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 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.