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Germany's Industrial Relations System at Risk?

by TGeraghty Mon Jul 18th, 2005 at 10:19:51 PM EST

Whataboutbob, in the Is the Euro Area Really Worse On Jobs Than the US? thread, has a key insight into the future political debate about the European economy:

We are seeing the beginning of the American neoconservative ideology being pushed on Europe...and I don't know if Europe is ready for it...

The next stage of this debate is currently being played out in Germany, where business interests are using the combination of high unemployment, the current scandal at VW, and the upcoming German elections in an attempt to undermine the political foundations of German social partnership.

Before discussing the current crisis in German industrial relations, however, let's consider the current system and how well it has worked.

Industrial Relations in Germany: the Basics

The German industrial relations system fosters peaceful adjustment to economic changes via active labor participation in firm management. It does so in two ways. On the shop floor, workers in any firm with more than 5 employees are entitled to elect a works council. Firm management must gain the agreement of the council on personnel issues such as hiring, dismissal, and pay, and must consult the council on issues involving the organization of the production process, such as the introduction of new technology. At the top level of the firm, codetermination requires all firms with more than 2,000 workers to have labor representatives on the supervisory board (in  Germany, these boards are responsible for the long-term viability of the firm, and elect the executive committee that is responsible for managing the company).

(Note: there is an excellent overview of the German IR system with much more information here. Don't overlook the links at the bottom of that page.)

In theory, codetermination can improve economic performance by (full links require subscription):

(1) Augmenting information flows between workers and management;

(2) Placing "checks and balances" in firm management.

These, in turn:

  • Prevent owners and managers from taking self-interested actions that ignore workers' interests, and;
  • Encourage workers to take a longer-term perspective on firm decisions.

The result may be higher productivity through greater firm investments in skill development and innovation, and moderation of worker demands in tough times. These benefits typically cannot be realized voluntarily, or enforced through financial markets alone.

The German IR System in Practice

In practice, the German industrial relations system has contributed to peaceful, collaborative adjustment to economic change, as Kathleen Thelen discusses in her book Union of Parts: Labor Politics in Postwar Germany.

During the 1980s, for example, codetermination was critical in the adjustment of the steel industry to growing international competition from Japan and from less-developed countries, as Thelen describes:

The defining feature of social partnership in the steel industry is that labor representatives wield considerable power in plant decision making, but with a deep sense that their ability to codetermine outcomes implies as well as shared responsibility for the firm's success. . . .

This pattern of plant relations . . . helps explain the low levels of conflict in the German steel industry [in the 1980s], despite prolonged economic crisis. . . . [B]oth [labor and management] agree[d] that the problem for German steel [was] . . . [n]ot whether, but how to rationalize production . . . works councils themselves are often great proponents of rationalization measures that elsewhere instill fear in the hearts of labor representatives. . . . works councils tolerate -- indeed they encourage -- rationalization investment, which they see as their only hope of making the remaining jobs . . . crisis-proof. . . .

According to Thelen, the German IR system has also been effective in managing economic change in automobiles and even in high-tech industries such as consumer electronics, where the key issues revolve around the wage and employment effects of changes in process and product technology. Labor's "quid pro quo" for cooperation is agreement with management on a "social plan" that regulates the number and terms of layoffs, including generous severance and retraining benefits for workers who are "eased out of" the industry.

Codetermination and Economic Performance

In terms of economy-wide indicators, the German emphasis on social partnership in industrial relations also seems to work well.

The number of working days lost to labor disputes in Germany remains low by international standards:

German labor productivity growth has been high:

Now it is true that German labor costs are higher than those in most of the industrialized world, but there is a clear reason for this that has little to do with codetermination, as Thomas Geoghegan points out in his article "No Flat World in Europe"

Yes, German unions have had to keep wages down of late. But that's at least in part because in the early 1990s they pushed them up too high, even by my left-of-center standards.

In fact, as Geoghegan implies, the German IR system is helping to fix this problem. Since 1999, German labor costs have fallen more quickly than anywhere else in the developed world, including the U.S. (left chart):

. . . and (right chart) as a result Germany is now the world's top exporter, surpassing even the U.S. (and with an economy only about 20% as large).

So, to summarize:

  • Germany's industrial relations system allows active labor involvement in firm management at both the board and plant levels;
  • This system has resulted in successful economic adjustment to globalization in industries as diverse as steel, automobiles, and consumer electronics;
  • The system continues to produce impressive results in terms of industrial peace, labor productivity, and international competitiveness.

Given these conclusions, why does German business apparently wish to scrap this system? We will investigate this issue in part II.

Very good job.

I was getting ready to post a diary on this IHT article about the scandal at VW, and the wider question of codertermination.  I know that this is own of the things I admire about Germany, and I'm sad that it seems to be under attack.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Tue Jul 19th, 2005 at 12:13:52 AM EST
The money quote from the piece you linked to typifies exactly what is wrong with our modern media:

Co-determination is not the only, and not even the major, culprit for Volkswagen's woes. But it has sounded an early warning that it's a model due for a major revamp.

Well, OK, if codetermination is not even the major culprit for VW's woes, let alone the whole German economy's, then why are they wasting time piling on? Why don't they write about the REAL problems with the German economy?

