Recent debates on pay policy in Germany

In autumn 1997, several debates on pay policy are taking place in Germany, overshadowed by persistent mass unemployment. There are at least two main questions which dominate discussions among the collective bargaining parties as well as among politicians and economic experts: has the very moderate pay policy of recent years really had positive effects on employment and should it, therefore, be continued in the future? And should Germany extend its low-wage sector in order to create more employment?

Since the late 1980s German collective bargaining has become increasingly overshadowed by growing mass unemployment, leading to a continuing controversy about pay policy and its impact on employment. Many employers' associations, with the support of "neo-liberal" politicians and economists, have embraced the arguments of orthodox neo-classical economic theory, for which unemployment is just a sign that the price of labour might be too high. Consequently, the employers' associations have demanded a very moderate pay policy which is supposed to make the German economy more competitive and, as a result, should lead to new employment. Even the trade unions have, to some extent, made concessions to this viewpoint by agreeing to relatively low wage increases and offering further income concessions in return for job guarantees.

However, in autumn 1997 new pay debates are taking place throughout Germany. Since unemployment rose to 4.5 million people in October 1997, and is expected to increase to a level of more than 5 million in the winter of 1997/8, there is a growing scepticism about the results of current pay policies in terms of safeguarding or promoting employment. At the core of this debate there are at least two main questions:

  1. Has the very moderate pay policy of recent years really had positive effects on employment, and should it therefore be continued in the future?
  2. Should Germany extend its low-wage sector in order to create more employment?

The end of moderate pay policy?

Traditionally, German pay bargaining has always oriented itself to the "margin of distribution" (Verteilungsspielraum) - that is the increase in inflation plus the increase in productivity. However, in many years since the 1980s the increase of wages and salaries has not exhausted this "margin of distribution" in western Germany (DE9709232N). In particular, since 1990 only in one year (1992) have wages and salaries grown by more than the sum of prices and productivity (see table 1 below).

Table 1: % increases in productivity, prices and gross wages and salaries in western Germany, 1990-6
Year Increases in productivity Increases in prices Margin of distribution Increase of gross wages and salaries
1990 2.7 2.7 5.4 4.7
1991 2.5 3.6 6.1 6.0
1992 0.8 4.1 4.9 5.8
1993 - 0.4 3.7 3.3 2.9
1994 3.4 2.8 6.2 1.9
1995 2.2 1.7 3.9 3.1
1996 2.4 1.3 3.7 2.0

Source: WSI Collective Agreement Archive 1997

During the 1980s, real net profits grew nearly five times faster than real net wages (see table 2 below). The same trend continued in the 1990s. While companies have been able to compensate for their decrease in profits arising from the recession of 1992/3, employees have had to accept decreases in real net wages since 1993. To sum up, trends in the outcomes of wage bargaining during the 1980s, which accelerated during the 1990s, led to a significant redistribution of national income from wage earners' income (Arbeitnehmereinkommen) to income from entrepreneurial activity and assets (Einkommen aus Unternehmenstätigkeit und Vermögen). Currently, the "wage ratio" (Lohnquote) - wage earners' income as a proportion of total national income - is at its lowest level since the early 1960s.

Table 2: Developments of real net profits and wages in Germany, 1980-96
Year Real net profits Real net wages Real net wages per employee
1980* 100.0 100.0 100.0
1990* 177.9 113.6 106.7
1992 165.7 133.6 109.4
1993 138.5 131.2 109.8
1994 169.5 127.1 107.3
1995 198.3 125.1 106.1
1996 199.3 123.8 106.5

* Only western Germany.

Source: DGB based on Federal Statistical Office ( Statistisches Bundesamt)

Under the pressure of growing unemployment, German trade unions have been more or less willing to accept a moderate pay policy. In 1995/6, the unions proposed setting up an "Employment Alliance" (Bündins für Arbeit) which was to include further limitations in wage increases in exchange for pledges on the side of the employers to create a concrete number of new jobs (DE9702202F). The failure of the Employment Alliance, however, led to a disillusionment among broad sections of trade union members. As the German economy is now recovering again, but without any substantial improvements in terms of creating new employment, the concept of moderate pay policy is being brought more and more into question among trade unions.

