Germany: Decline in collective bargaining coverage drives wage inequality

A decline in collective agreement coverage and opening clauses drives wage inequality in Germany. 

A research study by the Bertelsmann Foundation and ifo Institute Munich under the project framework of Global Economic Dynamics (GED) investigates why over the past 20 years in Germany wage inequality has increased to a faster extent than in the US and UK.

The study finds that the real wages of Germany’s high earners in the top 20% bracket have increased by 2.5% (adjusted for inflation) since the mid-1990s. At the same time, wage levels sank by 2% in the lowest 20%. During that same period, the percentage of companies with collective wage agreements declined from 60% to 35%. The share of employees covered by a collective wage agreement also fell from 82% to 62%. This decline is the strongest driver for rising wage inequality. The study estimates that the share of collective bargaining agreements has shrunk to around 43%.

The authors conclude that the development can be attributed to the decline of collective forms of wage bargaining, as well as to the widespread use of escape clauses and other measures to increase wage flexibility at company level and that these might have been set into motion with the process of growing international interdependence.

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