Productivity Growth, Wage Growth and Unions

ECB Forum on Central Banking, June 20th 2018, Sintra, Portugal

Alice Kügler1, Uta Schönberg1,2 and Ragnhild Schreiner1

1 University College London and Centre for Research and Analysis of Migration 2 Institute for Employment Research, Nuremberg

Questions • Wage growth: Did real wages grow? Or did they stagnate? • Decoupling: Did wages increase in tandem with productivity? Or did

wages decouple from productivity? • Unemployment: How did unemployment evolve before and after the

Great Recession? • Wage Inequality: Did wages increase more at the top than at the

bottom of the wage distribution?

• Focus: Germany and France (Paper: nine advanced countries) • Data Source: OECD Economic Indicators • Time period: 1995-2016

Trends in Productivity, Wages and Employment Germany

80

100

120

140

160

1995 2000 2005 2010 2015Year

GDP per hour Hourly labor comp. (GDP)Hourly labor comp. (CPI)

Trends in Productivity, Wages and Employment Germany

80

100

120

140

160

1995 2000 2005 2010 2015Year

GDP per hour Hourly labor comp. (GDP)Hourly labor comp. (CPI)

Trends in Productivity, Wages and Employment Germany

80

100

120

140

160

1995 2000 2005 2010 2015Year

GDP per hour Hourly labor comp. (GDP)Hourly labor comp. (CPI)

Trends in Productivity, Wages and Employment Germany

80

100

120

140

160

1995 2000 2005 2010 2015Year

GDP per hour Hourly labor comp. (GDP)Hourly labor comp. (CPI)

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men

t rat

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0.0

5.1

.15

.2.2

5U

nem

ploy

men

t rat

e

1995 2000 2005 2010 2015Year

Unemployment rate Employment rate

Trends in Productivity, Wages and Employment France

80

100

120

140

160

1995 2000 2005 2010 2015Year

GDP per hour Hourly labor comp. (GDP)Hourly labor comp. (CPI)

Trends in Productivity, Wages and Employment France

80

100

120

140

160

1995 2000 2005 2010 2015Year

GDP per hour Hourly labor comp. (GDP)Hourly labor comp. (CPI)

Italy

Trends in Productivity and Wages

80

100

120

140

160

1995 2000 2005 2010 2015Year

GDP per hour Hourly labor comp. (GDP)Hourly labor comp. (CPI)

Spain

80

100

120

140

160

1995 2000 2005 2010 2015Year

GDP per hour Hourly labor comp. (GDP)Hourly labor comp. (CPI)

Trends in Productivity, Wages and Employment

United States

80

100

120

140

160

1995 2000 2005 2010 2015Year

GDP per hour Hourly labor comp. (GDP)Hourly labor comp. (CPI)

United Kingdom

France vs Germany: Productivity and Unit Labor Costs

France: GDP per hour (solid)

Germany: GDP per hour (solid)

90

100

110

120

130

1995 2000 2005 2010 2015Year

Labor Productivity and Compensation

France: GDP per hour (solid)Comp. per hour (dashed)

Germany: GDP per hour (solid)Comp. per hour (dashed)

90

100

110

120

130

1995 2000 2005 2010 2015Year

France vs Germany: Productivity and Unit Labor Costs Labor Productivity and Compensation

France: GDP per hour (solid)Comp. per hour (dashed)

Germany: GDP per hour (solid)Comp. per hour (dashed)

90

100

110

120

130

1995 2000 2005 2010 2015Year

Germany

90

100

110

120

130

1995 2000 2005 2010 2015Year

France vs Germany: Productivity and Unit Labor Costs Labor Productivity and Compensation Unit Labor Cost

Labor Productivity and Compensation Unit Labor Cost

France: GDP per hour (solid)Comp. per hour (dashed)

Germany: GDP per hour (solid)Comp. per hour (dashed)

90

100

110

120

130

1995 2000 2005 2010 2015Year

France

Germany

90

100

110

120

130

1995 2000 2005 2010 2015Year

France vs Germany: Productivity and Unit Labor Costs

France vs Germany: Unemployment

France

Germany

.04

.06

.08

.1.1

2U

nem

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men

t rat

e

1995 2000 2005 2010 2015Year

Trends in Inequality Germany

50th percentile

8090

100

110

120

1995 2000 2005 2010 2015Year

Source: Germany: 10% random sample from the IAB Employment History. France: French Labor Force Survey.

Trends in Inequality Germany

50th percentile

90th percentile

8090

100

110

120

1995 2000 2005 2010 2015Year

Source: Germany: 10% random sample from the IAB Employment History. France: French Labor Force Survey.

Trends in Inequality Germany

10th percentile

50th percentile

90th percentile

8090

100

110

120

1995 2000 2005 2010 2015Year

Source: Germany: 10% random sample from the IAB Employment History. France: French Labor Force Survey.

Trends in Inequality Germany France

10th percentile

50th percentile

90th percentile

8090

100

110

120

1995 2000 2005 2010 2015Year

50th percentile

8090

100

110

120

1995 2000 2005 2010 2015Year

Source: Germany: 10% random sample from the IAB Employment History. France: French Labor Force Survey.

