Sectoral bargaining now on the agenda in construction industry

In May 2005, trade union and employers' organisations in the Hungarian construction industry agreed a schedule for negotiations aimed at concluding a sectoral collective agreement. Previous efforts in this direction have proved largely unsuccessful, but the issue has been given new impetus by the announcement of government measures to tackle undeclared work in construction. The parties believe that a sectoral collective agreement will be an important step in reducing undeclared work in the industry.

In April 2005, the government launched a major reform campaign, entitled '100 steps', to overhaul various aspects of regulation of the economy, welfare services and the world of work (HU0506101N). One of the main packages in the programme involves a crackdown on undeclared work in the construction industry.

Undeclared work in construction

Construction, and mostly small and medium-sized enterprises (SMEs) in the sector, is a major source of illegal employment or undeclared work (HU0406103T). According to some professional estimates, on average there are about 200,000 people working on the various construction sites, which is double the number of legally employed workers at all firms with more than four employees in the industry. The participation of migrant workers in the informal construction industry, especially of ethnic Hungarians from Romania and the Ukraine, has been covered extensively by the media. In a recent 'showcase' policing campaign at a major construction site, labour inspectors found that 63 out of the 150 workers present were working illegally. One third of the undeclared employees were migrant workers from neighbouring Ukraine and Romania, both considerably lower-wage countries than Hungary. Moreover, the inspectorate also reported major deficiencies in health and safety measures. Nonetheless, the understaffed labour inspectorate is practically unable to supervise and control this highly decentralised industry, save with a few showcase control campaigns (HU0211104F).

The current structure of the construction industry is the result of the break-up of state-owned companies in the early 1990s. Especially in housing construction, a highly decentralised, small enterprise-based industrial structure has developed, due to the prevailing use of subcontractors. It is widely agreed that the intense competition and the need to cut costs has led to a widespread use of undeclared work by these small and micro-enterprises. The use of undeclared work, in turn, has produced a downward spiral of outsourcing by major companies, which are unable to compete with smaller companies using unfair labour practices.

Industrial relations in the sector

The decentralised, workplace-level collective agreement-based Hungarian industrial relations system, which is prevalent in the construction industry as elsewhere, has proved to be incapable of combating the extensive use of undeclared work. Workplace-level collective agreements exist only at major construction companies, and it is exactly this group of companies that suffers from the small competitors. In recent years, these companies have increasingly relied on outsourcing and tend to spin off their low-technology and labour-intensive units or to close them down altogether and use the web of SMEs as subcontractors. This reorganisation has especially undermined trade union representation and has further reduced the influence of collective bargaining on wages and terms and conditions of employment in the industry. Unions without effective sectoral and regional representation are practically unable to organise workers employed by the SME sector.

Since the early 1990s, the trade union side has been arguing for shifting the locus of bargaining to the sectoral level. In 1992, a voluntary framework agreement was concluded for the construction sector between the National Federation of Hungarian Contractors (Építőipari Vállalkozók Országos Szövetsége, ÉVOSZ) and the Federation of Building, Wood and Material Workers’ Unions (Építő, Fa- és Építőanyagipari Dolgozók Szakszervezeteinek Szövetsége, ÉFÉDOSZSZ). This agreement, however, covered only a handful of companies that joined voluntarily and it was never extended to the whole sector. The agreement was terminated in 1994 by ÉVOSZ on the grounds that it was only a constraint undermining competitiveness. The union side, weakened by membership losses and the rapid process of decentralisation and privatisation of the industry, was unable to put pressure on companies to keep up the agreement. In 1995 the union, believing that the root of the problem in the industry was the widespread use of undeclared work, developed a comprehensive programme to combat it. The programme, however, was not endorsed by either the government or any of the political parties or by the employers’ associations. In 1997 once again, the union proposed to conclude a multi-employer collective agreement, which eventually was signed only by a handful of companies. The agreement later lost its regulating force without having been formally terminated by any of the signatories. EVOSZ, the most important employers’ association, which organises the major companies in the industry, made it clear that its vested interest was to conclude an agreement covering all actors in the industry. At the same time, however, member companies of ÉVOSZ refused to comply with the rules without other players in the market doing so (HU0211104F).

Nonetheless, the major companies represented by EVOSZ perceived that the widespread use of undeclared labour was a problem. Consequently, in 2002 ÉVOSZ proposed to trade unions a new round of talks on the conclusion of a collective agreement that would be extended to the whole sector. This agreement was expected to set mandatory minimum standards and to impose a wage-tariff system with a view to curtailing the use of informal practices. The talks failed to evolve into bargaining of any sort. One reason for the failure was that ÉVOSZ does not have the power to impose any constraints on its member companies. Also, many major companies have already become reliant on SME contractors offering cost-effective services. Further, unions are too weak to be able to enforce non-adhering companies to accept such an agreement.

Towards sectoral bargaining - recent events

Recently two important - although unrelated - changes in the institutional environment of the construction industry have helped the parties to return to the issue of a sectoral agreement. First, in 2003, the National Housing and Construction Office (Országos Lakás és Épitésügyi Hivatal, OLÉH) was set up to oversee the sector. This put an end to a situation created in 1990, when the Ministry of Construction ceased to exist and its portfolio was divided up between various ministries. OLÉH was put in charge of re-regulating the industry, including human resources and related legal regulations.

