggle. Improved productivity and increased

production also implied that the cost of production stops grew. Lockouts

therefore seemed less and less attractive for the employers. Cooperation

with the unions looked more appealing in order to hinder production

standstills.

4.4 Power balance

In 1931, the most wide-ranging labor conflict in Norway to that date took

place. There is a widespread view among Norwegian historians that this

conflict ended in a draw but with great financial losses on both sides.

NAF had built up significant debt and LOs strike funds were nearly

empty. A power balance appeared to have been established. It had been

seriously demonstrated to NAF that the organized labor movement had

come to stay, and LO understood from its perspective that if it was going

to safeguard the members income and jobs, they had to seek out solutions

that did not threaten the companies existences. Both parties seemed to

realize that labor and capital were tied to one another whether they liked

it or not. Hence, the massive conflict of 1931 was an important

contribution in promoting an understanding among both parties that

conflict and struggle were neither in the workers nor the employers

interest. Cooperation over modernization and a reasonable distribution of

the profits was necessary.

4.5 Shift to the right

Throughout the 1930s, the international political climate was increasingly

characterized by a rightward shift in state and society. Fascisms growth

23

in particular represented a serious threat to the organized labor

movement. In countries like Italy, Spain, Germany and Austria, a

deliberate policy was carried out in order to destroy and split up the union

movement. Incidents throughout Europe in which union leaders had been

imprisoned, abused and killed were continually reported in the press. In

Norway, the Farmers Party took over the government in 1931. This

marked a transition to a policy that was more hostile towards unions, and

a clearer right-wing activism in the rest of the society. This shift in

politics led to it being increasingly more important for the leadership in

LO to avoid big conflicts with the employers and the government which

could then lead to the labor movement being gradually left essentially on

its own. An escalation of the conflicts could threaten the labor movement

even in Norway. It became more and more apparent to the leadership of

LO that cooperation over pragmatic solutions was necessary precisely to

avoid ending up in the same desperate situation that the labor movements

in many other countries found themselves in.

4.6 Fighting unemployment

The fight against the record high unemployment also played an important

role for bringing LO and NAF closer together. The official and most

utilized unemployment statistic shows an unemployment rate at 33% in

Norway in 1933. With unemployment at this level there is reason to

believe that LO understood that it had a responsibility in the efforts to get

unemployment down, and that the constant labor conflicts represented an

obstacle to this. The statement made by the LO chairman at the LO

congress in 1932 can be interpreted as being an expression for such an

understanding: The Norwegian Federation of Trade Unions must now

24

take political and social factors into consideration based on the collective

working class interest.

4.7 Crisis plans

In an attempt to address the high unemployment and economic recession,

the Labor Party launched their so-called Crisis plan in 1934. This plan

marked an initial cautious alternative to the dominant economic thinking

at the time. In order to increase production and employment, the state

was ascribed a more active role in the effort to stimulate demand. The

Crisis plan was inspired by modern economic theory, which was also

introduced around this time. Yet it was difficult to formulate an effective

recovery policy as long as the parties of the labor market were unwilling

to cooperate. In particular, the challenge was that increased government

spending would increase the bargaining power of those who were already

employed, especially those employed in firms sheltered from international

competition. If increased demand should result in rising wages of insiders

in the labor market, this would not only limit growth in employment, but

also affect firms that competed on the international market. In order for

the Keynesian policies to work as intended, local militant unions had to be

brought under control (Moene and Wallerstein, 2006).

The employers were the first to seek out a solution to this problem

(Bjrgum, 1985; Bowman, 2002). In order to take the wages out of the

hands of local unions, NAF worked hard for a centralization of the wage

bargaining process. Their approach was not, however, to ban unions in

order to hold wages down. Their strategy was to give more power to the

leaders of the labor movement as a whole, and thus strengthen unions as

institutions. This was an idea that the leadership of LO could easily

25

support. Thus, both NAF and LO seemed to gradually realize that without

industrial peace the recovery policy would not work. But even more

important, they seemed both to understand that increased government

spending would work best if wage bargaining were structured in a

centralized manner. Yet, such an arrangement required extensive

cooperation between the parties of the labor market.

4.8 New alliances

Within the labor movement, it was especially labor unions who

represented workers in the export sectors that supported the idea of a

more centralized system of wage setting. These unions feared that

militant unions within the sheltered sectors of the economy (e.g. unions

organizing construction workers) would drive up wages if aggregate

demand should go up as a result of increased government spending. High

home-market wages would make it very difficult for union leaders in the

export sectors to maintain the wage moderation required for international

competitiveness. As a result, an implicit coalition consisting of unions in

the export sectors, in particular the union representing metal workers,

and the employers arose (Swenson, 2002). Both parties considered

centralized wage coordination as essential for controlling wage growth in

firms sheltered from international competition.

In practice, the extent and effect of the crisis policy that was put into

effect in Norway the 1930s was modest (Hodne and Grytten, 2002).

However, the implicit coalition between the employers and the unions

organizing workers in export oriented firms represented an important

institutional response to problems that could threaten the effects of a

more active stimulation of demand an economic policy that became more

26

relevant after the Second World War (Moene and Wallerstein, 2006).

Again, it seemed increasingly apparent that LO and NAF had shared

interests.

5. Beliefs, trust and cooperation

During the 1920s and 30s a series of events took place which led to a

mental reorientation among the parties of the labor market in Norway.

This mental reorientation was necessary in order to move the parties out

of the difficult situation they found themselves in. There are reasons to

believe that the parties of the labor market were well aware of the high

costs related to the many strikes and lockouts that were initiated. Still,

this fact is not enough in itself to explain why the parties managed to

move on from conflict to cooperation. The basic problem was that the

parties did not have trust in each other in the first place. They were in

conflict, they had been in conflict over a long period of time and they

therefore held the belief that the opposite party did not have the intention

to cooperate. As long as these beliefs remained, the parties had no reason

to change their strategy. Rather, the contrary was true, since they risked

getting the short end of the stick if they backed off when the opposite

party continued to stand firm. A change in beliefs was needed. Both

sides needed to be assured that the opposite party would choose

cooperation in order for they themselves to do the same.

If we again relate the discussion to Figure 4, we can interpret the events

discussed in section 4 as essential for bringing the parties beliefs above

the critical value , making cooperation the rational strategy to

27

implement. Both external and internal events were important for the

gradual change in beliefs. Among important external events were the

governments withdrawal from the wage negotiations, the growth of

fascism and economic crisis, while important internal events were a trust

between the top leadership, balance of power between LO and NAF and

new alliances across the two organizations. With the start of the 1930s, a

situation emerge where all these events join together with rationalization

and improved productivity which make the rewards of cooperation

increasingly greater. Together, this creates a state in which the parties

step away from conflict as their main strategy and start working for more

peaceful industrial relations.

Viewed in this way, the signing in 1935 of the Basic Agreement in Norway

was not a result a spontaneous declaration of trust among the two main

parties of the labor market. A gradual change in beliefs served as the

decisive factor. Yet when the Basic Agreement was in place, it led to the

further development of mutual trust between the parties. Without this

trust, the Basic Agreement would not have achieved the significance it

ended up having for the system of centralized wage bargaining, and for

the Norwegian model of labor relations in general.

28

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