I guess I shouldn't complain about the piece so much, since at least IHT is pretty even-handed in putting forth the benefits of the system.

And there may indeed be a problem with too-cozy insider relationships at the top of German firms. But that's hardly a problem that switching to the "Anglo-Saxon" model is going to solve.

by TGeraghty on Tue Jul 19th, 2005 at 01:23:22 AM EST
[ Parent ]
Yep, the IHT article seems more than a little unduly critical of the system. The subtle stereotyping of working class people as being untrustworthy, because they'll spend corporate funds on hookers <so sayeth the IHT>.  I guess that I'm fascinated by the neocorporatism that you see in Germany, and I can't help but think that the US was headed in this direction until the 1960's, but the reermergence of the neo-liberal right attacked this. It's convenient to dimiss this as an American problem, but I think that you made a good point calling this the Anglo-Saxon system.  So much of America's new neoliberal ideology is not American, but actually is transplanted from the UK.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg
by ManfromMiddletown (manfrommiddletown at lycos dot com) on Tue Jul 19th, 2005 at 12:18:08 PM EST
[ Parent ]
TG, your article has been on my radar to read awhile now...and as always, really respect your writing. So I see a very successful coalition between management and labor, the results of which has the best exports in the world, with a very good social safety net. And this, despite the fact that (at least as I've been told), that the Germans not only had to deal with WWII reparations, but have also had to deal with the costs of integrating East Germany. And STILL are THE most productive exporter in the world...that, oh by the way, pays its workers the best. So, of course, you now have me hooked to go and read the next part...which I do with trepidation.

By the way, I think we will very soon need to put together a German mega-diary, that kind of summarizes all the recent diaries on this subject, so we can try to get some kind of overview of Germany, where it is, and where it is going (or could).

Thanks again for your informative work!!

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Wed Jul 20th, 2005 at 01:20:35 PM EST
whataboutbob, you raise a very good point, namely that after reunification the East had to be integrated into Germany.  IHMO, this is the major reason for the current political and economical crisis in Germany.

First of all, our then-Chancellor Kohl decided to pay for the unification mostly by raising credit, a practice that has been hugely popular ever since.  Of course, the next generation will ultimately have to pay for that and we're already paying.

Secondly, while the rest of Europe went through some serious restructuring in the 90s the German government was asleep at the wheel, because the unification caused a boom in the economy.  There was a huge market of 16 million people to conquer, after all.

by hesk on Wed Jul 20th, 2005 at 03:36:13 PM EST
[ Parent ]
I think what we ought to do, since the French,  German, and Italian left seem so bereft of ideas now, is to create a manifesto for them, a set of policy proposals that would seriously address the problems of slow growth and high unemployment, but in a way that preserves the traditional European commitment to social justice.

There's potentially plenty of material available - Sweden, the Netherlands, Ireland, for example, are all countries that have recently faced economic crises and recaptured economic dynamism without totally succumbing to neoliberal nostrums. We might examine what lessons they hold for the bigger economies. We might also investigate what left policy intellectuals have come up with.

by TGeraghty on Thu Jul 21st, 2005 at 12:04:57 AM EST
[ Parent ]
TG, This is an EXCELLENT idea!! I'm sure others will climb on board a project like this. The question is, where to start, but this is an excellent opportunity to also develop our "open source community" around a project. I have been amazed to watch people utlize Daily Kos as a forum to organize investigative journalistic reports (eg, the White House fake reporter scandel, the Downing Street Minutes, etc), and really come up with some material that "grew legs" and made (is making) serious journalistic and political impact. So...where to start...perhaps we should start with a diary, in which we discuss your idea, getting other peoples input, discussing how to break down research into discrete areas, so certain people, or groups of people, could research it together. Maybe we can talk a little more in this thread about how to organize it, who will start off the diary, who will be project director(s), etc. We could engage other Euro blogs too. (etc., etc.) Heck, we have our first success with Irishhead's project on the front page, so we know that a litle energy put in the right direction can make a big impact!  What do you think? Anyone else out there game??

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Thu Jul 21st, 2005 at 02:15:01 AM EST
[ Parent ]

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman
by dvx (dvx.clt t gmail dotcom) on Thu Jul 21st, 2005 at 07:22:55 AM EST
[ Parent ]
I think it could really be useful. With all the diaries that have been published so far, we're already off to a pretty good start. I'm certainly willing to participate.
by TGeraghty on Thu Jul 21st, 2005 at 03:59:23 PM EST
[ Parent ]
What's the next step? A new diary? Collect links to the existing diaries in a "mega-diary"?

Also, Jerome had a bunch of issues that he planned to write about.

by TGeraghty on Thu Jul 21st, 2005 at 07:30:08 PM EST
[ Parent ]
I will start a new diary, as a way to begin discussion on how to proceed with this (It's Friday the 22nd, so will post it later today...and it can be on the diary list awhile). I'll link as many of the recent diaries as I can...and we can then develop it from there. Stay tuned...and GREAT idea!!

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Fri Jul 22nd, 2005 at 06:08:05 AM EST
[ Parent ]

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