The German model of industrial relations, in class

This week in class we discussed a recent Journal of Economic Perspectives article about the German model of industrial relations. Students had to prepare presentations relating the model to some contents of CORE's e-book "The Economy."

The article describes the strong role that labor unions play both in terms of sectoral bargaining at the regional and industrial level, and the role they play inside the firm, co-participating with owners in the decision-making of the organization. Although the model has eroded somehow in the recent past (forcing the federal government to play a more active redistributive role), it is still remarkable that the most powerful European economy departs so much from the classical model of the capitalist firm. Capitalist owners really share power with workers in the largest firms. Unlike worker cooperatives, the equity-holders remain owners, and are entitled to appropriate the profits, but the strategic decisions are shared with worker representatives. The model is respected across the political spectrum, and the article suggests that its success is related to the good results of the German economy in terms of employment, growth and productivity.

In class, we discussed these questions:

1) How does the German model fit with the definition of "capitalism" in Unit 1 of Core’s e-book "The Economy"? 

2) How does the model fit with the "Union voice effect" mentioned in Unit 9? 

3) Could it be applied in your country?

We concluded that the German model is a good example of the existence of varieties of capitalism. Although this economic system, characterized by combining firms, markets and private ownership, does not have a coherent alternative today, and it is dominant all over the world, it is compatible with variations, depending on the role of unions, government, democracy, etc.

The consensual German model facilitates the operation of the union voice effect, by which worker involvement reduces the cost of effort and increases productivity, preventing wage pressure from negatively affecting employment.

Although the model is singular of Germany and it only has some echoes in Nordic countries, there is nothing that prevents its expansion in other places. Social norms, or owners’ resistance, together with different productive structures, may explain why the model has not been expanded to more countries. However, the existence of German multinationals may result into subsidiaries that also have workers in supervisory boards (as it happens in Spain with Wolkswagen’s subsidiary Seat).