Germany Inc. And Labor Dig In For War

The metalworkers talk tough but may be fighting a losing battle

What a difference two months make. Last summer Klaus Zwickel, head of Germany's mighty IG Metall union, lost an all-out fight to derail government welfare reforms, and they became law. Now, after a string of strikes, Zwickel and his union are on the attack again. IG Metall has blocked industry's move to implement a just approved cut in sick pay and is flexing its muscles in the contract negotiations that have just begun.

The talks, which set pay and benefits for 3.4 million metalworkers, are a crucial test of Germany Inc.'s desperate push to slash sky-high labor costs. Zwickel says he'll accept a modest pay hike that approximates Germany's 1.5% inflation rate. But he has refused industry demands to reduce fringe benefits. At about $13 an hour, German benefits costs are nearly three times higher than in the U.S. and 40% higher than in Japan. So German companies want to chop sick pay from 100% to 80% of regular pay, saving an estimated $2 billion annually in the metal and electrical industries alone. They also seek greater flexibility to reduce holiday and vacation pay, which together now average roughly $3,500 annually per worker.

Economists and academics warn that if they fail, Germany's effort to regain competitiveness could suffer. IG Metall has long set the trend in German labor relations, and if it wins the benefits fight, other unions would likely cash in on its victory. "They can ruin the metal industry and the whole economy by pushing inappropriate demands," says Thomas Mayer, senior economist at Goldman, Sachs & Co. in Frankfurt.

Both sides are digging in. Werner Stumpfe, head of the Gesamtmetall employers' association, is under pressure from industry executives to reverse the big 7% wage hike negotiated two years ago. On the union side, Zwickel's hard-line stance has played well with workers, who have become more militant with every one-day strike. "Each protest action creates more agitation," says Ursula Engelen-Kefer, vice-president of the German Trade Union Federation.

Major strikes could still be avoided. The union's current contract runs until the end of December. That gives negotiators time to work out a face-saving solution to the sick-pay standoff, where the union has vowed to stand firm. For instance, Zwickel has hinted he would be willing to eliminate overtime pay and shift premiums from the calculation for sick pay, a change that would reduce payouts by about 10% for some companies, such as auto makers.

Moreover, Zwickel may realize that a big IG Metall victory would be pyrrhic. Germany's metal industry is currently losing jobs at the rate of about 140,000 a year, in part because German wage costs are the highest in the world. In the past five years, 1 million jobs have disappeared as companies shut down or moved production to lower-wage locations (chart). That rate will likely accelerate if companies don't start getting relief, says Stumpfe.

LONGER WORKWEEK. Companies that stay in Germany could increasingly opt out of the national IG Metall contract and cut their own deals. After the disastrous 1995 wage round, about 10% of Gesamtmetall's member companies quit the association in disgust. More will probably follow this time around if the union fails to give ground. Even companies covered by the national contract have some flexibility. In late October, a German appeals court upheld the right of Viessmann Werke, a small heating equipment company, to increase the workweek by three hours without any pay raise.

Ironically, the union and the employers' association have numerous models for ways to cut costs without reducing benefits. Workers at Adam Opel agreed to a combination of incentives and controls that helped halve the company's absentee rate, to 5%, in five years. To improve attendance, a portion of employees' holiday bonus depends on the company achieving an absenteeism goal agreed to by Opel's employee council. In addition, employees who frequently miss work are contacted by representatives of the works council.

At the moment, Zwickel hasn't scheduled further strikes to press IG Metall's case. Negotiations are set to resume in early November, when regional representatives from both sides will meet in the southern German state of Baden-Wurttemberg. They will try to hammer out a contract to be used as a pattern across the country. After months of strife, what Germany could use most right now is some cool-headed compromise.

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