MPIfG Working Paper
01/9, December 2001
Change in the German Wage Bargaining System –
The Role of Big Companies
by Anke Hassel
Max Planck Institute for the Study of Societies
Despite the emergence of new production systems,
Europeanization and economic internationalization, the national arrangements of
wage bargaining systems have not been eroded. The paper highlights the factors
that counteract the pressures for a straightforward decentralization with
reference to Germany. Firstly, the maintenance of peaceful labour relations is a
major advantage for big companies in centralized wage bargaining systems.
Secondly, big companies have been able to achieve labour cost control and the
differentiation of working conditions by drawing up pacts for employment and
competitiveness at the company level. Thirdly, they have succeeded in
introducing a higher degree of flexibility into the collective agreement
framework. The main argument will be that institutional change has taken other
forms than expected. Whereas the formal institutional setting has remained
relatively stable, the functioning of the German wage bargaining system has
Trotz der Verbreitung neuer Produktionssysteme, der
Europäisierung und der wirtschaftlichen Internationalisierung sind nationale
Tarifverhandlungssysteme in den meisten Ländern stabil geblieben. Dieses
Working Paper hebt am Beispiel Deutschlands die Faktoren hervor, die dem
Dezentralisierungsdruck entgegen wirken. Für Großunternehmen ist auch unter
veränderten Bedingungen die Vermeidung von Konflikten einer der Hauptvorteile
zentraler Tarifverhandlungssysteme. In dem gegebenen institutionellen Rahmen
haben Unternehmen Möglichkeiten gefunden, über
Standortsicherungsvereinbarungen auf Unternehmensebene die Arbeitsorganisation
zu flexibilisieren und Arbeitskosten zu senken. Zudem konnten sie Tarifverträge
flexibler gestalten und Öffnungsmöglichkeiten einfügen. Als Ergebnis wird
festgehalten, dass institutionelle Veränderungen andere Formen angenommen haben
als erwartet. Während die formalen institutionellen Rahmenbedingungen
verhältnismäßig stabil geblieben sind, hat sich die Funktionsweise des
deutschen Tarifverhandlungssystems verändert.
Since the early 1980s, a fast-changing political and
economic environment has led observers to expect a stronger tendency towards the
decentralization of wage bargaining institutions. Several reasons have been
given to support this belief (Wallerstein and Golden 1997; Wallerstein, Golden
et al. 1997). Firstly it was thought that more flexible production systems would
require greater differentiation of pay and a stronger connection between
individual performance and rewards (Katz 1993; Streeck 1993; Iversen 1996;
Pontusson 1996). This would give companies a greater interest in locally
designed pay systems as opposed to central wage agreements. Secondly, the
fragmentation of trade union membership was expected to reduce the capacity of
trade unions to act collectively. New groups on the labour market were
undermining the dominant position of blue-collar workers. Less cohesion on the
side of labour would reduce the ability of peak associations to obtain labour
peace or wage moderation in centralized bargaining systems. Central wage
bargaining institutions would become dysfunctional (Calmfors 1993; Moene,
Wallerstein et al. 1993; Lange, Wallerstein et al. 1995). Thirdly, to the extent
that centralized bargaining systems depend on government support, the decline of
discretionary macroeconomic policy-making at the national level might reduce
governments' interest in supporting centralized collective bargaining systems
The evidence has to some extent been different to the
expectations. Although a process of increased decentralization can be observed
in several countries, this has not led to the breakdown of centralized wage
bargaining systems. On an aggregate level, comparative studies have pointed to a
relatively high degree of stability on the part of industrial relations
institution (OECD 1997; Wallerstein, Golden et al. 1997). Where decentralization
did occur, as in the case of Sweden and Denmark, it moved from the national to
the sectoral level (Iversen 1996). In those countries where sectoral wage
bargaining institutions were already in place, they generally remained in place
(Traxler 1998). In some cases, such as Ireland, Italy and Spain, new central
agreements even led to a reorganization of wage bargaining institutions at a
more central level (O'Donnell and O'Reardon 2000; Perez 2000).
There is therefore some reason to believe that there are
either strong factors supporting a system of central wage bargaining which
qualify the pressures for decentralization or that, alternatively, the new
challenges such as Europeanization, new production systems and economic
internationalization impact on national bargaining systems in other ways than
the compulsion to straightforward erosion. In other words, the institutional
change might take other forms than expected.
Hence it is our aim to contribute to the emerging
literature on the defining pathways and mechanisms of incremental institutional
change, in particular to those approaches that look at institutional conversion,
"as institutions designed with one set of goals in mind are turned to other
ends" (Thelen forthcoming, 29). In the literature, institutions are almost
by definition stable, since structuring devices need a certain time horizon to
be effective (Genschel 1997, 47). Therefore, institutional change that falls
short of fundamental shifts is difficult to conceptualize. Since adjustment
pressure in a fast-changing economic environment is nevertheless strong,
institutions can be expected to change their functioning without necessarily
changing their form.
With regard to the transformation of wage bargaining
systems, the German case seems to be especially interesting for mainly three
reasons. First, the German model of industrial relations has impressed for
decades by its stability and its performance. Second, during the 1990s the
institutional arrangement had to meet extraordinary requirements by encompassing
the East German regions. No other West European system of industrial relations
had to cope with a task similar to this. Third, the German case is demonstrative
of a process of institutional change as described above: transformation without
breakdown. Wage bargaining institutions have remained relatively stable,
conditioned by a slow, but steady, trend of shrinking coverage of collective
agreements and works council representation (Hassel 1999). Moreover, unification
has transferred these institutions in almost the exact form from the west to the
east, although the pressure on the system has been high since the early 1990s.
The Council of Economic Experts has criticized the German wage formation system
continuously and demanded decentralization (Sachverständigenrat 1997).
Employers' confederations have consistently complained about rigid and high
Despite the criticism and complaints, very few major
companies have resigned from central wage bargaining. Employers present
themselves as weak and not in the position to withstand an industrial dispute.
