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The political economy of labour markets in Germany and the United Kingdom: a primer
Open Republic: July / August / September 2005

Robert Sproule, Department of Economics, Bishop’s University,
Lennoxville, Québec

THE IMPACT OF POLITICAL FACTORS ON TWO LABOUR MARKETS

From 1945 to 1980 (but especially during the “stagflation” years of the 1970s), a link existed between the ruling party and the union movement in most countries of Western Europe [Paldam (1986), Paldam and Pedersen (1982), and Piazza (2001)]. Piazza (2001) argues that this link was broken around 1980, which is a point in time that corresponds roughly to the rise of Thatcherism, Reaganomics, and greater volumes of international capital flows. In this section, we shall argue: (1) that this severed link has endured throughout the Blair years, (2) that this link was re-established in 1998 in Germany with the election of the Schröder Government, and (3) by implication, the presence or absence of a link between the unions and the ruling party helps to account for the divergence in the policy imperatives, and in the unemployment rates, of the two nations. In particular, we maintain that the presence of such a link spawns demands for non-market, “social wages” in excess market wages, shrinks the demand for labour, and gives rise to (additional) unemployment. In a few words, this link generates more labour market inflexibility, and hence additional unemployment.

Given the tumultuous encounter between the Thatcher Government and the Miner’s Union, the case that all Conservative governments since the election of Margaret Thatcher in 1979 were independent of the unions is easy to make. What may be more contentious is the claim that a formal link has not been re-established during the Blair mandates. Fortunately, this case can be made persuasively. In his “The Role of the British Labour Party a Century On”, Eric Shaw (2002, p. 3) writes, “New Labour held that the close association with the unions had been a crippling electoral handicap, a major cause of its bleak electoral performance since the 1970s”. He continues, “ending the association, in the minds of voters and business, between the Labour Party and organised labour … is the defining core of the modernization project. It is seen as central to the ability to appeal to more affluent swing voters, and to win the confidence of employers and financial interests. Gaining the respect and the confidence of the business community – and therefore of the predominantly probusiness press – was a major strategic goal and one largely accomplished by 1997. This entailed pledging that the Conservative-built pattern of labour of law would, in its fundamentals, be respected, a pledge readily made. This was not simply for political reasons. New Labour was convinced that an anachronistic trade union movement, steeped in the obsolescent rhetoric of industrial conflict and reluctant to co-operate constructively with management for the good of the corporate sector had been a major obstacle to economic progress. It therefore steadfastly opposed repealing those items within the Conservative legislative package which, in its view, risked a recurrence of the industrial dogfights of the past.” Shaw (2002, p. 4) adds, “This perspective has clear repercussions for the Blair Government’s approach to labour management relations. Its programme, the Prime Minister explained, was ‘to replace the notion of conflict between employers and employees with the promotion of partnership’ (Blair’s foreword to Fairness at Work). The unitary frame of reference often uses the analogy of the professional football team, ‘for here, combined with the team structure and its associated loyalties, one finds a substantial measure of managerial prerogative at the top in the persons of the manager, trainer, and board members. Team spirit and undivided management authority coexist to the benefit of all’. As Blair told delegates to the Labour party conference prior to taking office: ‘forget the past. No more bosses versus workers. You are on the same side. The same team’.”

Contrast Blair’s vision with that associated with the German model of “managed capitalism” (MMC), and with the attendant link that binds the Schröder Government to the labour unions. The importance of this link is made clear by Dyson (2000, pp. 21-22), when he writes that the epicentres of the MMC are the SDP and Christian Democratic Union (CDU).[20]

