Premium system for union members in metalworking

Since April 2004, the German Metalworkers’ Union (IG Metall) has been attempting to stem continuing membership losses by offering a 'premium system' to union members. The crucial point of this new collective bargaining policy is that the union accepts deviations from sectoral collective agreements at plant level only if the employer offers a premium (a payment or some other benefit) that is restricted to union members and cannot be obtained by non-union members. By autumn 2005, this strategy has, so far, been tried out only in North Rhine-Westphalia.

Union membership has been declining in Germany for many years (DE0506206F). The net unionisation rate (union membership excluding retirees and unemployed members in relation to the total labour force) declined from 29% in 1995 to 20% in 2004. The German Metalworkers’ Union (IG Metall) has been affected by this loss of members. It membership has declined by more than 400,000 workers from 2.9 million in the mid-1990s to a current figure of 2.4 million. In an attempt to stop this trend, IG Metall decided in April 2004 to introduce collectively agreed 'premia' for union members in North Rhine-Westphalia. The policy means that the union accepts deviations from sectoral collective agreements at plant level only if the employer offers a premium that is restricted to union members The premium system thus aims to make membership more attractive by offering a selective benefit that is provided only to union members. According to the chair of IG Metall in North Rhine-Westphalia, Detlev Wetzel, in an interview in Handelsblatt on 7 February 2005, the union was able to attract new members in 2004 as a result of the implementation of the premium system.

Different premium systems

There are various kinds of premia for union members under the IG Metall initiative, ranging from a right to participate in training programmes to one-off payments, additional paid leave, and preferential retirement arrangements or asset formation. According to IG Metall, the value of the premium for an individual union member usually ranges between EUR 250 and EUR 1,500 per year, depending on the occupation and grade. For example, one establishment that produces engines has implemented working time that is longer than the 35-hour week that had been collectively agreed in the overall metalworking and electrical industry, without offering a compensatory wage increase. The union accepted the longer working time in exchange for special dismissal protection that is provided only to union members. This 'premium employment protection' ends with the termination of the relevant firm-specific collective agreement. In a machine-construction firm, it has been agreed that each union member will receive an additional EUR 5,000 for longer working hours during the agreement period of two years. A final example is a steel company, where management and the union have cancelled a 'supplementary grant' for all employees of the firm except for those who are union members.

Premium systems seek to fight 'free-riding'

In Germany, employers belonging to an employers’ federation are obliged to pay their employees the collectively agreed wages only if an employee is a member of the corresponding union. Otherwise, wages and working time are settled by individual contracts. It is, however, common practice for organised employers to pay all employees the collectively agreed wages, irrespective of whether or not the employee is a member of a union. In 2004, two out of three workers received a collectively agreed wage, despite the fact that, in the same year, only one out of five employees was a union member. This equality of treatment between union members and non-members should prevent disputes arising between the two groups. Moreover, this equality of treatment means that non-union workers will not join a union to obtain collectively agreed wages.

Unions have been concerned about this common practice for a while. If employers do not distinguish between union members and non-union workers, the incentive to join a union decreases. The collective agreement is seen as being similar to a 'public good'. The union cannot exclude non-union members among the employees from consuming this good. Those employees who are not union members can save their membership fee, but they can still enjoy the collectively agreed benefits (ie 'free-riding'). As compulsory membership is prohibited by law, services such as legal advice, legal protection or beneficial insurances are supposed to induce employees to join the union. In the context of declining union membership, the provision of specific services has been revealed to be insufficient to recruit new members. As the membership fee amounts to 1% of gross earnings, this fee might deter employees from joining the union. The new premium system may increase the benefits of union membership and, thereby, make joining a union more attractive.

