Research examines gap between actual and collectively agreed wages in 1997
Published: 27 July 1998
In Germany, most employees are covered by collectively agreed wages ("collective contract wages") which are negotiated by trade unions and employers' associations at branch level. Collective agreements have the function of establishing legally binding minimum working conditions for the employees and employers bound by the agreement. According to the favourability principle [1] (Günstigkeitsprinzip) in German labour law, employers may pay more but not less than has been collectively agreed. The collectively agreed wage rate thus has the legal character of a minimum wage. The difference between actual and collectively agreed wages - in other words, the extent of payment above the general collectively agreed wage rate - is measured by the "relative wage gap".[1] www.eurofound.europa.eu/ef/efemiredictionary/favourability-principle-0
Recent research shows that in 1997, 17% of private establishments in eastern Germany and 49% in western Germany pay more than the collectively agreed wage rate, the average "wage gap" in these firms being 11.4%. This feature summarises the key findings of the analysis.
In Germany, most employees are covered by collectively agreed wages ("collective contract wages") which are negotiated by trade unions and employers' associations at branch level. Collective agreements have the function of establishing legally binding minimum working conditions for the employees and employers bound by the agreement. According to the favourability principle (Günstigkeitsprinzip) in German labour law, employers may pay more but not less than has been collectively agreed. The collectively agreed wage rate thus has the legal character of a minimum wage. The difference between actual and collectively agreed wages - in other words, the extent of payment above the general collectively agreed wage rate - is measured by the "relative wage gap".
The extent and importance of the wage gap in 1997
The actual, effective wages of many German employees are higher than the collectively agreed wages negotiated at branch level. Except for a number of regional or sectoral analyses, the frequency and the size of such wage gaps in the whole of Germany cannot be derived from official data. A recent analysis of representative data from the 1997 wave of the IAB establishment panel (covering 3,760 western German and 4,030 eastern German private sector establishments) of the Institute for Employment Research (Institut für Arbeitsmarkt- und Berufsforschung) - part of the Federal Employment Service (Bundesanstalt für Arbeit) - produces a number of interesting findings ("Ausmass und Entwicklung der übertariflichen Entlohnung", L Bellmann, S Kohaut and C Schnabel in: IW-Trends 2/98).
In western Germany, 55.8% of all establishments were covered by collective agreements in 1997, while in eastern Germany the respective figure was 40.9%. Of those private sector firms covered by bargaining, 16.8% in eastern Germany and 48.9% which in western Germany paid more than the collectively agreed wage. The average wage gap in these firms was 11.4% in both parts of Germany.
| Western Germany | Eastern Germany | |||
|---|---|---|---|---|
| Total | 48.9 | 11.4 | 16.8 | 11.4 |
| . | % of all establishments bound by collective agreements paying more than collectively agreed | Relative wage gap in % | % of all establishments bound by collective agreements paying more than collectively agreed | Relative wage gap in % |
| Agriculture | 46.2 | 8.1 | 14.0 | 11.2 |
| Mining/energy | 21.2 | 9.6 | 6.5 | * |
| Basic materials, producer goods | 58.0 | 10.7 | 22.5 | 9.8 |
| Investment goods | 52.5 | 11.3 | 16.3 | 13.4 |
| Consumer goods | 50.2 | 11.6 | 16.6 | 10.6 |
| Construction industry | 61.3 | 10.0 | 16.8 | 12.7 |
| Trade and commerce | 52.8 | 11.5 | 19.7 | 8.5 |
| Transport and information | 37.4 | 10.9 | 12.1 | 15.8 |
| Banking and insurance | 26.0 | 10.5 | 13.7 | 6.0 |
| Other private services | 43.0 | 12.5 | 15.9 | 12.8 |
* Too few cases to make a statement.
Source: Bellmann Kohaut and Schnabel - see above.
As shown by table 1 above, across branches, the extent and incidence of relative wage gaps varies considerably. In western Germany, wage gaps are most frequent in construction industries (61.3%) and the basic material and producer goods industries (58%). The wage gap is least frequent and smallest in banking/insurance and in mining/energy. In eastern Germany, the incidence rate is highest for basic material and producer goods industries (22.5%), and lowest in banking/insurances and mining/energy.
| Western Germany | Eastern Germany | |||
|---|---|---|---|---|
| Total | 48.9 | 11.4 | 16.8 | 11.4 |
| Employees per establishment | % of all establishments bound by collective agreements paying more than collectively agreed | Relative wage gap in % | % of all establishments bound by collective agreements paying more than collectively agreed | Relative wage gap in % |
| under 10 | 42.9 | 12.1 | 13.3 | 11.7 |
| 10-49 | 60.0 | 10.3 | 22.7 | 11.4 |
| 50-199 | 62.6 | 10.8 | 25.3 | 9.7 |
| 200-499 | 53.6 | 10.2 | 18.6 | 8.7 |
| over 500 | 50.4 | 10.3 | 13.6 | 6.2 |
Source: Bellmann Kohaut and Schnabel - see above.
Differentiated according to company size - see table 2 above - in western Germany small establishments are least prone to pay above collectively agreed wages, but when they do so, the wage gap is relatively high. The incidence is highest in establishments with 50-199 employees. In eastern Germany, the incidence is lowest for the smallest and largest companies and highest for establishments with 50-199 employees. The size of the wage gap is negatively associated with establishment size.
The number of firms which pay more than collectively agreed has fallen since 1993 in western Germany, from 60.6% to 48.9%. Across industries, the wage gap narrowed by 2%. The only exception was the banking and insurances sector, where the wage gap increased.
Commentary
A major finding of the study is that almost one in two of the west German and one in five of the east German enterprises which are subject to collective agreements pay more than the collectively agreed wage rate.
There are a number of reasons why. The more centralised a collective bargaining system, and the higher its coverage, the less the results may reflect the situation of different regions, industries, companies and individuals. The result may be the need and scope for differentiation. Traditional approaches explain the wage gap by the fact that higher than collectively agreed wage rates are needed in tight labour markets in order to attract or retain qualified labour. The wage gap may also depend on the power relations between employer and employees within the firm. If profits are high and/or the external job prospects of employees are good, the latter may be able to achieve higher wages. New approaches regard pay above collectively agreed rates as an instrument to increase labour productivity, to select good employees, to motivate current ones and to reduce labour turnover as well as absenteeism.
Increasing unemployment and firms' labour cost problems both may have contributed to the overall reduction and to the low frequency of wage gaps in eastern Germany. (Stefan Zagelmeyer, IW)
Eurofound recommends citing this publication in the following way.
Eurofound (1998), Research examines gap between actual and collectively agreed wages in 1997, article.
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