Ifo Viewpoint No. 87: Stand firm, Herr Mehdorn! – The German Railway Strike

Hans-Werner Sinn
Munich, 08 August 2007

The struggle between Deutsche Bahn AG and its union of train drivers (GDL) has intensified. Unlike the other two large unions that Bahn CEO Hartmut Mehdorn must negotiate with, Transnet and GDBA, the GDL has not signed on to the wage agreement of July 9, seeking to gain more for its members.

This would be fatal, since it would move Germany one step further in the direction of unions for individual trades which once dominated the labour market in England. The example of the stokers that rode along in electric locomotives and had to be paid is legendary. Germany traditionally had a great advantage over the English system in having industry unions, which represented all employees in a particular industry and which did not hinder the postwar Wirtschaftswunder.

Britain’s economy, at the time, was decrepit. In the mid-seventies it had only just half of West Germany’s per-capita income. The situation did not change until Margaret Thatcher was elected in 1979 and in bitter battles broke up the British trade-union system. In the meantime, Germany has fallen behind. Britain has again surpassed Germany in per-capita income, and the old British weaknesses are now becoming apparent in Germany. The behaviour of the train drivers (GDL) recalls unpleasant memories of the German flight-controllers’ strike or the recent strike of hospital doctors.

Unions for individual trades are the worst thing that can happen to a country’s labour market, since they tend to make aggressive wage demands that severely hinder the business of the affected industry and that even damage union members as a whole. The cake becomes so small that the workers together get less, even though they may manage to win a larger fraction of the cake. In this regard, Michael Sommer, head of the German Confederation of Trade Unions, is perfectly correct in criticising the maverick tactics of the GDL.

Why this dissent among union members? Competition among unions that represent alternative trades in the same industry is, for economists, a competition of monopolies that offer complementary goods. Such competition functions according to completely different rules than normal competition among suppliers of substitute goods. While the later form of competition is the lifeblood of a market economy, the former is more like a coffin nail. Competition between those who offer substitutes tends to lower prices and to increase the volumes sold on the market. Competition between those offering complementarities tends, in contrast, to raise prices and to decrease the volumes sold on the market. This aspect is fundamental to an economic understanding of competitive processes. The fact that this is not reflected in German competition and collective-bargaining law does not disprove this truth.

The impact of the two forms of competition is so different because the price changes of the one supplier have completely contrary effects on the other supplier. Under normal competition between suppliers of substitutes, a seller is happy when the other seller raises prices because this means the customers will run to him or he can raise prices himself without losing many sales. Under competition among suppliers of complementarities the opposite is the case. Here the one is happy when the other lowers his prices because now he can raise his prices without detrimental effects on turnover.

The differing effects between the suppliers imply that under competition totally different market equilibria arise. Competition among substitutes leads to lower prices and larger volumes than in the case of a complete monopoly; competition among complementarities in contrast leads to higher prices and lower volumes. If competition is replaced by a complete monopoly, this results in diverging price and volume reactions. To be sure, the amalgamation always leads to joint profits being maximised since the suppliers do more of that which they all benefit from. But in the case of substitutes this means rising prices and in the case of complements falling prices.

Monopolies are obviously not good for a market economy. Even worse is a chain of monopolies that offer complementary goods. It has such catastrophic effects that in comparison a total monopoly of all links in the chain is the better solution, both for the sellers and also for their customers.

This applies to the market for goods and also to the labour market. A monopoly union that represents all railway employees will negotiate lower wages than can be expected from independent negotiations with unions of the individual trades. In this way, a monopoly union will not damage employees, but on the contrary bring about more employment and a larger total income for employees. The additional, welcome benefit is that the railway and its customers also profit. So, stand firm, Herr Mehdorn!

Hans-Werner Sinn
Professor of Economics and Finance, University of Munich
President of the Ifo Institute

Revised version. Earlier published as "Stand firm, Herr Mehdorn!". Published as "Hart bleiben, Herr Mehdorn!", WirtschaftsWoche, no. 32, 6 August 2007, p. 134; additionally printed in similar form in Les Echos (Mali), The Australian Financial Review (Australia), The Korea Herald (South Korea), Daily Times (Pakistan), L’Echo (Belgium), Aripaev (Estonia), Vilaggazdasag (Hungary), Business and Finance (Ireland), Il Sole – 24 Ore (Italy), Het Financieele Dagblad (Netherlands), Danas (Serbia), Sme (Slovakia), Finance (Slovenia), L’Agefi (Switzerland), Al Jaridaa (Kuwait), Al Shabiba (Oman), Al Eqtisadiah (Saudi Arabia), Duowei Times (USA).