The transition of the Hungarian industrial relations system

This feature reviews the transition of the Hungarian industrial relations system from state socialism to "industrial democracy". In particular, it looks at the impact of the Hungarian Labour Code of 1992, which introduced the institution of works councils, and assesses to what extent recent reforms have been successful in creating a new structure of collective bargaining.

This is the latest in a series of articles examining the industrial relations systems of the Central and Eastern European countries which are due to start European Union accession negotiations in 1998 - see EU9708143F and EU9709146F.

In the European Commission's assessment - presented in July 1997 as part of its Agenda 2000 programme - of Hungary's application for membership of the EU, the country is regarded as being among the most advanced in its transition to a democratic political system and market economy. It is estimated by the Commission that Hungary will be able to take on the acquis communautaire(the body of Community legislation and policies) in the political, economic and social fields, without many difficulties.

The transition of Hungary's political and economic systems to a market-based economy coincided with debates on the need for a new national industrial relations system appropriate to the new economic structure and to the integration of Hungary into the EU. The transition thus provided an opportunity for the social partners to adapt new strategies of interest representation in reforming a system in crisis in the early stages of transition from its state socialist legacy.

As well as the many changes in the regulation of labour relations since 1989, including the revival of the institution of multi-employer collective bargaining, a new Labour Code was adopted in 1992 which introduced the concept of company works councils. Before the legislative and institutional developments are evaluated, it is necessary to outline the situation that preceded these developments in order to establish whether these new regulations had any impact on resolving the perceived crisis. This article draws on: "The invention of works councils in Hungary" , András Tóth, European Journal of Industrial Relations, Volume 3 Number 2, July 1997; "The role of multi-employer collective agreements in regulating terms and conditions of employment in Hungary", András Tóth, Transfer, Volume 3 Number 2. August 1997; and "Circumventing trade unions in Hungary: old and new channels of wage bargaining", László Neumann (Research Institute for Labour, Budapest , Hungary) European Journal of Industrial Relations, Volume 3 Number 2, July 1997.

Background - the transition from state socialism

András Tóth, a research officer at the European Trade Union Institute, has identified three major problems that constituted the crisis in the Hungarian system:

  • the fragmentation of trade unions;
  • the "vacuum of institutionalisation"; and
  • the "representation gap" for non-union workers.

According to Tóth, the Stalinist reorganisation of trade union structures in the 1940s led to the creation of 19 industrial Unions under the authority of a central confederation, SzOT. All employees in an enterprise were represented by the same industrial union, irrespective of occupational differences. As a result of a ban on multi-employer bargaining, enterprise sections of industrial unions became firmly embedded in the power structure of the company.

From the 1960s the dilution of the planned economy, coupled with a shift away from national wage determination, allowed the development of company-specific internal labour markets. The Labour Code of 1968 allowed workplace agreements to modify legal regulations and to adapt bonus and benefit schemes to company-specific situations. As a result, informal wage bargaining took place in many companies behind the guise of a centralised union structure. However, these informal channels were often beneficial only to "core" employees, thus leading to substantial variations in terms and conditions. The confluence of interests between these core employees and management highlighted further the lack of independence of the unions from management interests, and contributed to the discrediting of the unions at the end of the Stalinist period.

With the transition to a market economy, a pluralist model of industrial relations was introduced. Four of the existing national trade union confederations were effectively reconstituted - MSzOSz, Autonomous, SzEF and ÉSzT- and two new confederations were created - LIGA and the Workers' Council Movement.

This restructuring process was accompanied by fragmentation as these new structures accommodated a number of industrial and occupational unions. For example, MSzOSz had more than 50 member organisations. This fragmentation was also facilitated by the 1989 Law on Associations which enabled as few as 10 employees to establish an enterprise union. The existence of a pluralist union structure lead to a high incidence of inter-union rivalry at both the workplace and national level. These tensions were exacerbated by conflicts over the redistribution of the old confederations' assets to new confederations. These inter-union conflicts served to reinforce the pressures to remove the political and economic power of trade unions within the enterprise.