The unions have won the majority of industrial disputes, which leads some
observers to conclude that the continuity of the German system is based on trade
union strength (Turner 1998; Wallerstein 1998). The alternative view argues
that, rather than union strength, it is the employers' weakness which maintains
the system. Employers' associations are divided and unsure about the effects of
decentralization and are therefore unable to reach a political compromise among
themselves on how to proceed (Thelen 2000).
In this paper we would like to propose another
interpretation of the German case, which is based on the study of the behaviour
of big companies in Germany since the mid-1980s. We will put forward three main
arguments, which make up the remaining part of the paper. In the first part, we
will argue that, under regulations of the German wage bargaining system, there
are major advantages for big business to retain centralized institutional
arrangements. In particular, large employers have a strong interest in
maintaining the peace-keeping function of central industry-level agreements. For
this reason our analysis focuses on the role of big companies in the ongoing
development of the German wage bargaining institutions.
Instead of resigning from the system, and this will be our
second argument, they have preferred - and, indeed, been able - to achieve a new
degree of flexibility and cost-cutting within the system since the early
1990s. Large employers have strategically been able to increase their room for
manoeuvre at the plant level. This has contributed to the stabilization of the
formal institutions as the increased internal flexibility has prevented the
employers from resigning from the centralized system.
Yet that does not mean that nothing has changed. In the
last section, we will describe the type of regulatory change that evolved in the
wage bargaining system instead of a straightforward collapse. Here we will argue
that the emphasis on regulating working conditions has shifted from providing
uniform regulations aimed at a high level of equality between companies to the
introduction of the flexibility and hardship clauses which aim to ensure the
survival of business operations under uncertain conditions. This process has
implied a redefinition of the interaction between production model and labour
market regulation. The model of diversified quality production was originally
based on the German production regime of providing high wages and equal working
conditions. However, the 1990s brought about the reversal of this interaction as
the wage bargaining regime had to be adjusted to the needs of production.
Interests in Centralized Wage Bargaining Systems
We generally assume that stable institutional arrangements
are based on coalitions of actors who obtain economic or political gains from
them. Centralized wage bargaining systems are based on a coalition between large
employers and trade unions. Thus we claim that not only the unions but big
business as well will enjoy beneficial effects from bargaining centrally rather
For employers a centralized wage bargaining system has two
major implications. The negative implication is that central wage agreements
restrict the scope of local flexibility. Any agreement found at the central
level has to cover a whole range of different companies. It therefore has to set
certain standards in relation to wage patterns and working hours which does not
necessarily suit an individual employer and his or her firm. The individual
employer can only deviate marginally from pay schemes, usually by adding
voluntary bonus schemes. He or she might have been able to negotiate a more
suitable wage pattern at the plant level. The agreement might also entail
regulations on the implementation of personnel policy that the individual
employer would not have agreed to at the plant level. It also forestalls any
swift changes in wage patterns and other regulations. It therefore slows down
and prohibits certain personnel policies that the employers would have otherwise
It should be noted that the interest in local flexibility
is not limited to the employers but impinges on the needs of the workforce as
well. Interests which are to be realized at the centralized level have to be
capable of mobilizing solidarity among all the main groups of union members
(Streeck 1981: 156). While unions might call a strike for general wage
increases, they would not be able to do so for the demands of the workforce of a
specific company. Therefore employees need different channels of interest
representation. The most important sectional interest of workers seems to be the
economic survival and the competitiveness of the firm as the most important
precondition for job security. With regard to this issue, we can assume that
works councils tend to share the perspective of the management where the
preservation of jobs is concerned. The emergence of plant-level pacts for
employment and competitiveness in the 1990s supports this assumption (section
Hence, the interest in local flexibility and the
restrictions on the latter in the context of centralized wage bargaining systems
does not reflect a class conflict but a multi-level conflict between the
centralized and the plant-level actors.
The second implication of a centralized wage bargaining
system is its peace-keeping function. By transferring the distributional
conflict between management and the workforce to a level above that of the firm,
employers in general gain a greater degree of peace within the company.
Bargaining rounds take place between employers' associations and trade unions.
Employers can maintain a good relationship with their workforce by staying
removed from the process. Moreover, by being a members of a bigger association,
employers are not as easily singled out for trade union activity and industrial
action. Lastly, in many European countries, the employers' associations even
provide an insurance against losses in an industrial dispute by maintaining
strike funds. Nevertheless, centralized wage bargaining only remains a precious
advantage for employers as long as trade unions are able to introduce conflicts
in wage bargaining. If trade unions could not upset business interests in
preserving industrial peace, the employers' interest in maintaining the system
would be considerably lower.
The German case illustrates the interplay of peace-keeping
regulations and the capacity of the unions to challenge them. On the one hand,
the system imposes strict regulations on peace keeping and industrial action.
Firstly, the right to call a strike is limited to the unions, while works
councils are obliged to respect social peace. Secondly, industrial action has to
be limited to collective bargaining issues (instead of wider political goals).
And thirdly, legislation defines strikes as the last resort when any other
mechanism of conflict mediation has failed. As a result, the peace-keeping
potential of the German system is great.
On the other hand, German trade unions are, without a
doubt, able to introduce conflicts. They have even managed to turn the majority
of industrial disputes in their favour (Turner 1998; Wallerstein 1998). In this
sense, Wallerstein and Turner are right in claiming that the continuity of the
German system is based on trade union strength. Owing to the effective monopoly
of interest representation, German trade unions are able to control industrial
action without having to take into account competing organizations. In addition,
the leadership of the metal sector union and its capacity to jeopardize social
peace is of importance. One example is the wage conflict in 1995. Under the
impact of the recession and the aftermath of unification, the metal sector
employers' association adopted a particularly hard line by demanding that all
wage increases should be paid for by new flexibility concessions. However, the
union staged industrial action and won the conflict (Thelen 2000). After a
two-week strike in February 1995, the employers conceded an exceptionally high
Both implications of centralized wage bargaining systems -
the peace-keeping function as well as the restriction of local flexibility - can
be considered as a bargaining space defined by a class conflict and a
multi-level conflict. They create the arena for negotiations between employers
and trade unions as well as between different groups of employers.
