Introduction on state coordination (Hassel, 1999; Kitschelt


This essay aims to explain how the German employment relations model was able to cope with the challenges of globalisation and the great recession of 2008. The model received much attention from the academics, and many of them use the phrase the `sick man of Europe` from The Economist article to illustrate the poor condition of German labour market in the late 1990s and into the early 2000s (Dustmann et al., 2014; Bonin, 2012). However, when describing the current state of things, scholars refer to Germany as to the `overhauled engine` of Europe (Bosch et al., 2009) or even an `economic superstar`(Dustmann et al., 2014). So the model dramatically transformed within just a decade and it makes an interesting and unique case that will be discussed further in this essay. The paper will first present factors that caused the divergence of German model and then move to explaining why it was successful in dealing with them. The main argument will be that the German employment relations model overcame difficulties the country had due to the way it deals with challenges, and that is a cooperative manner. The paper will also shed light on model`s core characteristics, labour market reforms as well as favourable circumstances, all of which played a role in responding to the threats of globalisation and the 2008 financial crisis.

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Issues that were challenging the German employment relations model

In the late 1990s and into the early 2000s the German employment relations model faced a few critical problems that disrupted the whole economic system. Some academics argued that perhaps such model is not competitive enough in the realities of globalisation and emergence of international markets since it relies on state coordination (Hassel, 1999; Kitschelt & Streeck, 2004). There were a few reasons why German employment relations model had diverged at the beginning of the second millennium. The most significant one is the fall of Berlin Wall in 1989 and reunification of West and East Germany (Bosch et al., 2009; Marsden, 2015) which was the largest transfer of wealth in economic history as well as `institutional transfer` (MD4D2 Lecture slides, week 7). Although it opened an opportunity for renewing historic connections with Eastern Europe, it also caused an `erosion` of the model, the rise of the unemployment, the decline in GDP (between 1989 and 1991 it dropped by 40 % (Bosch et al., 2009) and a fiscal burden. Another issue that became pressing is the ageing of the population. After the Second World War the childbirth rate rose dramatically, and by 2000s there were too many senior people aged 50-60, thus, of a retirement age. The state was no longer able to afford such expenditure, and that is why pension policies required a profound review (Bonin, 2012).

Moreover, as Hassel (1999) argues two parallel and interconnected processes disrupted the stability of the German employment relations model: declining union density and changing structures of employment connected to decentralisation. Further, the paper will discuss the second issue and how the model was able to rein the process of decentralisation. The reduction in union density and decentralisation were influenced by globalisation, the growth of the private sector (Frege & Kelly, 2013), an appearance of small companies and new industries (e.g. IT, service sector) (Hassel, 1999). There was also a competitive pressure from the `Asian tigers` (Japan and other countries of East Asia) (Hassel, 2012). Last but not least, German employment relations model had always been associated with a rich welfare state which ‘involves state responsibility for securing the basic modicum of welfare for its citizens` (Esping-Andersen, 2006, p.160). However, it could no longer afford a generous welfare state due to rise in unemployment rates and the problem of ageing population, and that is why the model needed some changes to be implemented.

So how was the German model able to deal with all these issues? How did it manage to successfully transform from a `sick man of Europe` to one of the most developed economies of the world? Further, the paper will attempt to find the answers to these questions.

Cooperative approach to solving problems

Probably, the most important reason why German employment relations model managed to cope with the challenges is its collaborative approach. For every society there is always a choice between cooperation and competitiveness and Germany has historically chosen a path closer to cooperation. Another name for the German model is a model of social partnership (MD4D2 Lecture slides, week 7), and such name may even better illustrate the fact that it is based on cooperative relations. It is also a partnership model that is based on trust rather than law: `The specific feature of the German system of industrial relations that we stress is that it is not rooted in legislation, but instead is laid out in contracts and mutual agreements between the three main actors in Germany: employer associations, trade unions, and works councils` (Dustmann et al., 2014, p.168). It appears that if everyone adheres to the `rules of the game` and keep their word, the trust may be even higher. Since it is a culture of common interest, a core belief is that labour is not a commodity, but an essential part of the social partnership (MD4D2 Lecture slides, week 7).  This perception of labour is the reason why companies in Germany tend to invest more in employees` training and skills compared to Anglo-Saxon countries and why people stay longer with employers (Marsden, 2015). Furthermore, such collaborative approach usually leads to higher job security for employees which results in higher productivity for employers. It appears from the evidence that the employment relations model which is built on cooperation and trust can bring benefits to all actors.

