German employers are abandoning the country’s famous labour model

German industrial relations

Labour’s lost love

German employers are abandoning the country’s famous labour model

Aug 3rd 2013 |From the print edition

IT WORKED brilliantly in the dark days of 2008 and 2009 when exports faltered and companies might have been tempted to shed staff. German manufacturers, their workers and unions, with a little help from the government, engineered a compromise that put employees on short time and trimmed their holiday entitlements but saved their jobs. As a result, when Germany pulled out of recession in 2010 its companies had a skilled workforce in place to meet resurging demand. The pact, along with continuing wage restraint, has boosted productivity while keeping unemployment low.Some pundits attribute German industry’s success in weathering the downturn to its consensual labour-market system: “A model for Europe?” suggested a policy paper for the Robert Schuman Foundation, a Brussels-based think-tank, in April. The periodic “tariff agreements” between unions and bosses, that set wage rates in each industry, are credited with fostering pay restraint. Also praised is the practice of “co-determination”, which gives employees representation on works councils and, for those (typically larger) companies that have them, on their supervisory boards. This is seen as preventing labour conflicts and helping companies to cope with external shocks.

However, back in the late 1990s, when Germany’s economy was weak, many blamed the same concept ofMitbestimmung—consensus between workers and managers—for helping to make it the “sick man of Europe”, by bloating labour costs and preventing businesses from restructuring. As a result, a series of liberalising reforms were introduced that allowed German industry to cut fat and restrain pay. These meant that businesses entered the 2008-09 downturn in good shape: it was the reforms earlier in the decade, as much as the jobs pact at the start of the recession, that helped industry withstand it.

Now some German firms, especially in service industries, are concluding that consensus is no longer delivering the goods. To keep labour costs down and achieve flexibility, they are going their own way and preparing, if necessary, to endure disputes. For example, the German arm of Amazon, an American online retailer, is resisting demands from ver.di, a big trade union, to pay its staff according to the national scale for retail workers rather than the lower rate for logistics workers. Ver.di says Amazon staff would gain about €9,000 ($12,000) a year from being reclassified. But although it has managed to get some workers out on strike, the union is finding it hard to recruit among the many agency and part-time workers at Amazon’s eight depots.

Karstadt, a struggling department-store chain, announced in May that it would not take part in the next round of collectively agreed wage tariffs for the retail trade. Three years ago Nicolas Berggruen, an American investor, came in as a white knight and persuaded staff to sacrifice holidays and Christmas bonuses to keep the firm alive. Workers see his exit from the tariff round as a betrayal, and have been staging sporadic strikes. Ver.di is also demanding that Globus, which runs supermarkets and do-it-yourself stores, reconsider its decision to quit the tariff negotiations.

In the reforms of the early 2000s, employers gained flexibility to tweak the industry-wide tariff agreements to suit their own circumstances. But many bosses have walked away from such pacts altogether: by 2011 (the most recent year for which figures are available) only 29% of German firms were signed up for industry-wide tariffs, down from 34% in 2006.

The unions are battling to try to preserve national pay standards. In June IG Metall, which represents many workers in heavy industries, achieved a more-or-less nationwide deal for a 3.4% wage rise from July 1st and a further 2.2% next May. Ver.di, which is seeking rises of around 6% for its members in retailing, has so far won a deal for wholesale workers, worth a total of 5.1% spread over this year and next. Although businesses are giving up on collective deals, the employers’ associations that represent them accept that, after years of restraint, pay could catch up a bit. So there is some room for compromise.

However, the unions are continuing to lose members, as the older industries where they are entrenched trim jobs. Newer companies, especially in areas such as e-commerce, security firms and fitness studios, are “almost entirely without collective representation”, says Martin Behrens at the Hans Böckler Stiftung, a union-linked think-tank.

Workers at any German company with five or more employees can demand the creation of a works council. But in 2011 only 12.5% of all companies had one, down from 13.4% the year before. Only 659 German firms had supervisory boards with worker representatives in 2011, compared with 708 in 2007. Ironically, as America’s carmaking union seeks to bring Germany’s labour-market model into Volkswagen’s factory in Tennessee (see article), its future seems increasingly in doubt back home.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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