The myth on Germany’s decentralised bargaining

Dustmann et al. reported on Germany’s transformation from the Sick Man of Europe around 2000 into the Economic Superstar after 2010, in 2014a VoxEU and 2014b the Journal of Economic Perspectives.

Their VoxEU summary is:

“In a slow-growth, high-unemployment continent, Germany’s performance stands out. The success is often ascribed to the politically difficult Hartz labour-market reforms. This column discusses evidence to the contrary. The Hartz reforms played no essential role. Rather, the key was the threat of offshoring to central Europe together with the pre-Hartz structure and autonomy of the German labour-market institutions. This structure allowed trade unions to make wage concessions necessary to adapt to the new realities. Other nations should decentralise bargaining to the firm level while keeping workers’ representatives.” (Dustmann, Fitzenberger, Schönberg, Spitz-Oener, VoxEU, Feb 3 2014, my emphasis)

The latter statement in bold is a New Myth.

Response to the New Myth

In 2014 former IMF managing director Johannes Witteveen (1921) gave his valedictorian lecture on the Dutch policy of wage restraint and the surplus on the external account. In comment C I already responded to the Dustmann et al. analysis:

“The Dutch surplus actually started in 1981, see my 2009 paper “A macro-economic lesson from Holland“.
Gerhard Schröder (BRD Kanzler 1998-2005) started to copy the Dutch model of wage restraint. The consequence was that Germany and Holland out-competed the rest of Europe, creating the imbalances of the eurozone.
See The Economist “Model Makers” May 2 2002.
In VoxEU Feb 3 2014, Dustmann et al. look at wage-bargaining structures and argue that it wasn’t Hartz 2002-2005 that caused the German low wage policy, but rather the German Reunification in 1989. Okay, but: (1) The Dutch example helped Schröder to target lower rather than higher wages, (2) It remains important to maintain macro-economic co-ordination. Herein lies the main policy objective rather than in such wage-bargaining structures. The analysis by Dustmann et al. might be interpreted as suggesting the abolition of national bargaining but that would be false. My advice is also an Economic Supreme Court per country.
(Colignatus, comment C, May 21 2014 now bold)

The Dutch Royal Association on Political Economy (KVS) had a Preadvies on collective bargaining in December 2013.

(Former) KVS chairman Arnoud Boot (1960) – also a member of the Dutch Social Economic Council (SER) that monitors collective bargaining in Holland – liked the discussion so much that I felt encouraged to inform him in Februari 2014 about the drawbacks of the analysis by Dustmann et al.

Notably:

  • A factual analysis does not quite refute a counterfactual. The scenario of wage restraint might also have been adopted by central bargaining. When Germans grew aware decentrally that they needed restraint then this might also have surfaced centrally. The Dutch model of wage restraint was well known in Germany at that time.
  • Macro-economics remains more relevant than industrial relations. Papers on industrial relations say more about national conventions rather than about outcomes. Outcomes are rather determined by market conditions and policy decisions.
  • One should rather criticise the lack of co-ordination in Germany. Wage restraint (in West Germany) is no solution for the lack of investments (in East Germany). Certainly not when this causes problems in the rest of Europe.
  • If the advice by Dustmann et al. is followed then co-ordination in Southern Europe would be abolished, perhaps with ever lower wages without investments, which is a recipe for continued Depression. Beware of looking at the world through the glasses of industrial relations.
  • My comments on the KVS Preadviezen 2013 still stand: they are deficient on the Dutch policy of wage restraint and the lack of investments. Political Economy causes the suggestion of an Economic Supreme Court.
  • For the fall of the Berlin wall, see this memo.
Pseudo Erasmus and the European Soul

This issue becomes a bit more relevant since I came across a good summary of the New Myth by Pseudo Erasmus. This forms more entertaining reading, since this author isn’t quite interested in actual policy making, but rather searches for the elusive European Soul.

What makes Germany, France, England and so on tick, and keeps them apart ?

Reading requires these steps:

  1. First savour Der Todd des euro that debunks Emmanuel Todd‘s anti-German-isms.
  2. Secondly savour Pseudo Erasmus’s link to Graig Willy’s summary of Emmanuel Todd’s anthropological analysis on Europe.
  3. Thirdly savour Pseudo Erasmus’s discussion of the “anthropology” of the crisis, in which the New Myth also pops up. Pseudo Erasmus call’s Dustman et al. the “best” account of what happened but doesn’t think that the scheme would work in all countries. He basically agrees that the advice for decentralised bargaining in all countries is a myth indeed. His reasons differ from those above but can be supplemented with those.
  4. Finally check out that democratic nations need Economic Supreme Courts.

PM 1. I am reminded of Frank Sulloway, “Born to rebel”, 1996, who suggested a link with inheritance laws, in Catholic countries all going to the eldest son, and in Protestant countries an equal split. PM 2. Pseudo Erasmus states: “adjustment-through-recession is a painful process which might be alleviated, even avoided, if everyone could “share the pain”, rather than a select group of people be unemployed. But that just does not happen, because it cannot — except in Germany.” This isn’t quite true, since the Dutch model of wage restraint (exporting unemployment) is ex ante sharing of such pain (even before a recession). PM 3. Of course Germany should not be lumped together: there are important regional differences.

Since Pseudo Erasmus has an anonymous profile the picture prize is for Emmanuel Todd.

Emmanuel Todd in 2014 (Source: wikimedia)

Emmanuel Todd (1951) in 2014 (Source: wikimedia)

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