Reform within the Social-Market Economy: An Analysis of Current Labor Market Reforms in Germany and Predicted Repercussions on the Role of Trade Unions

By John R Seewald, Jr. | The George Washington Journal of International Law and Economics, January 1, 1997 | Go to article overview

Reform within the Social-Market Economy: An Analysis of Current Labor Market Reforms in Germany and Predicted Repercussions on the Role of Trade Unions


John R Seewald, Jr., The George Washington Journal of International Law and Economics


I. INTRODUCTION

In 1996 Germany's economy experienced some of its highest unemployment rates in the post-World War II period.1 In February of that year unemployment peaked at 4.27 million, or 11.1%.(2) The following year also failed to bring good news to German workers when the unemployment rate rose for eight straight months, reaching 4.53 million, or 11.8%, in November, without any indication that it would significantly decrease in the near future.3 German government officials have expressed concern that unemployment levels may reach as high as five million in 1998.(4)

The problem of rising unemployment in Germany has led to a debate on the best method to induce the German economy to generate jobs for its unemployed. IG Metall, one of Germany's largest trade unions, recently offered to accept a one-year wage freeze if employers' associations committed themselves to create more jobs-a program that the union named an "Alliance for Jobs".5 Most employers' associations, however, immediately dismissed this offer as unworkable.6

Employers' associations argue the unemployment problem will not be solved if trade unions and employers make only modest concessions that fail to recognize the extent of the necessary changes to make a meaningful difference in employment.7 Furthermore, employers' associations maintain that comprehensive reform of Germany's labor market and social-welfare system is necessary to solve the problem of intractable unemployment.8

The German government, led by Chancellor Helmut Kohl and the ruling Christian Democratic Union party, anxious to avoid political landmines, has taken the middle ground in the debate.9 Initially, Kohl and his administration attempted to develop policies to institute necessary reforms in accordance with the country's well-established system of consensus between the government, employers' associations, and trade unions.10 After fruitless roundtable discussions,11 however, Kohl and the ruling coalition have realized that modest reforms of the social-market economy and labor market-such as modification of Germany's early-retirement system and temporary wage freezes-will be insufficient to ameliorate the problem of unemployment.12 The government's "50-point programme to promote growth and employment" reflects this realization.13 The program consists of "a number of proposed initiatives and individual items of legislation covering the promotion of new enterprises, tax reform and the budget, the reduction of wage costs to stimulate employment, and the promotion of competition."14 The administration recognizes that far-reaching reforms are necessary, but it also hopes that these reforms will not lead to the breakdown of Germany's model system of industrial relations.15

Reports from both the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) attribute high levels of unemployment in Germany (and Europe generally) to structural defects in its labor market that prevent unemployment from being absorbed even in periods of strong economic growth.16 The government's proposals take aim at these structural defects.17 Nonetheless, some German trade unions have failed to recognize the need for drastic reform of Germany's onceprosperous social-market economy.18 As recently as October 1996, IG Metall and other trade unions were calling for nationwide protests if employers chose to implement legislative reforms aimed at the sick pay system19-a system that created incentives for employees to stay home from work.20 Although German trade unions have been willing to concede a few points to the government and employers, they apparently do not recognize the intractable nature of Germany's high unemployment rate.21 The unions have attacked proposed reforms in a manner that is painfully shortsighted in light of increasing global competition.22

One must consider the vigorous reactions of trade unions in Germany to the proposed labor market reforms against the backdrop of sharp declines in their membership numbers over the past several years. …

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