The trade-off between the advantage of having industrial
peace and the costs of being restricted in managerial discretion is determined
to a considerable extent by the size of the company. Company size affects both
dimensions of the bargaining space. Big companies are likely to be targeted by
trade union activities and give above-average pay awards. Therefore, they tend
to benefit from participating in centralized wage bargaining systems that can
offer them industrial peace. As big organizations, they are also more likely to
have a developed and formalized pay system themselves. Wage agreements therefore
do not necessarily restrict them further in their flexibility. Moreover, since
the wages they pay are above average and thus above the rates which are laid
down in the agreement, their scope for plant-specific bonuses is greater than in
Small companies, on the other hand, have less need for
conflict-avoiding mechanisms since they are not the target of trade unions in
the first place. Since they tend to pay less than big companies, they also run
the danger of paying higher wages than would otherwise be the case. Moreover,
their managerial discretion would probably be substantially higher without
collective agreements. This is especially true for those small or medium-sized
companies that do not have a works council. In these cases, local flexibility
does not have to mean negotiated flexibility. Therefore small companies tend to
benefit less from centralized wage bargaining, but run the same costs as big
companies. Hence, one can expect that big companies are generally more in favour
of centralized bargaining than small companies. The empirical data on the
membership density of employers' association bears this out. Small companies are
much less likely to participate in collective bargaining than big companies
(Hassel 1999). Also, small companies are more likely to voice stronger
opposition to centralized collective bargaining systems, while big companies are
likely to be in favour of them.
With regard to collective bargaining strategies, one can
therefore assume that the bargaining goals will differ between small and big
companies. Small companies are, firstly, more likely to go for bold bargaining
strategies which would make a difference to all companies (such as a reduction
in fringe benefits or holidays, lower wage increases and the like) and,
secondly, they are more prone to conflict strategies which can be accommodated
much more easily in small paternalist companies than in big companies. On the
other hand, big companies are more likely to favour strategies that are
conflict-averse and try to introduce a higher degree of flexibility into
existing standardized wage norms.
Although employers' associations have to mediate between
the diverging employers' interests we can assume that big companies control the
process of interest representation. In countries with sectoral employers'
associations such as Germany, the latter tend to have a highly uneven
distribution of membership companies, with few very large companies and high
numbers of very small companies. Membership dues are frequently based on the
number of employees (or the aggregate sum of wages a company pays); voting
procedures are sometimes attached to membership dues. In any case, they aim at
reaching a high level of consensus. The dominant position of big companies in
employers' associations is further strengthened by the fact that all employers
know that decisive conflicts are fought over in big plants. If the management of
big plants is not prepared to persevere with the trade union, the collective
bargaining strategy is not viable. As a result, there is no bargaining strategy
on the part of the employers against the interests of big companies. As big
companies will always veto deterioration in the peace-keeping capacity of the
bargaining system, the associations have to pursue a strategy to increase local
flexibility without losing the peace-keeping function of the system.
To sum up: at the level of firms' preferences towards wage
bargaining institutions there are positive and negative implications for firms
when bargaining centrally. Firms might lose managerial discretion while gain in
terms of labour peace and labour costs. We can also see that the costs and
benefits vary with firm size: small firms benefit less while having similar
costs. Big firms, on the other hand, have few if any costs from central
agreements and benefit most. Ceteris paribus, there are good reasons why big
companies are the main pillar of centralized wage bargaining institutions.
Empirical findings support our theoretical assumptions.
During the 1990s, tensions between big and small companies within employers'
associations rose. An increasing number of small and medium-sized companies in
several sectors complained about their associations' high-wage policies (Völkl
1998: 172), and these firms rather than big firms left the associations during
this period (Schröder and Ruppert 1996: 40f).
The next section of this paper will show how and why big
companies in Germany have sought to increase local flexibility under the
protection of the peace-keeping function of the centralized wage bargaining
system since the mid-1980s.
Bargaining in Big Companies
A number of factors have contributed to the heightening of
competitive pressure on German companies since the early 1990s and forced
adjustment processes upon them. The most important ones are the consequences of
reunification, the recession in 1992/93 and the increasing internationalization
First of all, reunification was marked by the transfer of
the industrial relations system from the west to the east. This political
decision was supported by all major West German political actors. The high-wage
strategy that had been successful for so many decades in the west was simply
transferred to the east, although this meant that the wages had to be raised far
beyond the productivity of eastern plants. Neither capital nor labour were
interested in a low-wage area. The trade unions were afraid of the erosion of
the high-wage regime in the west, whereas the employers wanted to prevent the
emergence of a price-competitive production area (Lehmbruch 1994). Although the
reunification process was supported by a massive financial transfer from the
west to the east it could not prevent rising mass unemployment. As a
consequence, public debt and labour costs exploded. Moreover, high wage hikes in
the early 1990s were not only relevant to the east; the west also experienced
exceptionally large wage gains, with trade unions claiming their share in what
they saw as the unification boom.
In 1992/93 the economy was hit by the worst recession in
post-war history, which was accompanied by major job losses, especially in the
manufacturing sector. The failures of the past became visible. German business
had been deprived of its leadership with regard to quality production and
innovation of products. Japanese firms in particular had learned how to produce
goods that were superior and cheaper than German products. As a consequence,
German firms had to learn how to improve on price competitive innovations.
Especially the implementation of "lean production" was accompanied by
job losses that could not be compensated for by the reduction of working hours
and a social policy which had always been previously a social net for the
negative effects of the high-wage strategy (Streeck 1997). Consequently, the
costs of social security and labour rose even further.
