The Minimum Wage in Germany: What Brought the State In?

Mabbett, Deborah (2015) The Minimum Wage in Germany: What Brought the State In? [Conference Proceedings] (Submitted)

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Abstract

A political system with high consensus requirements due to the presence of veto players is fertile ground for self-regulation by associations such as employers’ organisations and unions. As Scharpf (1997: 204) emphasised, they perform their regulatory functions ‘in the shadow of the state’. The government could intervene if there was a political consensus at odds with the regulatory choices made by the associations, but this is unlikely. An agreement reached between representatives of the main social classes can be expected to be close to the consensus political position. In any case the transaction costs of developing an alternative political position are high. In this light, the recent introduction of a statutory national minimum wage (SMW) in Germany poses two puzzles: how were the main political parties (the Christian Democrats and the Social Democrats) able to agree, and why did employers and unions fail to make their own agreements? Successive governments clearly preferred the selfregulatory alternative, and went to some lengths to create a framework which would allow employers and unions to determine sectoral minimum wages. Only when these initiatives were clearly seen to have failed did the Social Democrats switch their position to a statutory measure, and ultimately carry the larger party, the Christian Democrats, along with them. Political deference to corporatist bargaining is not without its critics. While Katzenstein (1987) lauded the stability generated by the preference of politicians in Germany’s ‘semisovereign state’ for promoting self-regulation by associations, Streeck (2003) advanced a withering critique of the pursuit of private interests by the labour market parties and the incapacity of the political system to pursue public interest-regarding reforms. Hardly had Streeck published his account when the government embarked on the Hartz reforms, a succession of social security and employment measures developed with limited involvement of the representatives of labour and capital, pushed through by a government that was notionally a Red-Green coalition but in practice a grand coalition (following Schmidt’s (2002) use of the term), relying on centre-right support to navigate the obstacles of the political process. Some commentators saw this as a profound shift in German political economy (Vail 2003), but many assessments were more muted. Social partner governance of public institutions (notably the Federal Employment Agency) was curtailed, as was the 2 ‘externalisation’ of employment adjustment costs onto the social insurance system (Trampusch 2005). Otherwise, the main thrust of the measures was to reduce statutory regulation of terms and conditions of employment, without impeding the rights of the parties to make their own agreements on how the new ‘flexibilities’ would be utilised. The result was dualisation: negotiated protection of the conditions of the core, organised workforce alongside a substantial expansion of peripheral employment where employer prerogatives held sway. Palier and Thelen (2010) argue that dualisation explains the political feasibility of reforms: corporatist bargaining prevailed but in a more limited domain than before. The result was, in many ways, business as usual (Hassel 2014). What had changed, however, was the capacity of the parties to regulate the peripheral labour market. This was hardly a pressing issue when the thrust of government policy was liberalising and deregulatory: there was no shadow from the state. The main trigger for re-regulation was an emerging problem of fiscal externalities. The expansion of lowpaid employment and the proliferation of ‘mini-jobs’ lacking social insurance coverage led to financial pressures on both social insurance and social assistance. A robust rate of job creation partly covered the trail of these costs, but implicit subsidies to low paid jobs increasingly became the target of political criticism in the 2000s. While fiscal externalities were the concern of the state rather than the labour market parties, successive governments nonetheless tried to promote a self-regulatory solution. Until 2009, both the Christian Democrats and the Social Democrats favoured establishing minimum wages in low-wage sectors through collective bargaining. Employers and unions would make collective agreements and the government would render them universally applicable, binding all firms in the sector whether or not they were party to the agreement. The motive for employers to cooperate was that this process would regulate competition. The favoured legal instrument was the 1996 Posted Workers Act, which had been introduced to ensure that workers on sites in Germany had to be paid minimum wages agreed by German employers, even if they were employed by firms based outside Germany in countries where lower wages prevailed. This paper examines why it was apparently not possible, or not adequate, to lend the authority of the state to the social partners to facilitate self-regulation and secure minimum wages based on collective agreements. Employers may seek to conclude these agreements in order to regulate competition, but this requires a consensus on the desirability of such regulation as well as mechanisms to prevent defection from the agreement. The competition-regulating motive for setting minimum wages could not gain traction in the intensified competitive environment that emerged after reunification. The inability of employers and unions to collude sufficiently to preserve Tarifautonomie (independence in wage-setting) in the face of political pressure shows the limitations of Germany’s vestigal corporatist institutions. The approach taken in the following discussion emphasises strategic interaction between employers, unions and the government in the making of policy. The central idea is that both employers and unions have incentives to ‘self-regulate’: to reach agreements on wages and working conditions that do not provoke the intervention of the government. 3 However, the strength of these incentives depends on the nature of the threat of government intervention. Culpepper (2011: 183) proposes that, in areas such as wage determination, which are salient to voters but primarily left to the market (‘informal rules’ in Culpepper’s taxonomy), the social partners share an interest in making compromises in order to prevent intervention. This does not depend on calculations about the likely nature of government intervention, but rather on a common desire to preserve autonomy and reduce political risk. If employers believe that the government’s stance is likely to be broadly neoliberal and deregulatory, they have less incentive to reach agreements with unions – but then the unions in their turn have more reason to make concessions to sustain self-regulation. If unions believe that at least some of their goals will be achieved by statutory regulation if negotiation with employers fails, they have more reason to adopt an intransigent bargaining position, but it is then the employers’ turn to recognise the threat and make concessions. If the parties have common information, they should evaluate threats in a similar way and be able to reach agreement. It follows that, if government intervention happens, it must either be because of miscalculation, or because, despite their recognition of threat, the parties have been unable to behave strategically. The discussion below shows how intensified competition undermined employers’ capacity for strategic action, and this in turn limited the opportunities for unions to promote self-regulation. After a preliminary outline of the various institutional mechanisms for setting minimum wages in Germany, the paper proceeds by examining in turn the strategies adopted by the three parties: employers, unions and the government. The puzzle about employers is why they did not give more support to the collective bargaining system, and thereby pre-empt the threat of state intervention. This is discussed in section 3, while section 4 turns to the unions, and asks why their endorsement of the SMW became more wholehearted and less confined to the unions in the weakest bargaining position. As with employers, unions have an interest in maintaining the autonomy of collective bargaining. However, they are also able to operate as political actors, and their political opportunities and capacities increased in the 2000s relative to their diminishing industrial strength. The political environment in its turn became more receptive because of the emerging problem of low pay linked to welfare reform (section 5). Yet the two main parties were some distance apart on minimum wage policy, and the chances of agreement looked remote right up until the 2013 election. Both the principle of establishing a single national minimum wage and the initial level for the wage (€8.50 per hour) were agreed politically: a striking contrast with the UK, where the setting of the initial level was delegated to a Commission (Mabbett 2014). However, the moment of political agreement was evidently not expected to last: power to determine future increases has been delegated to a commission of union and employer representatives. The concluding section briefly speculates on how this new commission will function and draws out some implications for the analysis of German corporatism.

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