Ifo Viewpoint No. 96: Market Order under Attack: Seizure of Power by Münchhausen

Hans-Werner Sinn
Munich, 01 July 2008

Before the construction company Philipp Holzmann AG went under, its employees offered management a wage cut to save their jobs. But they were not allowed to work more cheaply because the employers’ associations (HDB and ZDB) to which Holzmann belonged opposed the offer as did the IG Bau trade union. Why were the social partners opposed to the wage cuts? Because they included competitors of Philipp Holzmann who with their opposition were able to ward off low-wage competition. Philipp Holzmann was forced into bankruptcy.

German Reunification was similar. After western German employers and trade unions had set up new wage bargaining associations in eastern Germany, they worked out new collective wage agreements in spring 1991 which were aimed at raising wages in the east to western German levels within five years. Why this? Because the western German competitors of the companies privatized by the Treuhand didn’t want low wage competition at their doorstep. They wanted the Japanese, who were interested in the Treuhand workers, to either stay home or at least to pay western German wages if they came. The Japanese chose not to come, investments were scanty and eastern Germans are still waiting for self-sustaining economic growth.

And now the latest absurdity: When Deutsche Post CEO Klaus Zumwinkel realized that he couldn’t prevent the postal-carrier monopoly from ending on 1 January 2008, he demanded minimum wages. Why? He wanted to protect himself from competitors who were already waiting in the wings. And he succeeded. In the meantime, 40 of the 90 PIN Group companies, including the holding company, have declared bankruptcy, and almost 8000 employees have been dismissed.

This is German corporatism at its worst. If the competition can’t be kept out, it can at least be forced to pay the same wages that the others have to pay. Low-wage competition pays dumping wages, it is argued, a market economy needs quality competition and not wage competition, and appeals are made to the social conscience of the public to protect one’s own interests. Philipp Holzmann’s competitors proclaimed the noble goal of achieving more fairness in competition. In the case of the Treuhand companies, it was argued that help must be given to “our brothers and sisters” who were suffering hardship through no fault of their own. And Klaus Zumwinkel even claimed the Pope was on his side. Politicians have always gone along with this dubious game, drowning out the sabre rattling with the soothing music of social harmony.

By doing so they have compromised the prosperity of the nation. Philipp Holzmann could have survived and the workers could have kept their jobs. The Japanese and many other investors could have touched off a second economy miracle in eastern Germany with their know-how and the highly motivated staff of the Treuhand companies. And PIN could have continued to pay its workers, keeping the postal rates low at the same time.

Now the German government wants to perfect the Zumwinkel strategy by introducing industry-specific minimum wages. Chancellor Merkel is opposed to a comprehensive minimum wage, as she has repeatedly stated in public. But she seems to be willing to swallow the industry-specific minimum wages that her labour minister is demanding.

Today, collective agreements in Germany can be declared generally binding if at least fifty percent of the employees in an industry work for employers that are contractually bound to the wage agreement. This of course does not mean that more than fifty percent of the employees must be union members. If out of one hundred employees, fifty work in companies for which the collective agreements are binding, only about ten of these are typically union members. These ten are then able to determine the wages of the other ninety. That is called the autonomy of collective bargaining.

What happens, however, if the union members have even less power, and the fifty percent needed to make an agreement binding is not reached? Then expert committees, comprised in the decisive phase of equal numbers from the unions and employers' associations, have the task of determining wages for the whole industry. In principle, it is sufficient when there is only one union member out of 100 employees to negotiate minimum wages for the other 99.

It is particularly problematic when several unions are involved. In these cases the Minister of Labour now wants the largest of these unions to have the final say. If half of the employees are in the one and half in the other union, but the one union has 11 percent and the other union only 9 percent of the employees as members, the collective agreement of the smaller union is replaced by that of the larger one. The expert committees are also to have the right to dominate the smaller union if this union subjects less than 50 percent of the employees to the binding agreement. It will be interesting to see how the Federal Constitutional Court will rule in this matter.

What the Ministry of Labour is currently seeking to push through is an attack on the ordering framework that a market economy needs in order to function. It is the best way to force Germany again to its knees, after it had been freed from some of its fetters by the Agenda 2010 reforms. No member of the current government can later exculpate himself if he or she now approves these plans only to save the coalition. The coalition is not worth it.

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

Published as „Perfektionierte Zumwinkelei“, WirtschaftsWoche, no. 26, June 23, 2008, p. 48.