The declining competitiveness of the German economy became
even more evident as worldwide production became more feasible. Companies
exposed to the world market built up production sites abroad not only to be
present at the most important sales markets; they also aimed to benefit from
large and high-qualified workforces which they were able to employ for lower and
more flexible wages than in Germany. Many companies institutionalized
international benchmarking processes that compare production sites continuously
in terms of their labour costs and the flexibility of their working conditions
(Mueller and Purcell 1992). The plants that come out best are chosen for new
investment, whereas others are threatened by closure. Workers who are employed
by the same company, but work under different regimes of industrial relations in
different countries, compete for investments and job security. The car industry
in particular faces this new form of decision-making on investments, as do
certain parts of the chemical industry, the tobacco industry and household
The high costs of unification, the recession in 1993 and
the internationalization process exposed the German economy and its institutions
to new kinds of pressure. Rising unemployment and the declining competitiveness
of German companies prompted employers to complain about high and rigid labour
costs. As a result, they tried to expand their room to manoeuvre to modify the
negative effects of these developments on their firm's performance.
However, big employers did not try to dismantle the
centralized bargaining system in order to seek remedies for the competitive
pressure they were facing. Rather, they turned to company-level bargaining for a
solution. Bargaining at the company level has always played an important role in
the German system of industrial relations. Employers have accepted the
co-determination system as an element of the corporate governance structure in
German companies, as it enables management to enforce social peace and cohesion
by integrating the employees' interests into their decision-making process
(Kommission Mitbestimmung 1998: 7).
Diversified quality production - based on the continuous
improvement of skills, work organization, technology and products - benefits
from co-determination as it supports the incorporation of employees into
firm-specific coalitions: technological and organizational changes, which are
discussed with the works councils and regulated by firm agreements (Betriebsvereinbarungen),
are implemented more easily and more quickly. In addition, bargaining at the
company level has introduced some kind of wage drift into a wage system that
provides a high equality of incomes (Hassel 1999: 486). Central agreements
neglect the different capacity of firms to afford a certain wage level.
High-performing companies negotiate with their works councils paying "above
the going rate" (über Tarif) as well as a system of special
premiums to attract qualified employees.
However, since the late 1980s, a new type of plant-level
bargaining has emerged which goes far beyond the traditional form of
company-level bargaining. Rather than implementing or topping up the terms and
conditions of central agreements, company-level pacts for employment and
competitiveness (betriebliche Bündnisse zur Beschäftigungs- und
Wettbewerbssicherung) have emerged which include a whole bundle of measures
to improve competitiveness and job security. The rationale behind the emergence
of these pacts is that both groups of actors - management as well as the
workforce - suffer from the same fate of lacking flexibility in the regulation
of firm-specific needs. In this constellation, management and works councils
both share the same interest in increased local flexibility, in order to
strengthen the competitiveness of the firm and to secure jobs. Neither side can
realize this interest without co-operation. There is no possible way for the
employees to force management to grant job security provisions as employment
decisions are part of the management's prerogative. On the other hand, employers
cannot control the production costs and other aspects of their firm's
competitiveness on their own. At the collective bargaining level, they can
realize their cost-cutting and flexibility interests only if the unions at the
central level are willing to compromise. If the unions resist doing so and if
the employers do not want to sacrifice social peace they have to look for
solutions at the company level. Here, they have to compromise with their works
councils: firstly, due to their co-determination rights and, secondly, with
regard to the necessity of legitimacy for cost-cutting measures which can be
provided best if the works councils are involved in the decision-making process.
Local Flexibility by Pacts for Employment and Competitiveness
In order to assess the scope and importance of plant-level
pacts, we looked at the emergence of these pacts in the 120 biggest companies in
Germany between 1986 and 2000. During the 1990s, 55 (46%) of the companies
negotiated a company-level pact. These companies employed 4 million employees in
1996. 1.7 million employees were affected by the pacts. Within these 55
companies, at least 156 agreements can be found.
Other companies, especially in the banking sector, have
made use of different types of company-level agreements to pursue similar goals.
For example, an increasing number of firms have negotiated the modification of
payment schemes towards a higher share of variable wage components (Kurdelbusch
2001). However, our analysis focuses on pacts for employment and competitiveness
as they, more than any other type of company agreement, have left clear traces
in the institutional design, as we will show in the following sections.
The number of agreements per company varies: While Daimler
Benz AG has concluded more than 30 agreements; the majority of companies have
only negotiated one or two. However, there is a clear tendency that a successful
plant-level agreement on employment and competitiveness has knock-on effects in
not only the company but also the same sector. One can identify waves of
plant-level pacts in the car industry (in 1993 and 1997) and in the chemical
industry (1997 and 2000) (Rehder 2000). 41 (77%) of the pacts are to be found in
the manufacturing sector, where competitive pressure hit hardest.
When bargaining over plant-level pacts, three main
dimensions of management's interests can be distinguished: to control labour
costs, to increase productivity gains by improving the flexibility of the
production process and to redistribute work among the employees, which can be
another source of flexibility. Table 1 shows the three different types of pacts
Types of Pacts for Employment and Competitiveness
in Big German Companies
(in % of all companies)*
Reduction of working hours
Working time flexibility
- Reduction of
the wage drift
- Retrenchment of bonuses and premiums
- Paying below collective agreement standards
Additional working hours
Measures against absenteeism
Reorganization of work
Modification of payment schemes
Investment and production
|Investment and production
N = 55 companies
* = Many of the firms make use of more than one type of pact so the
figures do not add up to 100%.
53% of the companies have agreed on a labour
cost-cutting pact; they gain cost-cutting effects by directly reducing
employees' income. Income cuts are realized in many different ways. The most
prominent ones are the reduction of the wage drift between sectoral agreement
and company payment, as well as the retrenchment of bonuses and premiums. In
addition, several bargaining parties agree on paying below the collective
agreement standards either for the whole workforce or for special groups of
49% of the firms have negotiated productivity pacts.
Most of them have been introduced under the impact of the international
competition for investment and the intra-firm benchmarking procedure as
described above. They aim at adjusting working conditions to a specific
production process, to the life cycle of the product and to the changes in
demand. The conditions of capital investment can thereby be optimized. Typical
concessions made by the employees are, for example, the extension of working
hours (in most cases without wage compensation), measures against absenteeism,
changes in work organization, and the changes of pay schemes towards a higher
share of variable wage components compared to fixed pay. In return, management
offers investment or production orders. Because of the 1992/93 recession, the
car manufacturers (and later other industrial companies) have experimented with
the organization of production in order to increase productivity (Hancké 1998).