One more specific feature of the German employment relations model that contributes to a cooperative approach is a`dual` system of employment relations. It includes establishment-level co-determination (works councils) and collective bargaining (trade unions) (Frege & Kelly, 2013). This system functions in the way that different spheres of conflict are separated: unions represent employees and deal with issues connected to `bread-and-butter`, working conditions and focus on bargaining on industry level; whilst works councils concentrate on the implementation of collective agreements, individual grievances and have to take into consideration not only employees`, but employers` interests (Frege & Kelly, 2013). Hassel (1999) argues that co-determination and collective bargaining are the two main pillars of the German dual system of employment relations and that they complement each rather than compete with each other since there are no overlapping matters between them. The `dual` model of representation fosters the entire system to be more collaborative because it creates less industrial conflict and results in a lower rate of strikes compared to the countries of Anglo-Saxon model (MD4D2 Lecture slides, week 7). However, not only main actors trust each other in this model, but also people trust institutions to do the job and take the right direction when solving crucial issues.

Further, the essay will discuss how the perception of employment relations as a social partnership and the implementation of particular reforms helped the German model to deal with challenges of globalisation and the 2008 financial crisis.

Flexibility of German employment relations model in overcoming challenges

As previously discussed, in the late 1990s and into the early 2000s German economy was far from its best condition and welfare state could no longer provide generous benefits to its citizens. There was a necessity in implementing profound changes to the existing model to avoid the collapse of the entire system. That is why the Hartz Reforms were introduced and they `constituted a comprehensive modification of active and passive labour market policies` (Jacobi & Kluve, 2007, p.2). So what were the mains goals of the new policies? The most important objectives of the reforms were to deal with unemployment, reorganise the system of benefits and create a leaner welfare state as well as implement efficient labour market instruments (Bonin, 2012). The Reforms were designed in such way that unemployed individuals were motivated to look for a job by incentives, and the inactivity had no longer been a problem of German labour market (Hassel, 2012). Dustmann et al. (2014) claim that the reforms were quite controversial at that time since they transformed German welfare state dramatically and for some people they had proven effectiveness only over time.

With the introduction of the Hartz Reforms, the structure of the German labour market had changed and there was an increase in the employment rate. This positive tendency was due to dramatical decline in the number of full-time jobs (by 20 percent) and an increase in irregular employment and part-time jobs (Hassel, 2012). One of the new inventions of the Hartz Reforms was the introduction of `mini-jobs`. `Mini-jobs` were designed for mostly low-paid or part-time employment and implied income of below 450 EUR per month exempted from the income tax for employees (Frege & Kelly, 2013). It is argued that `mini-jobs` deepened the inequality and gave green light to firms to take advantage of atypical employment (Frege & Kelly, 2013). However, there is wide agreement among scholars that they have been a successful tool in overcoming the issue of unemployment: `mini-jobs and temporary work, are often discussed as drivers of Germany’s post-reform employment growth` (Bonin, 2012, p.796).

It should also be brought up to the attention that unemployment was concentrated among  unskilled employees (Esping-Andersen & Regini, 2000); however, within the next decade the labour market had transformed, and the situation changed in the way that the German labour market had the highest unemployment index among the low-skilled individuals in the western world (Hassel, 2012). Furthermore, the Hartz Reforms also modified pension policies. The solution for the issue of ageing society was the gradual shift of the common age of retirement (Bonin, 2012) and the introduction of the additional private pension scheme (Frege & Kelly, 2013).

