Unions That Built Germany Eroded by Rules Buoying Economy

Story originally appeared on Bloomberg.

Germany’s top trade unionist, Michael Sommer, looked out on a May Day crowd of workers and told them that a proposed labor flexibility plan wouldn’t create a single job.

Ten years later, the plan is law. Joblessness is close to a two-decade low and employment has increased by more than 3 million.

It’s unions whose numbers are diminishing. As more and more employees work for temporary agencies or on project-driven contracts, the jobs being created are mostly non-union, in a country whose modern form was built by organized labor.

Founded in the mid-19th century, German unions rose to power in the 1950s, when they were crucial in turning an economy shattered by World War II into an economic miracle. Their impact is waning at a time when Germany is being held up as a model for debt-stricken Europe.

“The influence of labor unions has diminished significantly as a result of those reforms,” said Thomas Harjes, senior European economist at Barclays Bank Plc in Frankfurt. “They’re fighting hard to win back some sway.”

Labor’s latest woes are being heard by Germany’s leadership. Chancellor Angela Merkel, who’s running for re- election this year from the Christian Democratic Union, said in January after meeting with the DGB union federation’s Sommer that Germany needed to “keep an eye” on contract work. It “can increasingly turn into circumvention of sensible union agreements,” she said.

Schroeder’s Plan

Unions represented 25 percent of the German workforce in 2000, three years before then-Chancellor Gerhard Schroeder started implementing a program for labor-market flexibility.

That number dropped to 18 percent in 2011, according to the Organization for Economic Cooperation and Development, as less generous jobless benefits and easier rules on firing pushed workers into lower-paid temporary jobs. The absolute number of union members fell by 21 percent.

At the same time, the new flexibility helped the German economy, Europe’s largest, contain unemployment during the 2009 crisis and emerge faster and stronger from the recession than most of its euro-region peers.

“Germany was a decade ago called the ‘sick man’ of Europe,” European Central Bank Executive Board member Joerg Asmussen said in a Frankfurt speech last month. “Since then, the country has become a showcase of how well-designed reforms can turn the situation around.”

Unemployed Youth

German employment was almost 42 million in February, the most on record. Unemployment, at 5.4 percent on an EU-harmonized basis, is the lowest in the euro area after Austria and less than half of the average in the 17-nation region. Youth joblessness of 7.7 percent in Germany compares with 23.9 percent in the euro area.

Temporary work is one way for them to find employment. In Germany, about 7,500 agencies offer workers a job via that channel. ManpowerGroup Deutschland, the third-largest, employed about 20,000 people last year, twice as many as 2002.

“Temporary work has a reputation problem, which is unfortunate,” said Stephan Rathgeber, spokesman for the Eschborn, Germany-based company. “It facilitates the entry into the labor market, protects against unemployment in times of crises and is especially attractive for qualified workers.”

For Benjamin Fendt, 21, temporary work meant posts at 18 different companies after he finished his apprenticeship as an industrial and precision machinist in 2010. Sometimes the turnover was just over a week.

Too Qualified

“Temporary work was the only option to make some money,” he said in a phone interview from Landshut, Germany. “I had hoped to stay somewhere longer. All I wanted was a secure job.”

What he got was work he was overqualified or not trained for, long commutes and trouble with pay; and after an odyssey of more than two years a permanent job at plastics company Riedl Kunststofftechnik und Formenbau GmbH & Co.KG in Erding, Germany.

Fendt has been a member of IG Metall, Germany’s biggest union, since 2011, an example of how unions are beginning to court temp workers. Today, about 20 percent of all workers on loan in the metal industry are members, compared with almost 50 percent of permanent staff.

Another sector with union representation is contract work, which grew last year after unions and employers began agreeing to introduce minimum wages for temporary workers. While employees in temporary work are lent to a company for a specific period of time, contract workers are employed for a specific project, with pay often falling short of hourly wage minimums.

Fewer Accords

The share of companies following collective wage agreements fell to 47 percent in 2006 from 63 percent in 2001, according to an OECD report published in September.

“We have to adapt to a changing environment,” said Peter Donath, who heads the operations and participation-policy division at IG Metall in Frankfurt. “For a long time, we haven’t paid attention to temporary and contract work because we were focusing on our core factories.”

While IG Metall membership has edged higher in the past two years, at 2.26 million it is still almost 500,000 lower than at the beginning of the century.

Similarly, Ver.di, Germany’s biggest union when it was founded in 2001, has lost more than a quarter of its force since then and has ranked second behind IG Metall since 2005.

“Since the crisis, sentiment has changed,” said Christoph Schmitz, spokesman for Ver.di in Berlin. “The feeling among workers that somebody needs to represent their interests has increased.” In the first quarter, more people joined Ver.di, which represents services workers, than left the union.

Rising Rarely

Elsewhere in Europe, union membership has risen in seven euro countries studied by the OECD and declined in eight in the past decade. As a percent of the work force membership has risen in only two: Belgium and Italy.

Schroeder, from the Social Democratic Party, first outlined his intentions to change the labor system in March 2003, six months after his government was re-elected by the narrowest margin since 1945. At that time, the economy was contracting at the fastest pace in seven years and unemployment was approaching 10 percent, tied with Greece for second-highest after Spain.

The laws lowered welfare payments for long-term unemployed, withheld benefits from unemployed people who reject job offers and shortened the period for assistance. The measures also reduced early-retirement options and made it easier for companies to lay off employees in a country with employment protection stronger than the OECD average.

Two Classes?

Temporary and contract work spiraled in response. In June last year, 908,000 people were working on loan, one third of them in the metal and electrical industries, a traditional union stronghold, according to data by Germany’s Labor Agency. In 2000, temporary work had encompassed 338,000 workers.

“New forms of work have created two classes of employment, with different conditions for core and temporary workers,” said Ulrich Walwei, deputy director of Germany’s Institute for Employment Research in Nuremberg. “If temporary contracts were a transition into perpetual work, unions could probably live with it. But unfortunately, they’re sometimes just revolving doors.”

Almost half of all temporary contracts end after less than three months and, at 1,419 euros ($1,858) per month on average, pay little more than half of regular employment in 2010, according to labor-agency data.

Still, wage disparity narrowed last year with the introduction of industry premiums in pay. They add as much as 50 percent to hourly wages of temporary workers in the metal and electrical industries, according to IG Metall data.

More Strikes

At the same time, labor unrest has increased during the crisis. Deutsche Lufthansa AG (LHA) had to suspend almost its entire flight timetable on April 22 as workers struck over pay, and auto workers may strike across the country this month. German unemployment rose for a second month in April, to a seasonally adjusted 2.94 million, the government said today.

Union leader Sommer, who characterized his ties to Schroeder as a “civilized non-relationship” in an interview with German newspaper Die Welt this month, hasn’t changed his view that the success of the economy isn’t related to the labor- market reform of the early 2000s.

“It was and is our strong export economy, flexible work models, co-management, free collective bargaining and last but not least wise crisis politics in 2008 and 2009,” he said. The labor changes mean “dumping wages, precarious employment, a low-wage sector and old-age poverty.”