Employers’ organisations demand more flexible industry-wide agreements

In late June 2003, Germany’s largest industrial trade union, IG Metall, halted strikes in the eastern metalworking industry after failing to secure a reduction in the working week. The strike highlighted the trend towards more companies brokering their own deals with their workers, and breaking away from sectoral collective bargaining. Some commentators believe that the fall-out from the failed strike could reinforce important changes in the traditional German wage bargaining system, as more workers accept more flexible working time or lower wages in exchange for job guarantees in individual firms. However, many employers and employers’ organisations still support industry-wide collective agreements, but only if they set more 'employment-friendly' minimum standards and leave enough leeway for flexibility.

On 28 June 2003, the German Metalworkers' Union (Industriegewerkschaft Metall, IG Metall) called off a four-week strike in the eastern German metalworking industry, after failing in its attempts to negotiate a 35-hour working week (down from the current 38 hours) with employers' associations, amid widespread opposition to the action in the federal government, amongst the general public and, indeed, in the union's ranks (DE0307204F). IG Metall's defeat has revived the debate on the future of collective bargaining in Germany.

IG Metall’s failure in achieving a 35-hour week in eastern metalworking comes at a difficult time for it and other trade unions. Several unions sought, but failed, to block the government’s recent economic reform proposals based on its Agenda 2010 programme (DE0303105F), which aim to help Germany out of its severe economic downturn. IG Metall’s defeat also coincides with an accelerating decline in its membership: it lost 46,912 members in the first six months of 2003, compared with a fall of 43,000 for the whole of 2002. Furthermore, IG Metall’s discomfiture occurs at a time when many companies in Germany’s eastern states, where the unemployment rate is over 18% in some areas, are opting out of collective agreements in order to negotiate lower wages and more flexible working hours directly with their employees. Moreover, due to the aborted strike, IG Metall relinquished some of the achievements of the previous industry-wide metalworking collective agreement without gaining anything new in return. For instance, provisions on the employment of trainees and on part-time work for older workers, which were part of the sectoral agreement, were abandoned. These included a right for trainees to be offered a job by their employer after their apprenticeship for at least 12 months, and financial incentives for older workers to compensate them for accepting lower incomes if they moved to part-time work. However, it appears that the previous agreement will now be reapplied (see below).

Many commentators have asked whether these developments mean the beginning of the end for the German system of industry-wide collective bargaining, which has often been regarded as a pillar of the German economy. The answer from employers and their organisations, as well as from many economists, is: not necessarily - but in order to play an important role in the future, the system has to become much more flexible.

Industry-wide collective agreements

The (West) German industrial relations system dates back to the mid-1940s, and has retained many of its key characteristics. Large industry-based trade unions negotiate with their respective employers’ organisations, usually on a regional basis. The ensuing collective agreements, which cover a large range of subjects, have a wide application across Germany as well as across firms in a sector. It was this system that was 'exported' unchanged to the east in 1990. However, in the 1990s, partly as a result of the loss of members in the east (DE9908113F and DE9708128F), the system of industry-wide bargaining declined, as did the coverage of industry-wide wage agreements (DE0201299F). Nonetheless, according to the latest figures available, in 2001 about 60% of employees were still directly covered by industry-wide collective agreements, and another 16% benefited indirectly as these industry-wide agreements are used as benchmarks for their own decentralised agreements (see 'Zur Erosion des Flächentarifvertrags: Ausmaß, Einflusssfaktoren und Gegenmaßnahmen', Susanne Kohaut and Claus Schnabel, in Industrielle Beziehungen, Vol. 10, No. 2) .

While trade unions, in particular, have suffered from membership losses (the membership of employers’ associations has not decreases to the same extent) and a decline in their wage-bargaining power, the other main form of employee representation – works council s – have gained new responsibilities. For example, some works councils have negotiated more flexible working time in order to safeguard jobs, and to restore their company’s competitiveness (DE9902293F). Works councils are, on the whole, establishment-based bodies of workers’ representatives elected by all regular employees of the business establishment. Works councils can be elected in all but the smallest companies – unionised or not – and so they are, de jure, independent from trade union influence.

