`The German Worker Is Making A Sacrifice'

With jobs fleeing the country, unions agree to lower wages and higher productivity

Hans-Gunter Eidtner felt like the first officer on a jet that was losing altitude with sickening speed. Head of the works council at the Hamburg factory of struggling Daimler Benz Aerospace (DASA), Eidtner faced the ugly prospect of 800 fellow workers losing their jobs by the end of 1998. But the 60-year-old labor boss last month averted disaster, persuading the powerful IG Metall union to O.K. concessions, such as axing overtime pay. "We had a big fight" to push through the givebacks, says Eidtner.

Such a deal would have been unthinkable a few short years ago. Historically, Germany's big unions forced companies to accept nationwide "pattern" contracts, a practice that gave them enormous power. Ailing steelmakers in the north had to give workers the same cushy contracts as thriving carmakers in the south. But now, with a near-record 4.3 million people out of work and jobs fleeing the country, workers suddenly are eager to compromise. What began as a trickle of reform at stumbling midsize companies in eastern states quickly has spread to Germany's biggest companies. "The German worker is making a sacrifice," says Hubertus von Grunberg, chief executive of tiremaker Continental.

SNOOZING ECONOMY. Such flexibility, plus a wobbly German mark that is making German exports cheaper on world markets, are giving the snoozing economy a boost. Economists figure growth could rise to 2.25% this year and 2.75% in 1998. Moreover, the steadily rising jobless rate, now 11.4%, may finally have reached a plateau.

The bad news is there's no sign that unemployment lines will shorten anytime soon. Modest growth means that only about 120,000 additional people will find work by the end of 1998, figures Kurt Vogler-Ludwig, a labor economist at the IFO Institute for Economic Research in Munich. "It'll take a miracle" to change the situation, he laments.

But German business, on a campaign to boost profits and shareholder value, is pushing ever harder to restructure. Increasingly, companies are cutting deals with workers that improve productivity and flexibility (table). Most negotiate concessions with the works councils at individual factories or subsidiaries, then gain reluctant approval from national unions. Some even sever all union links and deal directly with workers. At DASA's Hamburg plant, which assembles Airbus 319 and 321 jets, some employees will shift to a 40-hour work week, up from 35 now. All 7,000 workers agreed to up to 100 hours of overtime a year without extra pay, in return for free time when demand slackens.

Such deals are most common in eastern Germany. That's because, ironically, unions have less clout in the former communist zone. Moreover, companies there, unable to compete in a market economy, have scrambled to slash labor costs. In Saxony, for instance, only about 8% of companies in the electrical and metalworking industries are bound by pattern contracts, says Dietmar Voigt, an official at the regional employers federation in Dresden. The rest have cut their own deals--either with or without the consent of IG Metall, Germany's largest union.

In the west, small and midsize companies were first to jump on the bandwagon. At Gustav Selter Ltd., a knitting-needle maker near Dortmund that employs 40 people, workers have agreed to flexible working hours and pay cuts totaling 16% since 1994. In return, they now receive a share of profits. Sales are growing 15% a year, vs. just 5% before the concessions were implemented, and profits should jump nearly 50% in 1997, says owner Thomas Selter. "At the grass roots, major change is under way."

It's trickling up, too. One German union has decided to support the trend toward company-tailored contracts. IG Chemie-Papier-Keramik, the nation's third-largest labor group with 725,000 members, in June struck a groundbreaking, industrywide deal. It allows hard-pressed companies to reduce pay by as much as 10% in return for job security and commitments for further investment in German operations. Although the contract doesn't go into effect until January, about 50 companies already are negotiating to take advantage of the new provisions.

Such shifts are contributing to a productivity boom. After accounting for inflation, productivity jumped by 4.6% in 1996, nearly a percentage point faster than the last year productivity surged--after unification in 1991--according to the Institut der Deutschen Wirtschaft in Cologne. As sales pick up, the improvements are boosting corporate earnings. At the 30 companies represented in the DAX stock index, profits jumped an average 45% in 1996--one reason German stocks are flying so high. The DAX has steadily set new records this year, gaining more than 40% since January.

Will workers reap the rewards of their newly accommodating spirit? Unfortunately, even over the medium term, most of Germany's new labor agreements aren't likely to boost employment. That's because most simply give companies greater ability to meet increased demand without hiring new staff. It's a huge benefit for employers, since layoffs are so difficult and costly under German law. And some companies will continue to trim payrolls by attrition. But workers are facing the fact that concessions now could forestall another bout of radical surgery. Says DASA's Eidtner: "Each one of us knows that in three or four years, when the [aircraft] boom is over, we'd have exactly the same problem as before."

Indeed, until Germany undertakes far more sweeping structural reform of its labor market and regulatory system, companies will have to struggle to stay globally competitive. Even with the mark hitting a six-year low against the dollar, 1.79 on July 15, Germany's wage costs are still the world's highest. And social security taxes, which Chancellor Helmut Kohl pledged to cut to less than 40% of gross wages, are actually headed toward 42%, in part because of the added costs brought on by high unemployment.

BALLOONING TAB. Kohl's embattled government is unlikely to help lower the cost of doing business anytime soon. The chancellor faces tough parliamentary elections next fall: Polls show that the opposition Social Democrats have increased their lead over Kohl's Christian Democratic Union to as much as eight percentage points. And Germany's costly social safety net--about $19,000 annually per unemployed person--caused a budget crisis in early July. A supplementary emergency budget unveiled by Finance Minister Theo Waigel added $10 billion in government borrowing to help pay the tab. But the bleak employment outlook--and legislative gridlock in Bonn--ensures that the crisis will spill over into 1998.

The governing coalition's tax-reform plan to cut rates for individuals and companies also looks moribund, a victim of political wrangling. "Nothing's going to happen until the end of 1998, after the elections," says Thomas K. Bentz, a co-owner of Melitta Group, the Westphalia coffee company.

But business has long since stopped waiting for Bonn to get moving on tax and regulatory reform. Companies continue to shift some labor-intensive operations to lower-cost locations. And in their relentless pursuit of efficiency, they are finding that with workers back home, they have more leverage than ever before.

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