Germany's Dual System of Industrial Relations

The collective bargaining system, as well as unions and employers' associations, have been legally recognized in Germany since the end of the First World War (Schnabel, 2005). While the state was still able to intervene in the decisions of social partners during the Weimar Republic, Germany now relies on the principle of tariff autonomy. This means that the state does not interfere with the functions and decisions of the collective bargaining system; rather it merely defines the legal framework in which collective bargaining agreements take place. Within this framework the tariff autonomy relies on Article 3, Paragraph 3 of the German Constitution, which gives the 'right to form associations to safeguard and improve working and economic conditions every individual and to every occupation or profession'.

While coverage has declined since the mid-1990s (Kohaut and Ellguth, 2008), collective bargaining agreements are still the most important bargaining mechanism in Germany. Accordingly tariff commitment, the share of employees who are subject to collective bargaining agreements, still ranges around 52 per cent in West Germany and 33 per cent in East Germany in 2007 in the private sector (Kohaut and Ellguth, 2008). Company-level agreements are less frequent, with 7 per cent and 12 per cent respectively in West and East Germany. Newer analyses with the IAB-Establishment Panel Survey Wave 2012 reveal that 53 per cent of all employees in West Germany and 36 per cent of all employees in East Germany are covered by a multi-employer collective agreement. Despite lower coverage compared to the 1990s, the importance of industry-level agreements is not diminished: over 40 per cent of all firms, which are not directly subject to collective agreements, base their wages and employment conditions on a collective

The dual system of industry- and establishment-level bargaining

Figure 7.11. The dual system of industry- and establishment-level bargaining

bargaining agreement. This affects approximately 50 per cent of all employees who are not directly subject to a collective bargaining agreement. Furthermore, many firms use the terms of collective bargaining agreements as a gold standard.

At the industry level, regional, industry-wide collective bargaining agreements negotiated between unions and employers' associations determine working conditions, for example working hours, employment security, and wages (see Figure 7.11). According to German labour law, they overrule (or complement) individual contracts. Works councils then negotiate employer-employee relations and regulate further working conditions at the establishment level. Thereby, industry-level agreements function as the reference point, making a clear distinction between these two pillars of the dual system difficult.

The institution of the German works council is legally based on the Works Constitution Act,[1] which states that a works council can be formed in establishments with at least five employees, three of whom must be eligible for election (§ 1). However, the formation is not automatic as it needs to be triggered by the employees. The works council consists of employees elected for four years, and their numbers vary with establishment size (§ 9). Once elected, the works council has considerable rights (information, consultation, objection, and codetermination rights) and its influence mainly extends over personnel affairs and working hours or overtime. Nevertheless it is restricted in its capabilities by its obligation to take the welfare of the establishment into account in addition to the welfare of the employees.

Furthermore, to meet the increasing demand for flexibility in the German collective bargaining system, opening clauses and company- level pacts have become fundamental instruments in the German system. Thus, since the 1980s, more areas of regulation have been transferred from the industry-level to the establishment-level through opening clauses.[2]

In sum, the German collective bargaining system is characterized by a multi-level bargaining structure with both centralized and establishment-level agreements. Thereby, the employment relations system is an organized decentralization with a dual system of industry- and establishment-level bargaining (Ellguth, Gerner, and Stegmaier, 2012). One major distinction of the German system of industrial relations is that it is not based on legislation alone, but that a major part is grounded in contracts and mutual agreements between unions, employers' associations, and works councils (Dustmann etal., 2014). Additionally, the system has changed from centralized bargaining to an increasing localization of the bargaining process with a stronger emphasis on the firm level. This is in line with the idea that employer and employee interests are increasingly aligned (Carlin and Soskice, 2009).

  • [1] For more details on German works councils see Addison (2009).
  • [2] For a detailed description of the development of the German collective bargainingsystem since the 1980s see Addison etal. (2014).
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