With the dismantling of the state socialist system came the re-institutionalisation of multi-employer collective bargaining with an amendment to the Labour Code in 1989. This enabled the development of multi-employer collective agreements above the company level. The agreements proved to be popular up to 1992, but after this period their number and coverage declined. Some of this decline can be attributed to the complementary status given to these agreements (in relation to workplace agreements) by the 1992 Labour Code. Primarily, however, sectoral bargaining proved difficult in the absence, in many sectors, of stable and representative employer organisations.

Towards the end of state socialism, there was evidence of a growing interest "representation gap" as privileged core workers cooperated with management to take over the running of state enterprises. These new entities were known as "enterprise work partnerships" or VGMK s. In 1989, around 5% of the working population (approximately 250,000 people) were involved in these partnerships, under which national wage rate systems and formal trade union channels of bargaining were increasingly circumvented.

This interest representation gap was to be exacerbated further in the transition to the market economy as privatisation and restructuring led to a reduction in union membership (to a density of about 30% as new unions failed to attract a substantial membership) and a growth in non-unionised segments of the economy due to increasing competitive pressures.

The 1992 Labour Code

The original proposal for the 1992 Labour Code envisaged a fundamental revision in the legal regulation of employment, which aimed to reconstruct industrial relations institutions along the lines of the German model. A dual system was proposed in which works councils were to have the power to conclude workplace agreements, whilst trade unions would be responsible for multi-employer collective bargaining at sectoral level. However, by implication this would leave local union sections without a bargaining role and unions voiced concerns over the status of their workplace organisations.

The unions' concerns were largely accommodated in the 1991 draft bill, under which works councils were entitled to conclude workplace agreements only if there was no appropriate union organisation at the workplace, otherwise works councils just have consultative functions. As a result, workplace union sections (rather than works councils) retained the right to conclude collective agreements at workplace level in most cases.

With regard to multi-employer collective agreements, the Labour Code diluted the initial regulation, giving such agreements a complementary status in relation to agreements at the workplace level. Enterprise agreements under the 1992 legislation are permitted to deviate from collective agreement if they provide conditions more favorable to employees. Employees also have the right to negotiate for individual terms if they are superior to those set out in any collective agreement.


Tóth has argued that the Labour Code in its diluted form has largely failed to resolve the crisis in the industrial relations system as a new depth and coverage of regulation has not materialised, thus maintaining an institutional deficit. He argues that:

  • Works councils do not provide their intended function as an alternative channel of employee representation, as they tend to function only where there is a workplace union organisation. Where works councils are operational, they are largely dominated by local trade unions as works council elections have served to strengthen the local sections. This has consequently led some employers to view works councils as an additional bureaucratic form of employee representation
  • The provisions in the 1992 Labour Code did not facilitate a step forward for multi-employer collective bargaining, as workplace agreements can gain exemption if conditions are more favourable. Also, although the majority of collective agreements are binding, many agreements permit the adoption of less favourable conditions in local agreements. This problem is compounded by the fact that the adoption of agreements is locally determined.
  • The interest representation gap has not been closed, as the legislation concerning elections of works councils has not been fully enforced. Also, informal bargaining mechanisms have continued to exist, only in different forms. For example, with the privatisation process core employees were able to buy shares in the companies via the legislation on employee share ownership programmes (ESOP s) which was passed by Parliament in June 1992. There is thus a high degree of continuity between VGMKs and ESOPs, which are used as substitutes for collective bargaining.

It has therefore been argued that the Labour Code has created an environment whereby management can play an active role in deciding with whom it wishes to negotiate. This has allowed strong pressures towards maintaining decentralised bargaining mechanisms, which conflict with more regulatory mechanisms. The industrial relations environment is currently still subject to change, as the social partners' organisations continue to evolve, and the state is yet to develop more effective mechanisms to promote sectoral bargaining. Hungary has taken the first steps towards a continental European system of collective bargaining and this evolution is likely to continue in the context of the accession negotiations. (Peter Foster, ECOTEC Research & Consulting Ltd)

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