The 'Pforzheimer' agreement in the metalworking and electrical industries, concluded in February 2004, allows deviations from the sectoral collectively agreed minimum standards not only in cases of potential bankruptcy, but also in cases where existing jobs can be preserved or new ones created (through 'alliances for jobs') (DE0403203F). Since this agreement was signed, more and more firms have called for alliances for jobs at the plant level. IG Metall verifies all of the requested alliances. In most cases, the union signs a firm-specific agreement that supplements the binding sectoral collective agreement. Such accords specify, in detail, all of the possibilities that are permissible to deviate from the collectively agreed minimum standards. In North Rhine-Westphalia, IG Metall announced that it would accept deviations from the collective agreement only if the firm offered a premium to union members. The premium system has to be acceptable to the majority of the union members in the affected firm. According to an estimate by IG Metall, around 70 such premium systems have been introduced. Moreover, the unionisation rate has risen between 10% and 20% in firms with premium systems for union members.

Reactions

Premium systems are a matter of controversial debate. The Federal Labour Court (Bundesarbeitsgericht, BAG) has outlawed any kind of collectively agreed discrimination between union members and non-members. A premium system is thought to restrain the freedom of the employer to negotiate contracts with non-union members on an individual basis. In this respect, a premium system could damage the freedom of association that is laid down in Article 9 of Germany's Basic Law (Grundgesetz). The BAG has criticised premium systems on the grounds that they could create undue pressure on employees to join a union.

Nonetheless, some experts argue that premium systems for union members could be justifiable if the financial benefits are capped. The membership fee should determine the upper limit. Such a restriction would prevent premium systems from exerting an undue pressure on employees to join a union.

As reported in Handelsblatt on 9 March 2005, the various employers’ federations in the metalworking and electrical industries are opposed to all kinds of premium systems. They prefer to 'pay equal wages for equal work within a single firm' in order to prevent disputes arising between employees. Therefore, no regional employers’ federation has, as yet, approved agreements on alliances for jobs that contain a premium system. However, every single company is free to negotiate a firm-specific agreement with the union.

Up to now, most German trade unions have not favoured premium systems. Such systems have been mostly restricted to the metalworking and electrical industry in North Rhine-Westphalia. However, it should be mentioned that the Mining, Chemical and Energy Industrial Union (IG Bergbau, Chemie und Energie, IG BCE) called for a collectively agreed premium system during the most recent bargaining round in the chemicals industry in spring 2005. Due to strong resistance from the Employers’ Federation for the Chemical Industry (Bundesarbeitgeberverband Chemie, BAVC), the demand was abandoned before a settlement was reached (DE0507202N).

Commentary

IG Metall’s new strategy has been criticised on the grounds that premium systems do not solve the 'free-riding' problem in the long run. As long as the free-riding problem prevails, unions will, however, be eager to make union membership more attractive to employees by offering selective services. Among Organisation for Economic Cooperation and Development (OECD) countries, union membership is highest where union-affiliated institutions administer unemployment benefits. Such benefits exist in Belgium, Denmark, Finland and Sweden. Although no obligation exists to combine the level of benefits with union membership, unions do have the right to decide what constitutes 'reasonableness' in terms of the type of jobs that unemployed workers have to accept in order to retain their unemployment benefits. In this respect, union membership gains in attractiveness. The new premium system in the metalworking and electrical industry in North Rhine-Westphalia is just another selective service to attract new members.

Irrespective of the judicial perspective, the premium system does not guarantee a sustainable reversal of the declining union membership trend. Initial experiences show, in the short run, rising unionisation in companies with premium systems. It remains, however, an open question if a premium system can lead to a sustained increase in the growth rates of unions over the long run. As a premium system raises labour costs only for union members, firms may be more prone to recruit only non-unionised workers. This might reduce the incentive to join a union.

Alternatively, unions can optimise the cost-benefit aspects of union membership. By doing this, unions could benefit from experiences that are currently being gained by employers’ federations. Because more and more companies have opted out of collective agreements in the 1990s, some employers’ federations have offered companies the possibility to become a member of the federation with all of the services, but without the obligation to offer collectively agreed minimum standards to employees (DE0212202F). Today, the organisations without such an obligation cover 2,000 companies. This success indicates that employers’ federations are attractive to companies if they offer good services at low cost. In a similar way, trade unions may attract new members, if they increase the quality and variety of services provided to non-union members as well. (Hagen Lesch, Cologne Institute for Economic Research, IW)