Commentary: Germany: Breaking the Iron Grip of Labor Law

By Jack Ewing

The German unit of Hewlett-Packard Co. (HWP ) has figured out a novel way to weather the tech slowdown: The company asked its 5,700 workers to accept a voluntary 10% pay cut for four months or give up eight vacation days. In return, managers swallowed a 15% cut of their own and promised to do their utmost not to lay anybody off. In July, some 80% of the workforce agreed.

BMW was considering whether to build a new $870 million plant in Leipzig or in low-wage Central Europe. To keep the plant in Germany, BMW employees agreed to put in more time when demand is brisk and dial back during slow periods.

The examples of BMW and HP demonstrate that the German labor market isn't always as sclerotic as it's reputed to be. "You hear a lot of complaining, but companies find ways to adjust the workforce to their needs," says Jorg Peter Domschke, co-managing director of the Frankfurt office of personnel consultant Towers Perrin.

What's distressing is that the sensible practices of individual companies and their workers are still not reflected in the national debate about labor regulation. Government rules still make layoffs time-consuming and costly, which increases the reluctance of companies to hire in the first place. Meanwhile, IG Metall, Germany's biggest labor union, wants the government to force companies to hire new workers rather than use overtime. But that increases companies' costs and tempts them to shift production to labor locales such as Poland, where hiring and firing are easier. "It scares away investment," says Gert Schroder, manager of labor relations at United Parcel Service Deutschland Inc.

The trick is to increase flexibility in a way that Germans will accept. Sure, some German managers would love to ramp up the workforce in boom times and spill employees onto the street in a downturn, just like in the U.S. That's not going to happen. Elections are just over a year away, and growth in 2001 will be lucky to top 1%. Chancellor Gerhard Schroder isn't likely to pick this moment to make it easier for his constituents to get fired. "He knows who is voting for him," says Ursula Engelen-Kefer, deputy chairman of the German Federation of Labor, an umbrella group. By the same token, leaders at German unions would love to keep denying the link between rigid labor laws and a jobless rate of almost 9%. Such denials won't lower the unemployment rate. Instead, labor and management should explore the areas where compromise is possible. Here are some ideas:

First, it's time to fix the collective-bargaining system. Unions and employer associations currently negotiate terms for whole industries and regions. Yet it's tough for small, struggling companies to offer the same benefits as DaimlerChrysler. A better idea is to let smaller companies participate in the bargaining but reserve the right to tailor the agreements to their needs.

TOO MUCH PAPERWORK. Second, the Labor Ministry should make it easier for small companies to navigate the country's myriad workplace regulations. In theory, those rules are more flexible: Companies can now employ more temporary workers, for example. In practice, only well-heeled German giants such as BMW can afford to prepare the government paperwork needed for such arrangements.

Next, cut unemployment benefits for people who refuse to accept jobs, and encourage others to train for new professions or to move to German cities where their skills are needed. Germany is still short of workers in IT and tourism. In June, German companies posted 542,000 job openings, while 3.7 million unemployed collected jobless benefits. "In south Germany, they are paying a premium for workers, and in East Germany, they're walking around on the street," says Herbert S. Buscher, a labor-market specialist at the Center for European Economic Research in Mannheim. One idea: Provide subsidies to unemployed people who move to take a new post. Whatever the solution, it's time Germans applied their genius for innovation to the critical question of jobs.

Frankfurt bureau chief Ewing covers the German economy.

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