Second, a sectoral bipartite social dialogue committee for construction was set up within the framework of a Phare project to reshape the structure of industrial relations in the country (HU0212106F). The trade union side hoped to use the new forum to relaunch the bargaining process, whereas the employers’ side concentrated on developing consultation with governmental actors on the most important issues. In February 2005, the union side unilaterally submitted to the sectoral committee a draft collective agreement and a proposal for a wage-tariff system. The committee, taking the employers’ side, appeared to prefer programmes dealing with issues related to the proper functioning of the industry, particularly with vocational training.

Nonetheless, in April 2005 a debate on a background study on the situation of vocational training in the sector threw new light on the importance of collective bargaining. The construction industry, now experiencing a high growth rate, is increasingly facing a shortage of skilled workers, which will cause the industry difficulties in the forthcoming decade. The study argued that the industry should be made more attractive for young people. Both employers and unions appeared to share the concern that bad working conditions, 'contingent' work contracts, widespread use of undeclared work and low wages contribute to the low appeal of the construction industry. Both sides agreed that the trend of a downward spiral in working conditions should be reversed and the attractiveness of the industry should be restored. Furthermore, they shared the view that a sectoral collective agreement could be an option for regulating the increasingly chaotic situation and may facilitate an improvement.

New government initiatives in the industry

The renewed discussion on combating undeclared work among major actors influenced governmental policy planning. Parallel with the intra-industry discussions, the government has prepared the major '100 steps' package of piecemeal reform measures to overhaul various aspects of regulation of the economy, welfare services and world of work. One of the programme's packages focuses on fighting undeclared work, especially in the construction industry, including the specific step of facilitating the creation of a sectoral collective agreement in the industry, expected to help combat undeclared work.

The launch of the '100 steps' programme gave the discussion on sectoral collective bargaining a new impetus. On the initiative of the Prime Minister, OLÉH convened the representatives of the social partners, who signed a joint declaration which says that the conclusion of a sectoral collective agreement should be one of the steps on the way to re-regulation. As a next step, OLÉH organised a meeting of the sectoral social dialogue committee and proposed that the issue of collective bargaining should be put on the agenda and that a schedule for the negotiation process should be set. At the meeting on 8 May 2005, the draft agreement prepared by the trade union side was accepted as a basis for further negotiations and a schedule of negotiations was agreed on. According to this timetable, the agreement should be concluded in autumn 2005 by the trade unions and employers’ associations present in the sectoral committee. The government would then move to extend the agreement to the whole construction sector so that it could come into force on 1 January 2006.

The collective agreement is expected to set stricter threshold levels than the relevant legal regulations, including the national minimum wage and the minimum working conditions regulated by the Labour Code. Unions wish to introduce a comprehensive wage-tariff system, which would set minimum wages according to skills level, responsibility and seniority. For instance, the unions propose to set the monthly minimum wage for skilled workers at HUF 120,000 (EUR 500), which is almost the double the present national minimum wage. This proposed relatively rigid and compulsory wage-tariff system would serve to eliminate the practice of reporting only the minimum wage and making additional payments to workers informally. The employers' initial position is different: they would prefer to set minimum wages for various trades within the sector, but would not like to endorse a wage-tariff system with thresholds for the various skill levels with a seniority component.


An earlier report on the construction industry concluded that the main problem in the industry, as far as industrial relations are concerned, is that both unions and employers’ organisations are relatively weak. The fragmented and decentralised nature of trade unions and of employers' organisations, the weakness of the union side in terms of putting pressure on employers across the sector, and the internal conflict of interest between large and small companies within the employers’ associations have inhibited joint initiatives beyond company level.

The current effort to develop meaningful collective regulation at sectoral level is connected to the crackdown on undeclared work. The government and the social partners expect that the conclusion of a sectoral collective agreement will be an important step in reducing undeclared work in the sector. It seems that the social partners and governmental actors have finally found a common goal that can serve as the basis for cooperation in creating the necessary regulations.

Nonetheless, commentators warn that a stricter regulation would have negative consequences too, such as greater unemployment and the bankruptcy of companies that base their business on the use of undeclared work. Insiders, on the other hand, fear that the agreement would be a one-off event without any major impact on the practices in the industry - just as earlier sectoral agreements have failed to influence the decentralisation trend which is now seen as the main source of illegal practices.

The success of the collective bargaining process in the construction industry, nevertheless, could represent a beginning of a new phase in the Hungarian industrial relations system, and may be a catalyst for new strategies across the economy and facilitate the necessary change in the attitudes of social partners and governmental authorities in the economy as a whole. The other main issue is that the collective agreement alone would not solve the problems. Undeclared work and illegal practices are widely used in the industry ,despite the existing legal regulations banning and penalising it. The social partners need to develop new ways of enforcing rules and contracts, perhaps in cooperation with state actors and local government, in order to ensure the implementation of the regulation of the would-be collective agreement. (András Tóth and László Neumann, Institute of Political Science, Hungarian Academy of Sciences)

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