These experiments have included the introduction of lean management, teamwork
and a three-shift-system in one or several plants (Mueller 2000). Some firms
have even partially returned to a modified model of fordist production (Springer
1999). Owing to the debate about "lean management" a range of
opportunities for organizing production has opened up. As a result, a process of
destandardization has taken place. Productivity pacts have been an instrument
used to facilitate these developments in plants, as the reorganization of
production always implies the reorganization of work.
42% of the firms have introduced work redistribution
pacts. In this context, the flexible reduction of working hours has been the
most prominent issue. It increases flexibility by adjusting the employees'
working hours to the demands of the market. In addition, these pacts have been
used by companies that have had to cut a large number of jobs. Through the
reduction of working hours and the resulting redistribution of employment the
firm increases its flexibility in cutting labour supply: the intensity as well
the speed (and the costs) of the cuts can be shaped more carefully so that
neither the production process nor social peace in the company is disturbed.
Another prominent way of redistributing work is to increase labour mobility in
terms of functional and geographical flexibility. This is usually organized in
the context of workforce pools. The management can refrain from redundancies if
core employees, whose jobs have been cut, go on to replace those on short-term
contracts. External flexibility thus gives way to increased internal
Role of the Unions
In the previous section we aimed to show why and how big
companies have succeeded in increasing local flexibility. In this section we
argue that they have done so without risking social peace by incorporating the
unions into the process.
Hardly any agreement has been negotiated in the past
without the unions' participation. In 55% of the firms the concerned union(s)
usually joined the bargaining table and signed the agreement. In other cases
they did not sign the pact but acted as a veto-player, meaning that the
agreements had to be approved by the unions with regard to the legal aspects
before the works councils signed them. In 35% of the cases the unions acted as a
consultant for the works councils with regard to the legal or strategic aspects.
In this way, unions always acted as a veto-player. Only in 10% of the firms were
trade unions not at all involved in the bargaining process. This was, for
example, the case at a printing plant owned by the Bertelsmann AG.
The high level of involvement of trade unions can be
explained by the features of the German corporate governance system. German
industrial companies have always been marked by a high involvement of labour in
the decision-making process. In most companies, more than 80% of works
councillors are union members; in many cases the figure is 100%. In addition,
unions are very often represented on the supervisory board of a company. In all
companies of our sample that negotiated a plant-level pact, representatives of
employees and/or trade unions occupied half of the seats on the supervisory
board. Hence, employers usually accept trade union officials as negotiators in
plant-level employment pacts. They prefer to involve them rather than risk
The peace-keeping interest is also the reason for the fact
that only a few of the pacts clearly violate collective agreements. In our
sample, only 10% of the agreements actually broke the terms and conditions of
the sectoral collective agreement. Consequently, the management can rely on the
willingness of trade unions to improve flexibility and to be generous in
exceptional cases. Deviations from collective agreements are usually controlled
by unions. Unions have agreed to sign several agreements that did not meet
collective agreement standards in order to prevent job losses or the firm's
bankruptcy. During the 1990s this voluntary practice entered the collective
agreement framework, as we will describe in the following section.
Transformation of Collective Bargaining
Internal flexibility in the framework of high external
rigidity has traditionally been the modus of the German industrial relations
system. As we have pointed out, negotiated flexibility at the plant level and
comprehensive rules in centralized collective agreements have been the trademark
of the German model. Are the company pacts of the 1990s, therefore, a mere
continuation of the successful path of company adjustment to changing economic
conditions? In this section, we will argue that, despite the formal stability of
German wage bargaining institutions (central collective agreements), the scope
and power to standardize employment conditions by collective agreements has
changed to a degree which implies a more fundamental transformation of the
Generally, it is indeed the case that plant-level
bargaining beyond the central collective agreement has been an integral part of
the German industrial relations system. During the 1960s, it was even trade
union policy to negotiate additional agreements at the plant level to capture
wage drift (betriebsnahe Tarifpolitik). The implementation of the metal
sector wage agreement (Lohnrahmentarifvertrag II) in
Nordbaden-Nordwürttemberg in 1973 required the management and works councils at
the plant level to negotiate up to 30 supplementary plant agreements (Schauer et
al. 1984; Billerbeck u.a. 1982: 176); similarly the framework agreement in 1978
(Sadowski 1985: 244).
Moreover, the agreements on working time reduction in the
metal sector in 1984 opened the previously standardized regulation of working
hours in central agreements for tailor-made plant-specific working time regimes
(Thelen 1991; Bispinck 1997). More than 10,000 plant-level agreements were
negotiated following the 1984 collective agreement. Within centrally defined
parameters, plant level negotiations aimed at finding flexible solutions.
The example of the dispute over working hours also
highlights the double logic of interest representation on the part of the
employers' associations: the acceptance in principle of reduced working hours
(in spite of the protest of small business) helped to restore social peace at
the collective bargaining level and the opportunity of working time flexibility
increased the room to manoeuvre at the company level (Wiesenthal 1987: 173ff).
Employers were obviously hoping to compensate for the costs of working time
reduction by making productivity gains through working time flexibility. This
was, however, a strategy mainly available for big companies, which developed
highly sophisticated work schedules for their large workforces. In particular,
the big manufacturing companies using high-technology equipment were able to
decouple the production process from individual working time arrangements and
thereby achieve high productivity gains (Silvia 1999). Research on the
implementation of working time flexibility has shown that the majority of small
firms continued to keep a standardized working week, while more than 80% of big
companies did not (Hermann et al. 1999). The main long-term effect of this
conflict was the increasing role of plant-level bargaining as the combination of
working time reduction and working time flexibility had to be negotiated and
implemented in each single company independently (Thelen 1991, 165).
