ZEW President Franz on Wage Policy

This article appeared in the June 2005 edition of the ZEWnews.

Steel Wage policy finds itself once more beleaguered by familiar problems, as can be seen in the new collective wage agreement for the steel industry. The contract provides for a wage increase of 3.5 per cent for the entire duration of the wage agreement (17 months) as well as a lump sum payment of €500. Instead of forging an innovative and contextually-flexible agreement allowing employees to profit from the current boom in the steel industry, policy-makers have instead ordained a new wave of redundancies for the future. Protests demanding politicians “Stop the Job Cuts” and accusations of exploitative and unpatriotic employers are predestined to crop up once more, once more force politicians to handle with anti-capitalist rhetoric surrounding offshoring. Slowdowns in the steel industry are a foregone conclusion. Countries such as China are increasingly able to meet their own needs through domestic production, while other foreign steel producers like Russia and Brazil have even strengthened their international competitiveness. The rapid growth of demand in Germany has been dwindling while high labour costs persist. Part of the costs will likely be passed on to other industries in the form of price increases, bound to delight the likes of the automotive industry, for example, due to the surge in the demand for cars that will certainly follow. It is not as though adequate solutions considering the interests of steelworkers and their wish to benefit from their companies’ successes have never been proposed—numerous profit-sharing models have been around for decades. The German Council of Economic Experts has addressed this topic several times in its annual reports. The parties to the collective bargaining agreement need not have reinvented the wheel to arrive at a solution, though they were certainly free to think critically and incorporate their own innovative ideas into the agreements. Nevertheless, apparently no one had the sense to examine the available research. Profit-sharing models come with a number of benefits, for example the strengthening of productivity incentives. Productivity rises as employees identify more with the goals of the company (and less with the necessity of class conflict). They reduce the risks for trade union officials of being accused by union members of agreeing to unsatisfactorily low wages, liable to occur if the economic situation develops more favourably than originally predicted during wage negotiations. Apart from that, profit differences between companies play a bigger role than in traditional collective agreements. To establish a successful profit-sharing model, some key points require clarification, though these may be hard to discern. Firstly, the procedure evaluating corporate success needs to be transparent and delineated in advance in order to avoid disputes with employees who could feel they were cheated. Secondly, negotiations must clearly specify whether the distribution of profits is to base itself on one’s wage or if distribution is to take the form of a fixed amount on all employees. Thirdly, an agreement must define the symmetry of the profit-sharing and whether employees will also be obligated to share losses. As workers are unlikely to find loss-sharing palatable, an upper limit for distributed profits could prove a reasonable compromise. The steel industry is an industrial environment perfectly-suited to reap the benefits of a profit-sharing model. Unfortunately, they missed the opportunity. The German President’s thoroughly justified push to “Give way to work” faltered from the get-go, stalling at the very first traffic light. The industry is likely to sit idle for the foreseeable future, waiting for the next green light.