Long-Term Collective Agreements Can Destroy Jobs during Recession
Research
10.06.2024
ZEW Study on the Duration of Collective Agreements in Economic Crises
Recently, collective labour agreements resulting in significant wage increases were reached in Germany. However, inflation has since noticeably fallen. In view of the current economic situation, this is not necessarily good news, though: If agreements from pre-crisis times with long contract durations, such as collective bargaining agreements, come up against a recession charactised by low inflation, the risk of unemployment will increase. These findings are the result of a study conducted by ZEW Mannheim. The researchers investigated how wage floors affected the labour market in Spain following the severe recessions in 1993 and 2009. In total, over 1,000 collective agreements and their effects on the labour market were examined.
“Collective agreements also apply if the economic situation deteriorates drastically and companies are no longer able to fulfil the conditions. If there are no alternatives available, such as salary cuts or short-time work, employees will ultimately have to be laid off. In this way, negotiated wages in collective labour agreements can even exacerbate economic shocks. Therefore, our study confirms the usefulness of measures such as short-time work,” emphasises Efi Adamopoulou, PhD, researcher in ZEW’s “Inequality and Public Policy” Group and co-author of the study.
Short contract terms secure jobs
Employees with salaries just above the respective wage floors benefit most from the renewal of collective bargaining agreements. However, if a recession with low inflation hits and the collective agreement from before the crisis still has much time remaining, the risk of being laid off increases for these employees. The reason: their salary can hardly be reduced, if at all, and the current contract cannot simply be renegotiated. This happened on a grand scale in 2009 when many employees with salaries close to the wage floor were laid off.
“Overly long durations of collective agreements can destroy jobs in a crisis. If those signed in pre-crises times run longer than two years into a recession, the consequences can be devastating for employees with salaries close to the wage floors. In 2009, neither unlimited employment contracts nor employment protection laws helped matters in Spain,” says Adamopoulou.
The situation is different if a collective agreement is renegotiated during the recession. The study makes it clear that collective agreements then resulted in salary growth that was on average up to 1.5 percentage points lower than before the recession. The study also shows that in the economic recession of 1993, there were hardly any layoffs, as the collective agreements at that time only had short durations of approximately one year. The employees were able to keep their jobs.
Over 1,000 contracts analysed
The study examines how wage floors affect the labour market during economic shocks. To this end, the researchers analysed the recessions of 1993 and 2009 in Spain. As in many sectors in Spain, each province negotiates its own contracts, it was possible to analyse over 500 contracts per recession. In addition, large subsamples with information on the respective salary floors could be created in order to determine which employees were most affected by unemployment. Spanish collective agreements are not legally equivalent to their German counterparts. However, the mandatory wage floors are comparable, meaning that the results of the study are also relevant for Germany.