Typical of the German bargaining system is its high level of 'juridification' (DE9905200F). For example, collective agreement s must expire before a strike can be called legally. Moreover, those involved in agreements have a legal duty to try to reach an agreement, a 'cooling-off' period is required after a strike ballot, elaborate conciliation and arbitration arrangements exist, and there is a relatively high degree of centralisation in the system, such that agreements apply to all employers belonging to the relevant employers’ organisaiton and to all employees who are members of the union concerned. Furthermore, most member companies extend the provisions of agreements to all their employees, even to non-union members.

Roland Czada, professor of political economy at the Open University of Hagen, has stated that: 'The balance of this dualistic industrial relations system became rather precarious as works councils took over traditional union roles of wage bargaining in the eastern parts of Germany. In the west, a growing service economy with low union membership has supported this trend' ('The German political economy in flux', Roland Czada, in Ten years of German unification: Transfer, transformation, incorporation?, Jörn Leinhard and Lothar Funk (eds), Birmingham University Press, 2002).

Evaluation by employers’ organisation

Generally, the employers’ organisation for the German metalworking and electrical industry, Gesamtmetall, argues that the system of industry-wide bargaining 'has substantial advantages, one of the most important being the obligation to refrain from industrial action during the period in which regional agreements are valid'. According to Gesamtmetall, 'this system contributes to the maintenance of industrial peace at the workplace level, creates a secure foundation for relationships with suppliers, provides a reliable basis for planning, and ensures that individual plants are not exposed to the possibility of trade union pressure'. Therefore, Gesamtmetall and the Confederation of Germany Employers’ Associations (Bundesvereinigung der Deutschen Arbeitgeberverbände, BDA) support industry-wide agreements in principle. The most important precondition is, however, that these agreements include only minimum conditions which do not hamper employment or economic growth. In response to threats by some IG Metall representatives to force through firm-specific agreements (Haustarifverträge), Dieter Hundt, president of BDA, has stated that those 'who want industry-wide collective bargaining, cannot force individual companies to conclude firm-specific contracts'. Instead, Mr. Hundt added, more leeway is needed for actors at the firm level to shape conditions.

Assessments by academics

Opinions on industry-wide bargaining are extremely mixed among academics in Germany. Strong opponents, such as Professor Norbert Berthold, a labour economist at the University of Würzburg, argues that industry-wide collective bargaining in Germany looks like a dinosaur that belongs in a museum of extinct species: 'In a nutshell, centralised systems of wage bargaining, which cede relatively little room to firms for manoeuvring with respect to wages in order to mitigate incentive and efficiency wage problems, are becoming more and more inefficient. They prevent firms from offering their employees adequate incentives to perform the appropriate mix of tasks, thus reducing their profit opportunities and investment incentives. Allowing much greater wage drift is not a solution as this undermines the system and is therefore not acceptable to central wage setters.'

In contrast, the industrial relations expert Professor Wolfgang Streeck and collaborators at the Max Planck Institute for the Study of Societies have stated that major changes that have taken place in the German industrial relations system in recent years, though for the most part they have gone unnoticed: 'Of particular significance are the inclusion in collective bargaining of several areas of social policy, like old-age pensions and early retirement; the growth and lasting establishment of company-level alliances for employment and competitiveness; and the expansion of contingent pay negotiated at the workplace'. According to this school of thought, 'the system of industry-wide collective agreements has not stood in the way of these developments and, indeed, has pragmatically adjusted to them.' Going further, Professor Streeck, together with Britta Rehder, has stated that the trend towards bargaining at the firm level ('Verbetrieblichung') has not changed up until now, and will not change, the existence of industry-wide collective bargaining and trade unions: 'The idea of a few so-called reformers that establishment agreements (Betriebsvereinbarungen) and works councils will be free from any regulation above the company level, appears today, as it was 10 or 20 years ago, to be mistaken.'