In this sense, the developments of the 1990s might be
interpreted in the same vain. The transfer of industrial relations institutions
to the east in the course of reunification provided a further impetus towards
the delegation of bargaining rights to the plant level. After bargaining
institutions had been transferred to the east, the impact of high wage
agreements was felt immediately. In 1993, the coalition of the various political
actors which had pushed for the transfer of western institutions fell apart. The
east German firms in the metal sector which could not afford to pay high wages
any longer denounced the collective agreement (Bispinck 1993; Henneberger
1993;). The system was saved by the introduction of so-called 'hardship clauses'
into the collective framework. Companies could apply for exemption from the
collective agreement and would be granted this if they met certain conditions.
For the first time in post-war history, a German firm which is legally bound by
a collective agreement was allowed to fall short of collective agreement
standards in order to survive. Research commissioned by trade unions reported
181 companies which applied for hardship in east Germany between 1993 and 1996
(Bahnmüller, Bispinck et al. 1999).
Hardship clauses in the east were introduced in the midst
of the recession. Between 1992 and 1993 more than 0.5 million jobs were lost in
German manufacturing. In this context, hardship and exemption clauses spread
across all the industries and spilled over to the west in no time. The issues on
which exemptions were to be made were similar to those in company-level pacts:
flexible and longer working hours, working time reduction with pay cuts, and
cuts in pay and basic bonuses. The most generous hardship clause was introduced
in the chemical sector agreement in 1995, which allowed companies in hardship a
cut in basic pay of up to 10% (Bispinck 1997).
While employers' associations in general aimed to find a
peaceful way of introducing flexibility and cost-cutting measures into sectoral
collective agreements, trade unions developed a strategy in which they opposed
any general concession in principle, but accepted major concessions in
individual cases. Hardship clauses therefore emphasize the singularity of the
cases by introducing qualifying conditions such as "in particular
justifiable cases" (as in the 1973 metal sector collective agreement of the
powerful region of Nordwürttemberg-Nordbaden). In many cases, these clauses
were an attempt to bring the regulations of collective agreements in line with
reality since company-level social pacts were being agreed at a rapid rate
without anyone bothering about the terms and conditions of the relevant
collective agreement. Especially in the car industry, company-level pacts had
already become a matter of course and preceded the introduction of hardship
clauses in the collective agreement.
Compared to the traditional pattern of the negotiated
internal flexibility and external rigidity of the German industrial relations
system, two major changes occurred during the 1990s which cast doubt on the
continuation of the current system.
Firstly, the hierarchical order between collective
agreement and plant-level negotiations has been reversed. Previously,
plant-level bargaining took place within a predefined corridor. The associations
at the regional or national level decided upon the room for manoeuvre at the
plant level and defined the scope in which plant-level actors were able to find
their own solutions. Legally, the collective agreement supersedes plant-level
agreements. Plant-level actors need explicit permission to reorganize issues of
pay and working time at the plant level. If the collective agreement does not
include this permission or a possible delegation of bargaining to the plant
level, plant-level actors are legally requested to refrain from bargaining about
these issues. The delegation of bargaining rights from the central to the plant
level has been a process of enabling plant-level actors to deal with issues
which were principally reserved for the associations. The associations took
their right to restrict plant-level bargaining seriously and in particular trade
unions tried to regulate as much as possible at the central level. Companies had
to wait to be enabled by collective agreements to change practices at the plant
level. The plant-level pacts for employment and competitiveness of the 1990s
have in many cases superseded collective agreements. Even though the legal
situation has not changed and even though many pacts do not violate agreements,
associations have lost their capacity to limit or avoid plant-level bargaining
by enforcing collective agreements. While previously plant-level bargaining
implemented collective agreements, the agreements of the 1990s tended to
implement the current practice at the plant level. The superiority of collective
agreements vis-à-vis plant agreements on crucial issues of terms and conditions
has been lost.
Secondly, plant-level agreements are no longer to the
advantage of employees. In the past, the delegation of regulation to the plant
level was only used if the plant-level solutions were regarded as being to the
advantage of the employees. The 1960s' idea of additional company agreements
aimed at improving the terms and conditions by concluding supplementary
agreements. The supplementary plant level agreements of the 1970s were agreed in
the context of programmes of the so-called "humanization of work"
(Humanisierung der Arbeit), which aimed at improving working methods. The
working time flexibility that was agreed in the 1980s was at least ambiguous
with regard to its effects on employees since they often gained financially from
working time flexibility. The social pacts of the 1990s, however, were primarily
concession-driven. Cost-cutting not only included further flexibility gains but
also unpaid over time or outright wage cuts. The previous principle that the
collective agreement sets the minimum terms and conditions, which are then
topped up at the plant level, has been abandoned. Opening clauses in collective
agreements enable plant-level actors to undercut the pay laid down in collective
In effect, the associations have lost their power to
effectively set terms and conditions for individual employees through the
practice of company pacts. Changes in collective agreements in the form of
opening clauses are driven by plant-level practices and not vice versa.
Furthermore, the collective bargaining associations have signed away these
rights. While many opening clauses contain the right of the associations to veto
plant-level agreements, in practice this rarely happens. Associations know that,
once management and works council have negotiated an agreement, there is hardly
any way of stopping them implementing it. The central collective agreement,
which used to be the main piece of regulation on which the standardization of
the terms and conditions of German employees rested, has turned into a document
which offers guidance to remuneration, but leaves considerable scope as to its
regulation at the plant level.
Does this mean that trade unions have lost their capacity
to call social peace into question? If this was the case, big companies might
lose their interest in centralized wage bargaining as its peace-keeping function
becomes redundant. While trade unions are increasingly unable to prevent the emergence
of plant-level pacts, they still have the power to resist special issues.