Another process that appeared even before the reunification of West and East Germany and the Hartz Reforms implementation was decentralisation. It facilitated adaptation to new realities and changing employment structures within the German employment relations model as well as its further transformation. In case of Germany that belongs to coordinated market economies (Hall & Soskice, 2001) this process was often described as `organised decentralisation` (Frege & Kelly, 2013), `regulated decentralisation` (Hassel, 1999), or  `regulated flexibility` (Esping-Andersen & Regini, 2000). It first appeared in the 1980s, when IG Metall implemented amendments to existing collective agreements and introduced a 35-hour working week (Frege & Kelly, 2013). This form of the delegation from the collective bargaining level to the plant-based level allowed to negotiate issues on the lower level and in order to find plant-specific solutions (Hassel, 1999). It was called `opening clauses` since the collective bargaining agreements were `open up` by labour market actors. As it can be seen the German employment relations model was also able to deal with the pressure of decentralisation in a cooperative way. `Regulated decentralisation` gave an opportunity for employers to be more flexible regarding working hours arrangements for employees as well in wage determination. Moreover, if the company was close to bankruptcy, it could use the `hardship clauses`, which allowed it to be excluded from a collective bargaining agreement until the firm fixed its financial issues provided that the strategy for economic viability is developed (Hassel, 1999). 

Bosch et al. (2009) argue that one of the distinguishing features of the German employment relations model is the fact that it focuses on high-quality and export-driven production, highly-skilled labour and hierarchical management of companies. They also add that such organisational form proved to be inflexible when it comes to reacting to changing requirements from customers. Global competition facilitates innovation and challenges traditional market strategies of German companies: `classically, they avoided price competition by targeting high-end customers or customers with special needs, most of whom were located in highly developed political economies` (Herrigel, 2015, p.138). Nevertheless, under pressure from globalisation and market competition, it was able to adjust and facilitate product innovation as well as retain its leading positions on the international market. Interestingly, German model represents a different approach compared to the one used by the most Asian countries.  It focuses on the strategy of  `advanced technology` product innovation or high-value goods rather than `cutting-edge technology` or high-technology goods (Bosch et al., 2009). Moreover, it appears that the approach to innovation of the German employment relations model lies not only in the fact that it incorporated some of the advanced innovative technologies but in its ability to adjust to changes: `one of the long-standing strengths of the German system has been its adaptability` (Marsden, 2015, p.14). At the same time, the main actors tend to rely on the state`s regulation and support and a cooperative approach to decision-making and problem-solving.

The 2008 financial crisis hit German economy comparatively late and not hard (Bonin, 2012; Hassel, 2012), and factors that played a role in stabilising the labour market were all implemented previously measures and reforms as well as internal flexibility that model had demonstrated. I tend to agree with Bonin (2012) that it was a unique coincidence of circumstances as well as unique features of the German employment relations model that could not be copied elsewhere. At the same time, as Marsden (2015) points out, much of the current discussions are concerned whether the German employment relations model has reached its limits and whether it would be able to face another financial crisis. This question can be only answered by looking closely at practice and current financial and employment rates as well as by gathering data from other world-leading countries. It is worth to mention that one of the limitations of this paper is that most of the articles used were published up to 2015, and one should not forget about issues that have become more pressing within the last few years and of them is the refugee crisis the German model, as well as the rest of Europe, are facing nowadays.





This paper has attempted to explain how the German employment relations model was able to overcome the challenges of globalisation and the great recession of 2008. To sum up, the most important factor lies in the main characteristic of the model which is in its cooperative approach to decision-making based on partnership and trust. However, the model did not just cure itself. To cope with issues that appeared after the Fall of Berlin Wall and the reunification of East and West Germany, the Hartz Reforms were implemented. Also, the German model was able to adjust to pressures of globalisation by introducing some flexible arrangements for employers and employees such as `opening clauses` and `hardship clauses`. Last but not least,  the German employment relations model was able to transform to `economic superstar` because of its adaptability and willingness to apply innovation at the workplace at the same time focusing on high-quality production.