Against that background, in October 1997 the president of the IG Metall metalworker's union, Klaus Zwickel called for an "end of modesty" (Ende der Bescheidenheit) in trade unions' pay policy and announced that the next bargaining round, which will start in late autumn 1998, will see the end of wage moderation. Mr Zwickel is supported by the leader of the German Social Democratic Party (Sozialdemokratische Partei Deutschlands, SPD), Oskar Lafontaine, who also called for an end to wage restraint in order to strength mass purchasing power. Mr Lafontaine referred to the fact that the recent economic recovery is mainly driven by German exports, while internal consumer markets are still lagging behind.

The proposals for a more offensive wage policy have led to a strong wave of criticism. In particular, employers' associations have sharply rejected the union's planned demands for higher wage increases. Dieter Hundt, the president of the peak employers' association, Bundesvereinigung der Deutschen Arbeitgeberverbände (BDA), declared that an end to moderate pay policy would have disastrous consequences for the German economy and could strangle the recent economic recovery. Mr Hundt stated that for the following year, pay increases should continue to be below the increase of productivity and inflation, in order to improve the cost performance of Germany and create new employment.

The position of the employers has been supported by two recent economic reports - the "autumn economic expert report" (Herbstgutachten) of six prominent German economic research institutes and the annual report of the Council of Experts on Economic Development (Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung). Both annual reports, which have mainly been written by supply-side economists, have advised the collective bargaining parties to maintain moderate pay policies for an extented period. However, the German Institute for Economics (Deutsches Institut für Wirtschaftsforschung, DIW) which is one of the institutes which produces the autumn economic expert report, this year published a "minority statement" in which it demands that the collective bargaining parties make a U-turn back to a more productivity-oriented pay policy.

Should Germany extend its low-wage sector?

Beside the Scandinavian countries Germany has one of the lowest levels of wage dispersion among the OECD countries. To a certain extent, this is the result of the relatively centralised system of branch-level collective bargaining. However, in recent years more and more German politicians and economists have seen the relatively low level of income inequality as one major source for the high level of unemployment. Pointing out the example of the USA, these critics see great potential for new jobs, especially in low-skilled service sectors, if the cost for this kind of labour drops. However, since the US example also stands for the phenomenon of the "working poor" and a very low level of overall social welfare, most critics in Germany are not simply arguing for an extension of the low-wage sector, but suggesting a system of low wages which are subsidised by the state. The basic idea of concepts like a "negative income tax" (negative Einkommenssteuer), for example, is to channel some funds used for unemployment and social assistance into wage and income subsidies.

The concept of wage subsidies has long been limited to academic debates, but in June 1997 the BDA employers' association came forward with a policy proposal to introduce a new "combination income" (Kombieinkommen), combining a low wage with some state assistance. According to the BDA, in the current system people who are unemployed and receiving social assistance do not have many incentives to take a low-paid job, because in most cases there will not be a significant improvement in income as the new earnings will lead to a reduction of social assistance. Therefore, the introduction of a "combination income" should extend the exempted amount which someone can earn before his or her social assistance is reduced. To make this system work, the BDA furthermore demands a freeze in the amount of social assistance and the introduction of new low-wage grades into collective agreements, which might be between 20% and 30% below current average wage levels.

The reaction to BDA's proposals were rather ambiguous. In a first reaction, the German Federation of Trade Unions (Deutscher Gewerkschaftsbund, DGB) welcomed in principle the idea of having a system of wage subsidies and announced its willingness for joint talks with the BDA on that issue. However, the DGB has also made clear that the unions do not want an extension of the low-wage sector in Germany. Therefore, the trade union organisations declared that the introduction of further low-wage grades into current collective agreements is unacceptable. On the contrary, the DGB emphasised that, in the meantime, even in Germany there already exists a significant low-wage sector (DE9702201F). Finally, the trade unions expressed their doubts as to the possibilities of financing the concept in the way proposed by the BDA.


The recent debates on pay policy in Germany are a clear sign that under the conditions of rising mass unemployment, collective bargaining has become more and more politicised. After more than 15 years of moderate pay policy, the dominant supply-side economic theory is under growing criticism. In particular, trade union members have started to recognise that their policy of "wage renunciation" (Lohnverzicht) had not led to the promised positive effects on employment. Therefore, it is understandable that trade unions now call for the "end of modesty".

On the other hand, some of those who stood for a policy of pay moderation now seems to be radicalising their concepts by demanding an extension of the low-wage sector. However, for the moment such a strategy seems to be rather limited because it would imply a radical change in the structure of German collective bargaining. Nevertheless, the 1997 autumn debates have shown a growing polarisation on pay policy.(Thorsten Schulten, Institute for Economics and Social Science (WSI))

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