At the political level they define the limits of cost-cutting and deregulatory
policies. In these cases, they can rely on the willingness of their members to
go on strike - even if employees accept a competitiveness pact at the plant
One prominent example is the conflict over sick pay in
1996. The employers' association of the metal sector wanted to cut sick pay, but
the union resisted this issue, and the employees of several car manufacturers
and their suppliers immediately went on strike. In order to re-establish social
peace, business backed down. A wave of additional plant-level pacts was
negotiated. Management and works councils regularly agreed on the retrenchment
of bonuses and premiums in order to maintain the level of sick pay. Hence, the
union was able to define certain taboos of cost-cutting policies at the
collective level (i.e. sick pay) while it was unable to prevent plant-level
Change in the German Wage Bargaining System
In the preceding sections we have offered three arguments
as to why large German employers have not abandoned the centralized bargaining
system. Firstly, industrial peace has become of major importance for companies
in an uncertain business environment. All things being equal, the system
guarantees a much higher level of industrial peace than would be the case in a
decentralized bargaining system. Secondly, companies have been able to offset
cost increases and the rigidities imposed by collective agreements through
plant-level pacts for employment and competitiveness. Thirdly, collective
agreements themselves were opened up to provide a range of options for companies
to deviate from the standardized regulations of the agreement. This was possible
as unions accepted the possibility of local flexibility being extended without
calling social peace into question.
While the reasons for keeping a centralized wage
bargaining system outweigh the pressures for outright decentralization, the
adjustment of the German wage bargaining system to an internationalized economic
environment has left clear traces of change on its institutions. To some extent
these changes resemble the notion of organized decentralization - the
dual system combining strong centralized co-ordination with substantial
decentralized elements - as described by Traxler (1995). The term 'organized
decentralization' describes a wage bargaining system in which "bargaining
tasks have been deliberately delegated to lower-level associations in a way that
does not eliminate co-ordinating control by the higher-order associations over
the bargaining process at lower levels" (Traxler 1995: 7). Because of their
peace-keeping interest, big companies seek flexibility within the system and
accept the unions' role as a veto-player. Thus the institutional setting remains
relatively stable. Nevertheless, under the cover of formal institutional
stability we can witness a process of institutional transformation towards a competition-driven
model of wage regulation that rests on the local deviation from centralized
wage setting rather than on its implementation. While collective agreements at
the sectoral level still provide a general framework for pay and working
conditions, the actual terms and conditions for individual employees and plants
can vary substantially with the performance of the firm. Highly flexible working
time regimes enable production on demand to take place without an increase in
pay for overtime. Opening clauses in collective agreements and plant-level pay
agreements allow companies to adjust their labour cost increasingly to the
The German wage bargaining system has traditionally
provided high wages and standard working conditions for a large number of
employees and thereby eliminated low cost competition within Germany. It has
also created a high degree of social peace. Moreover, institutionally supported
employment security, which was inherent in the German model for decades,
enhances the commitment of the workers and encourages employer investment in
improved skills - both features of high-quality production (Streeck 1997).
As a consequence, companies have had to seek quality
leadership. Diversified quality production (DQP) has emerged as a strategic
response by firms to the constraints of the rigid external regulation of wages,
workplace co-determination and labour legislation. DQP does not refer to the
individual business strategy of a firm but reflects a type of industrial order.
It depends on a specific institutional and organizational setting to offer
collective goods which firms are not able to produce on their own. For instance,
social peace is one of the general and unspecific 'redundant' capacities which
make the model work well (Sorge 1985). Social peace at the company level
contributes to better quality and higher productivity, which makes high wage
settlements pay off.
Today the interaction of wage regulation and production
model has been reversed. Under the impact of internationalization, German
companies have become price-takers not price-setters for their products. This
does not mean that they have left the path of diversified quality production. It
does mean, however, that, today, even quality production has to face the
necessity of being cost-conscious. Previously, companies had to adjust their
production regime to the labour market regulation, which aimed at providing
equity and equality of working conditions. The newly emerging wage-setting
regime follows the need of production strategies aimed at market performance and
competitiveness. In this sense, the German wage bargaining system has changed
its functioning in the political economy without changing the formal
institutions. This transformation is driven by the changing product market
strategies of big German firms that have to adjust to international cost
The emerging cost competition-driven model of wage
regulation is still based on the beneficial effects of the traditional
centralized wage bargaining institutions. In particular, the presence of high
levels of social peace and moderate and predictable wage negotiations still
serve as a precondition for introducing further flexibility. At the same time,
however, competition-driven forms of wage regulation introduce competitive
elements that are set to undermine the co-ordination capacity of the system.
Pacts for employment and competitiveness and the emergence
of opening clauses in the collective agreement framework that introduce price
competition into the German model cause the free rider problem to reoccur. In
competitive markets, companies are tempted to deviate from collective agreement
standards in order to exploit a short-term advantage - and they know very well
that their competitors do the same. The history of pacts for employment and
competitiveness in Germany reveals that cost-cutting and flexibility agreements
spread in no time between firms and sectors. This is particularly true in highly
oligopolistic sectors with massive overproduction - such as the car industry.
The cost-cutting interests of big companies and the
emergence of plant-level pacts for employment and competitiveness make the
interaction between co-operation and competition more difficult. Whereas quality
production depends on co-operation between firms, cost-conscious production does
not. On the contrary, cost-cutting effects only provide rents as long as the
competitors do not close the gap. Hence, the introduction of cost-consciousness
into the model of diversified quality production leads to a new form of
competition between firms in which cost-cutting is not necessarily based on
productivity growth any more, but on reduction in pay.
As we have shown, this new competition has not led to the
breakdown of the centralized wage bargaining system. Yet its capacity to solve
collective action problems has clearly shrunk. The liability of the collective
agreement standards is to some extent no longer an institutionally guaranteed
collective good. Rather, it depends on the processes and results of private
face-to-face negotiations between specific unions and specific firms in
reference to an opening clause.
