Gütersloh, March 18, 2015. A study by the Bertelsmann Stiftung and the ifo Institute in Munich demonstrates that the decline in collective bargaining is the number one factor in rising wage inequality in Germany. While wages have increased in the upper 20 percent of workers since the mid-90s, they decreased in the bottom 20 percent. This development is the result of a 40+ percent drop in the number of companies and employers bound by collective wage agreements. By contrast, stronger international trade is a significantly smaller factor at just 15 percent.
The real wages of Germany's high earners in the top 20-percent bracket have increased by 2.5 percent (adjusted for inflation) since the mid-1990s. At the same time, wage levels sank by 2 percent in the lowest 20 percent. Although wage inequality in Germany remains lower than the OECD average, it rose faster in the last two decades than in the USA and Great Britain, for example.
During that same period of time, the percentage of companies with collective wage agreements declined from 60 to 35 percent. Likewise, the share of employees covered by a collective wage agreement dropped from 82 to 62 percent. This decline is the strongest driver for rising wage inequality. The study estimates that the share of collective bargaining agreements has shrunk to around 43 percent.
Export orientation increases employee wage levels
Growing global trade has proven to be a significantly smaller driver for wage inequality compared to the decline of collective bargaining. Its share is estimated at just over 15 percent, which the study uses to explain the differences in wage structure in particular between companies that are domestically and internationally active. By the mid-1990s, export-oriented businesses already paid gross wages that averaged 11 percent higher than companies with an exclusively domestic market. This difference has continued to grow and averaged 15 percent in 2010.
When evaluating the "decline in collective bargaining" factor, the study’s authors point out the changing composition of Germany's workforce.It is certainly plausible that wage flexibility has enabled the creation of new jobs in the low-wage sector in particular. According to estimates by the German Federal Statistical Office, 20.6 percent of workers were employed in the low-wage sector in 2010 compared to 18.7 in 2006.
Dilemma between job creation and wage inequality
For Aart De Geus, Chairman and CEO of the Bertelsmann Stiftung, finding a balance between employment and distribution-policy objectives is essential: "We need greater efforts in Germany to reduce income inequality while keeping job losses at a minimum. In addition, we also need accompanying government measures to prevent a race to the bottom. The comprehensive statutory minimum wage in effect since the start of 2015 is an effective instrument against escalating inequality, but it must be perfectly balanced so it doesn't provoke job losses and unemployment. Social partners need to step in here as well."
While opponents to globalization often call for limitations on international trade, economic experts at the Bertelsmann Stiftung do not consider this an appropriate measure for increasing wage equality. An expansion of global trade would be far more suitable for balancing out wages. Evidence has shown that companies engaging in international trade pay higher wages, so small and midsized businesses – which traditionally have a more difficult time marketing their products on a global level – should receive support specifically to enhance their competitive and export capabilities.
About the study "Increasing Wage Inequality in Germany: What Role Does Global Trade Play?"
In its Global Economic Dynamics project, the Bertelsmann Stiftung focuses on the issue of shaping inclusive and sustainable growth in the face of ongoing globalization. One fundamental assumption is that the increase in economic integration has positive effects on economic growth for all participating national economies. Two previous studies ("Globalization Report 2014" and "20 Years of the European Domestic Market") showed that this assumption is true for most national economies at the macro level. This study examines the actual influence of global trade on rising wage inequality in Germany between 1985 and 2010. Data from the German Federal Employment Agency, particularly from the SIAB (Stichprobe der Integrierten Arbeitsmarktbiografien) and the LIAB (Linked Employer-Employee Data), served as the primary information source. The influence of possible causes on the growing gross wage inequality were calculated using variance decompositions and RIF (recentered influence functions) regressions. These methods were able to break down the rise in wage inequality into a total composition effect and a total wage structure effect, enabling the experts conducting the study to determine the individual contribution of each explanatory factor for both components.