Commenting on the present-day viability of the MMC, Streeck and Hassel (2003, pp. 120-121) observe that: “(i)n its hey-day, Modell Deutschland disciplined business and labour and forced them to work with each other, pursuing their respective interests in ways that did not interfere with the sustainability of the existing industrial order. With hindsight, it appears that this accomplishment was conditional on a range of factors, which were beyond the control of the parties involved. Foremost among these were world markets that not only put a premium on the comparative advantages of the German labour market regime, but also allowed for near-full employment in Germany at high and relatively egalitarian wages. This condition slowly began to wither away in the late 1970s and finally came to an end in the years after unification, when high unemployment combined with low labour market participation became the signature characteristic of the German economy.” However, “(t)he deadlock that began in the final years of Kohl is not likely to be overcome any time soon. Public finances are overdrawn, the European Union effectively enforces fiscal austerity and the limits of axation have long been reached, especially with respect to social security contributions … Macroeconomic reflation is out of the question in the Europe of Monetary Union. More employment requires more flexible labour markets, but flexibility endangers the security unions are committed to defending.”

It is clear that union support was a necessity for the election of the Schröder government in 1998, and its re-election in 2002. With this support came obligations, and with such obligations the aforementioned deadlock.[21] So for example, the Schröder government has a clear understanding of the need for labour market reform. In its Agenda 2010[22], the government states: “Either we modernize as a social market economy or we are being modernized by the untamed forces of the market which want to push the social aside ..” But the government realises also that it is in a double bind: it cannot undertake radical restructuring of the labour market without the support of organised labour [Streeck and Hassel[23] (2003, p. 120)], and that union support for radical reform is not likely.

SUMMARY REMARKS

This paper has sought to explain the disparity between the unemployment rates in the UK and in Germany in 2004. In our explanation, we cited the importance of the presence or absence of a link between the ruling party and organised labour. Here we maintained that no formal link exists between the unions and the government of Tony Blair, a fact that stands in stark contrast with the link between the unions and the government of Gerhard Schröder.

The aforementioned link explains the failure of present efforts to close the gap between policy objectives and actual outcomes in Germany.[24] As Righter (2003) observes, “Germany has its Agenda 2010, France its Agenda 2006, ..” She continues, “Yet the gaps between promise and performance are dispiritingly wide, with almost every reform watered down ... Their countries need a revolution on the scale of the Thatcher years, and many industrialists know it. But the truth is that their leaders, out of fear of the unions or love of the moribund ‘European social model’, will not even talk the talk.” As the The Economist (2004, p. 67) notes, “Most business people simply long for the government to get on with it, as Margaret Thatcher did in Britain in the 1980s. However, that would be very un-German. The post-war consensus model remains robust, even if the German economy no longer is.”

footnotes

[20] It has been noted also that the MMC has “strong historical, cultural and institutional roots. Historically, it formed a continuity with the organized capitalism of cartels, elite networking and regulation that characterized early German industrialization. Culturally, it rested on a respect for the principle of consensus. This principle was deeply entrenched in both the political and the economic systems. Hence there was a ‘goodness of fit’ in domestic governance” [Dyson (2000, p. 21)].

[21] Mertes (2002, p. 80) notes, “Global change has also confronted German domestic politics with new challenges. Looking back to four “red-green” years since 1998, one is tempted to say that Schröder has merely intensified Kohl’s neocorporatist style of ‘round-table’ agreements between Big Business, Big Labor, and Big Government. That method no longer works. The structurally conservative network of intertwined institutions lacks the flexibility and creativity needed to give an innovative answer to globalization.”

[22] For more on Agenda 2010, see Deutsche Welle (2003b) and Schröder (2003).

[23] The Schröder government set up Hartz Commission in 2002. It was mandated to make recommendations for reforming the labor market [Deutsche Welle (2003a)]. These were supported by labor, and greeted lukewarmly by business [Fichter (2002)]. In any case, the core elements of the MMC remain untouched [Sinn (2002)].

[24] On a broader scale, witness the ambitious aspirations outlined in the EU’s Lisbon Strategy. For details on the related gap between policy objectives and actual outcomes, see Commission of European Committees (2004), and Blanke and Lopez-Carlos (2004).

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