The developments of the 1990s have shown that the
character of social peace has shifted from an institutional effect of the wage
bargaining system to a private good. Firstly, employment security at the company
level has been questioned by employers and has become contractual in the form of
pacts for employment and competitiveness. For example, some workers in the metal
sector are protected by a firm-specific formal employment pact while others are
not. Secondly, at the sectoral level, social peace no longer is a
"redundant capacity" in the sense of a beneficial institutional
effect, but a private good that firms and employers' associations try to deal
with. By negotiating cost control and flexibility without risking the
peace-capacity of the system, firms and sector-specific associations try to find
their private "social peace equilibrium" (Streeck 1989: 57), which may
differ between companies and sectors. It is the privatization of previously
generalized institutional effects that is at the centre of the transformation of
German wage bargaining institutions.
Appendix: The MPIfG Database on Big German Firms
The sample of 120 companies (100 biggest of 1986 and 1996)
in Germany was taken from the German Commission on the concentration of German
industry (Monopolkommission), which since 1978 has bi-annually ranked the
largest 100 German companies on the basis of net value added (in Germany). In
contrast to sales, which are a more common variable for ranking companies, net
value added has several advantages. First, it is a more stable factor, which
allows for the inclusion of banks and insurance companies. Second, it ignores
different price developments across industries, which would bias the company
sample. Third, net value added can indicate the vertical integration of
different industries. For example, in retailing companies, which have a low
degree of vertical integration, the ratio of net value added to sales is
frequently lower than in companies in other industries (Monopolkommission 1998:
The selection by size (measured in value added) produces a
bias towards the largest employers since labour costs are a major component of
value added. The firms in the sample employ 3.8 million employees in Germany;
about 16% of all employees in the private sector. Similarly, they contribute 18%
to the gross national product produced in the private sector. Also, in terms of
international activities, the sample covers a proportionally large share. The
companies employ about a third of all employees of German companies abroad (1.4m
compared to an estimated 3.5m employees). They are therefore on average much
more internationalized than the average German company.
In our sample, we have 76 manufacturing firms, 39 firms in
the service sector and five companies in the construction sector. The
manufacturing firms include the chemical sector (14), industrial machines (13),
automotives (11), electronics (3) and others. The service sector firms break up
in banks (11), insurance firms (8), retail (10) and general services (10).
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1 The material is based on the research project "The German System of
Industrial Relations under the Impact of Internationalisation", which is
being carried out at the Max Planck Institute for the Study of Societies. We
would like to thank the members of the MPI companies project Wolfgang Streeck,
Jürgen Beyer, Martin Höpner, Antje Kurdelbusch and Rainer Zugehör for their
comments and support throughout the project. Thanks also to the participants at
the Workshop on Institutional Change in German Industrial Relations at the MPIfG
on 8th and 9th December 2000, in particular to Reinhard Bahnmüller, Bob Hancké
and Richard Hyman, and finally to André Kaiser and Armin Schäfer, who acted as
internal reviewers at the Max Planck Institute for the Study of Societies.
Note the use of the term wage bargaining centralisation. Some of the political
economy literature distinguishes between centralized bargaining systems at the
national level and intermediate bargaining systems at the sectoral level (in
particular Iversen 1999). In our understanding, a centralized wage bargaining
system is defined here as any bargaining level above the level of the firm.
The trade-off also depends on the company's production system and its product
market. For the sake of clarity we confine our considerations to the issue of
company size, since in our view it is the dominant factor for diverging company
interests with regard to wage bargaining in the German case.
In the past one could assume that small companies were more focused on domestic
markets than international markets. If that is the case, central agreements take
wages out of competition and thereby level the competitive base between
companies. In an open economy, however, this only applies to a small and
shrinking fraction of companies.
While the emergence of pacts for employment and competitiveness at the company
level is not only a German but also a European and American phenomenon
(Zagelmeyer 2000, Hancké 1998, Sisson et al. 1999, Mitchell 1994), it should be
noted that the necessity for management to come to co-operative solutions with
the works councils distinguishes these agreements from mere "concession
bargaining" as took place in the US during the 1980s.
See Appendix on the sample of companies.
The simultaneous emergence of negotiations in companies of the same sector is
not always an indicator of increased competition, but it may also
indicate a high degree of inter-firm cooperation. For example, the management as
well as the works councils of German car manufacturers usually exchange their
ideas and experiences in the process of negotiating and implementing the pacts.
Hence, processes of policy-learning seem to contribute a lot to the diffusion
and appearance of the pacts. Owing to space restrictions we cannot deal with
this issue here.
Because of the fact that Bertelsmann is a media company, the company is exempted
from the obligation to include employees' representatives on the supervisory
board, although it would qualify for co-determination in other respects.
One main difference between concession bargaining in the United States and in
Germany is that German managers - since they have no choice - seek to involve
the unions in the bargaining process, whereas American firms often combine
company-level bargaining with union avoidance strategies (Bronfenbrenner 2000).
correlation is statistically significant (r=.86, p=.000, n=46 companies).
parameters changed over the years. Generally, the average weekly working hours
had to be met over a certain period of time. Management could ask their
workforce to work longer hours in some weeks and shorter hours in others. Since
1991 the corridor in which the average working hours have to be met is one year,
so that workers in the metal sector can in principle work on annual working time
accounts. A further reduction in working hours in 1993 has led to the exemption
of 18% of the workforce from a shorter working day, mainly in order to enable
companies to make precious highly skilled engineers and software specialists
work longer hours without having to deal with the works council. In 1995, the
collective agreement on employment security enabled companies to shorten the
working week to 32 hours with the equivalent cut in pay (Herrmann et al. 1999).
12 Although the violation of collective agreements is unusual in big companies, it
is fair to assume that this is not the case in smaller companies, which have
suffered more from the system and which are not covered by the unions. Moreover,
it is often very difficult to establish whether a company arrangement is in line
with the sectoral agreement because of the complexity of flexibility measures.
13 Throughout the 1990s there have been debates about the legal abolition of the
superiority of collective agreements which is laid down in paragraph 77 III of
the Works Constitutions Act (Betriebsverfassungsgesetz). The changing practice
of the 1990s has made legal reform largely superfluous.
Copyright © 2001 Anke Hassel and Britta Rehder
No part of this publication may be reproduced or
transmitted without permission from the authors.
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