Ifo Viewpoint No. 165: Stop the Splinter Unions

Hans-Werner Sinn
Munich, 01 June 2015

There are some things that Germany’s unions can be praised for. Although they got carried away with excessive pay claims in the 1970s and 80s, leading to mass unemployment that turned Germany into the sick man of Europe, they subsequently contributed to the turnaround with Agenda 2010 – when, by exercising wage restraint, they helped Germany to achieve new prosperity and low unemployment.

While 85 and 306 working days per employee were lost in France and Italy respectively between 1980 and 2007 through strikes or lockouts, the figure in Germany was just 15 days, showing that, on the whole, the social partnership had been effective.

However, the more collective German wage model was undermined by devastating strikes in recent years by unions representing small groups of employees with specific roles within a company. Some of the unions, in particular those representing workers with critical jobs, such as air traffic controllers or pilots, have demanded extremely high wages – and obtained them. This happened because they were granted new powers in a decision taken by the German federal labour court in 2010, which removed the pressure to achieve a unified wage structure within companies.

In 2011 strikes by train drivers quickly got out of hand and they are again on strike. The Deutsche Bahn railway company, which had started running late after privatisation and was neglecting its infrastructure, is again being attacked by aggressive trade unions that paralysed vast swathes of the economy with their long strikes. The state only narrowly averted disaster by loaning Deutsche Bahn train drivers with pre-privatisation deals and civil servant status, who cannot go on strike, to keep things going.

Then in 2012 flight controllers at Frankfurt airport brought air traffic to a standstill with a series of strikes and could only be pacified by pay rises of up to 70 percent. Up until the Germanwings air crash there were also massive strikes at its parent company, Lufthansa.

If this attitude continues, Germany may well suffer the fate of England in the postwar era. At that time companies had to deal with several trade unions representing specific professions, driving the companies into lasting crisis with high wage claims, which meant they lost ground to their German counterparts.

In the mid-1970s British per capita economic output was half of Germany’s. That did not change until Margaret Thatcher became prime minister in 1979 and crushed the trade unions. Britain subsequently experienced an unprecedented economic upturn, and its per capita gross domestic product is now at virtually the same level as Germany’s.

Unions that negotiate for certain professions may push wages per employee higher than if a single, overarching trade union had negotiated, but the overall staff will get smaller as jobs are cut to make the wage bill affordable. Such job-specific unions not only harm employers, but ultimately damage the employees too. Therefore, from an economic point of view, they should not exist – regardless of what any legal system has to say about this.

But such unions are now legal in Germany, so politicians needed to change that without delay. That is exactly what they are now doing, with a new law on wage unity, which Andrea Nahles, a social democrat, who is the federal minister of labour got the cabinet to approve in December.

The change, which the unions plan to challenge legally, was first debated in the Bundestag on March 5 and is scheduled to take effect this summer. At that point companies should be able to relax over wages again.

Hans-Werner Sinn
Professor of Economics and Public Finance
President of the Ifo Institute

Published as “Germany Has Started Putting Right Costly Labour Law Mistake”, The Times online, 11 May 2015. Also published in German as “System schleunigst verändern”, WirtschaftsWoche, 30 March 2015, p. 43.