EU Economy
Fall in collective bargaining main factor in rising German wage inequality
By Michael Hennigan, Finfacts founder and editor
Mar 19, 2015 - 4:59 AM

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A study by the Bertelsmann think-tank and the ifo Institute at the University of Munich published Wednesday shows that the decline in collective bargaining is the number one factor in rising German wage inequality.

While wages have increased for the top 20% of workers since the mid-90s, they fell for bottom 20%. This development is the result of a 40%+ drop in the number of companies and employers bound by collective wage agreements. By contrast, stronger international trade is a significantly smaller factor at just 15%.

The real wages of Germany's high earners in the top 20% bracket have increased by 2.5% (adjusted for inflation) since the mid-1990s. At the same time, wage levels sank by 2% for the lowest 20%.

The study says that while wage inequality in Germany remains lower than the OECD average, it rose faster in the last two decades than in the US and Great Britain, for example.

During that same period of time, the percentage of companies with collective wage agreements declined from 60 to 35%. Likewise, the share of employees covered by a collective wage agreement dropped from 82 to 62%. This decline is the strongest driver for rising wage inequality.

The study estimates that the share of collective bargaining agreements has shrunk to around 43%.

The authors say that most German trade now takes place within narrowly defined industries, that is, Germany is both exporter and importer of very similar goods. Trade is thus no longer inter- but rather intra-industrial in nature. As a result conventional theories on the correlation between inequality and trade, such as the Stolper-Samuelson theorem, have lost their empirical foundation.

"Traditional trade theories focus on the return on education. According to such theories, the return on education rises in highly developed countries such as Germany due to the distribution of labour with less affluent countries, while the value of low educational qualifications or a lack thereof declines. However, studies show that only about 20% of the structure of wage inequality can be explained by this factor (Felbermayr et al., 2014). The remaining 80% has more to do with the characteristics of the employer. This is also consistent with new trade theory literature, where the analysis focuses on companies – the drivers of the globalization process – rather than industries."

The authors acknowledge: "It is thoroughly plausible that the decline of collective forms of wage bargaining as well as the widespread usage of escape clauses and other measures to increase wage flexibility at the company level were set into motion with the process of growing international interdependence."

They also says: "Further possible drivers for wage inequality include other aspects of a changing institutional landscape (e.g., Hartz reforms ) and other forms of globalization, such as international migration and foreign direct investments, which we have not examined in this report."

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