Labour Markets
German unions

Many believed during Germany's rapid post-war growth that centralization of collective bargaining at regional and industry levels enhanced its efficiency, but union power is now seen as a major obstacle to the restructuring and real wage cuts needed to alleviate the high and persistent unemployment experienced throughout the 1980s. In Discussion Paper No. 801, Research Affiliate Christoph Schmidt and Programme Director Klaus F Zimmermann propose that unions' organization by industry affects workers' decisions over membership. Although German labour law requires equal pay and conditions for unionized and non-unionized workers and micro studies have found no relative wage differential, unionized workers seem to hold more stable jobs and experience less unemployment. Wages will generally be higher and employment lower than in a competitive labour market. If union membership enhances job security, so workers' incentives to invest in firm- or industry-specific human capital increase, there may be a positive correlation between membership levels and real wages, and there should also be a narrowing of the income distribution.

Schmidt and Zimmermann's empirical results indicate that a 1% rise in the labour force entails a 0.45% rise in union membership in long-term equilibrium and a 1% rise in periods of high unemployment. In the long run, real wages and union membership display a positive correlation, while the dispersion of the wage structure is negatively related to membership. In the short run, however, membership is driven by adjustments to the long-run equilibrium and its own past changes; it also falls by about 0.6% in response to a 1% rise in unemployment. Union membership does not drive short-term fluctuations, which is consistent with industry unions acting as monopolists and not internalizing their actions' effects on other unions' members. They conclude that continued support for the role of unions in wage setting will probably raise the share of aggregate income accruing to workers in the long run and lead to a narrower wage distribution and enhanced productivity growth, even though fluctuations in membership exert no significant short-run effect on the wage- employment trade-off.

Unemployment, Real Wages and Union Membership
Christoph M Schmidt and Klaus F Zimmermann

Discussion Paper No. 801, July 1993 (HR)