Ifo Viewpoint No. 7: Opt-out Clauses

Hans-Werner Sinn
Munich, 22 Nov. 1999

In Germany sector-wide pay agreements are negotiated between unions and company representatives. The specific competitive conditions facing an individual enterprise are not taken into consideration and the agreements are binding for member companies of the employers associations. According to the German Workplace Labour Relations Law (Art. 77, Sec. 3 BetrVG) not even the companies that are not bound by the wage settlements are allowed to negotiate with their own works councils on working conditions already regulated by collective bargaining agreements. It should, however, be permissible for companies to opt out of sector-wide wage settlements, for when both employer and employees decide on lower wages than those established in collective bargaining to save a business, it should be possible to implement this decision.

It is surprising that the unions have voiced criticism of the opt-out clauses since, contrary to a prevailing assumption, it is the workers who stand to profit. In the short-term and at present negotiated wage levels the opt-out clause saves jobs that would otherwise be lost, thus also increasing payrolls. In the long-term wage income will increase because the unions will no longer have to adjust their wage demands to the weakest companies but will be guided by what the better enterprises can afford, given that the other companies can make use of the opt-out clauses and reach agreement on lower wages. If anyone should have objections to the opt-out clauses, it would be expected to come more from the employers' organizations than from the unions. The public positions expressed by the two sides do little justice to the true facts of the matter.

Regardless of these distributional matters, wage differentiation that will result from the opt-out clauses will create additional jobs that would otherwise not be economical. The fact that the shifts in distribution would benefit labour more than capital does not change the fact that there will be welfare gains for the society as a whole. Opt-out clauses should be included in the Alliance for Jobs initiative.

Hans-Werner Sinn
President of the Ifo Institute