According to an empirical study by Claus Schnabel, professor of labour market and regional policy at Erlangen-Nuremberg University, and Susanne Kohaut of the Institute for Employment Research (Institut für Arbeitsmarkt- und Berufsforschung, IAB), however, 'neither collective agreements above the firm level nor decentralised solutions at the firm or the individual level will always lead to the best results.' Professor Schnabel, therefore, suggests in terms of policy advice: 'The main aim should be to maintain the transaction-cost saving and peacekeeping function of industry-level wage negotiations, while increasing flexibility, plant-level orientation and the possibility of differentiating within collective bargaining agreements. Industry-wide agreements should primarily determine the most important framework conditions for every plant down to the smallest detail they should give the plants more scope for their own actions.'

Controversy between Gesamtmetall and IG Metall

Gesamtmetall generally agrees with the arguments put forward by Professor Schnabel, whereas IG Metall fervently disagrees. According to Gesamtmetall, 'hardship clauses' in industry-wide collective agreements that include a veto right of both collective bargaining partners over company-level application of the clause do not suffice to introduce more flexibility into collective bargaining. Hardship clauses enable companies to apply for an exemption to the wage rates set out in an industry-wide collective agreement if they are close to bankruptcy, but have a promising strategy for restoring economic viability (DE9703205F). However, both collective bargaining parties have to accept that a case of hardship indeed exists and that, for example, temporary wage cuts could save the firm. If one of the collective bargaining parties disagree, it can veto agreements to this effect between local management and the works council. Representatives of Gesamtmetall argue that this retention of authority by the collective bargaining partners can hurt employment and economic growth. They support the idea of local 'alliances for jobs' that are based on a sound legal footing, and that should be allowed to come into being before companies face bankruptcy. Moreover, there should be clarifications in the law on collective agreements to make such local alliances for jobs easier to negotiate. Such changes would, in fact, result in 'opening clauses' (DE9709229F) without veto rights. They would provide local management and the company’s works council with a limited opportunity to conclude a works agreement that undercuts the industry-wide collective agreement, and that need not be approved by the relevant employers’ representatives and trade unions.

By contrast, according to Jürgen Peters, IG Metall’s vice-chair, IG Metall will apparently not countenance suggestions that far-reaching opening clauses should be allowed without collective bargaining parties having veto rights. As he stated on 16 July 2003: 'We shall not accept the possibility that local actors in companies will be able to hollow out collective agreements.'

Even if some of the current problems in eastern metalworking regarding the employment of trainees and income compensation for older workers switching to part-time work are resolved – on 16 June 2003, both employers and trade unions said that, in principle, both sides were interested in re-establishing the previous industry-wide agreement – fundamental disagreements will remain.


Empirically, it is not clear whether decentralised bargaining is always superior to industry-wide agreements. Much of the empirical evidence that exists suggests, however, that strongly regulated labour markets, such as the German one, are a cause of persistently high unemployment and low employment growth. In order to avoid an uncontrolled collapse of the current institutional setting with unwanted side effects, it is advisable to make the highly regulated industry-wide bargaining system that currently exists more flexible, and to cede greater decision-making power to the firm level - as recently proposed, for example, by the Council of Economic Advisers (Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, SVR) (DE0302106F). Up until now, IG Metall has positioned itself in such a way that it has become one of the fundamental sources of opposition to such reforms. Germany’s biggest industrial union should use its self-inflicted crisis as an opportunity to revise its policy stance, not only towards industry-wide bargaining, but also towards other policy areas not discussed here. In order not to become, in the medium to long term, a subject of interest to historians only, collective agreements will have to take into account weak companies, and give enterprises and their workers more room to manoeuvre so that they can conclude company-specific agreements. This would be an important step towards returning to the practice of social partnership. IG Metall could learn, for example, some lessons from the consensus-oriented Mining, Chemicals and Energy Industrial Union (IG Bergbau, Chemie, Energie, IG BCE). Apart from the fact that there have been no 'labour battles' or strikes in the chemicals industry for 30 years, IG BCE has created collective wage agreements that contain a rather high level of flexibility. Such flexibility does not exist in the metalworking and electrical industry in important fields. (Lothar Funk, Cologne Institute for Business Research, IW)

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