Trends in Inequality Germany France

10th percentile

50th percentile

90th percentile

8090

100

110

120

1995 2000 2005 2010 2015Year

50th percentile

90th percentile

8090

100

110

120

1995 2000 2005 2010 2015Year

Source: Germany: 10% random sample from the IAB Employment History. France: French Labor Force Survey.

Trends in Inequality Germany France

10th percentile

50th percentile

90th percentile

8090

100

110

120

1995 2000 2005 2010 2015Year

10th percentile

50th percentile

90th percentile

8090

100

110

120

1995 2000 2005 2010 2015Year

Source: Germany: 10% random sample from the IAB Employment History. France: French Labor Force Survey.

What Can Account for the Divergent Experience of Germany and France?

• Our focus: The role of unions in the wage setting process (Dustmann, Fitzenberger, Schönberg, Spitz-Ӧner, JEP, 2014)

• Other factors are at play as well:

• Decline in labor share: the rise of ‘superstar’ firms (Autor et al., 2017; Kehrig and Vincent, 2017; De Loecker and Eeckhout, 2017)

• Technological change (Autor et al., 2003; Dustmann, Ludsteck and Schönberg, 2009)

• Structural problems; labor market inflexibilites • Hartz reforms

Unions in Germany and France: Similarities

• Negotiations between employer federations and trade unions predominantly take place at industry level

• Negotiations take place (most importantly) over pay and working conditions

• Agreed union wages typically vary by skill and act as minimum wages

Unions in Germany and France: Differences Germany • Firms’ union recognition is

to large extent voluntary o Firms can opt out of union

agreements o New firms can decide not to

recognize union agreements

• Opening clauses: many union agreements allow for downward deviations at the firm level

• Until recently: No national minimum wage

France • State extends union

agreements to virtually all firms in the sector

• Until recently: Downward deviations at firm level not possible

• National minimum wage set at high level

Government plays an active role in wage setting process in France Wage negotiations are more consensus-based in Germany

Germany’s Experience: De-Unionization • After fall of Iron Curtain:

Germany was burdened with reunification; moving production abroad became a credible threat Paying high union wages became increasingly costly; firms started to opt out of union agreements

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.7.8

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1995 1998 2001 2004 2007 2010 2013 2016year

West East

Decentralization of wage setting process from the industry to the firm or individual level

Deunionization Contributed to Low Wage Growth in Germany (in Particular at the Bottom)

Counterfactual

Actual

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50

.05

.1.1

5.2

10 30 50 70 90percentile

‘Actual’ and ‘Counterfactual’ Wage Growth Along the Wage Distribution, 1996-2012 (Update from Dustmann, Ludsteck, Schönberg, QJE, 2009)

German Unions Adapted … and Were Willing to Make Concessions

• Opening Clauses: downward deviations from industry-wide agreements at firm level oPrevalence (manufacturing): 1995: 5% of union agreements allowed for opening clauses 2004: 60%

Further decentralization of the wage setting process within the formal unionized sector

• Wage restraint shown by unions Klaus Zwickel: low wage demands—based on inflation rather than productivity increases—in exchange for more job creation

Union Wage Agreements and Realized Wage Growth in Germany, 1995-2016

100

110

120

130

1995 2000 2005 2010 2015Year

Real GDP growth per hour worked

Union Wage Agreements and Realized Wage Growth in Germany, 1995-2016

100

110

120

130

1995 2000 2005 2010 2015Year

Real GDP growth per hour workedReal wage growth agreed by unions

Union Wage Agreements and Realized Wage Growth in Germany, 1995-2016

wage growth below productivity also in the unionized sector

100

110

120

130

1995 2000 2005 2010 2015Year

Real GDP growth per hour workedReal wage growth agreed by unionsRealised growth of real hourly compensation

Germany vs France

• Decentralization of wage setting process in Germany from the industry to firm and individual level occurred without intervention of the German government, without legal changes

• Differences in the system of industrial relations o Automatic extension of union agreements to all firms o Legalized increases in the minimum wage

prevented France from responding in a similar way higher wage growth in France, in particular at the bottom of the wage distribution increase in competitiveness—measured as a reduction in unit labor costs —in Germany relative to France lower unemployment in Germany?

The Recent Experience – Some Convergence? • In economic outcomes

oWage growth has picked up in Germany and now closely follows productivity growth

o Since 2010: Wage inequality has stopped increasing in Germany oDe-unionization seems to have slowed down somewhat oUnemployment lower in Germany than in France

• In terms of systems of industrial relations oGermany introduced a national minimum wage in 2015

o Ratio minimum wage/median: 0.49 in Germany, 0.61 in France o Labor market reforms under Hollande and Macron

Shift in wage negotiations from the industry level to the firm level

Unions Protest Against Macron Reforms

• Unions have called for multiple protests against Macron’s reforms.

• 18 hours after Macron’s victory: Demonstrations supported by dozens of brances of CGT and SUD unions.

«There will be no grace period, no truce» (Romain Altmann, head of Info’Com-CGT union)

French railway workers protest against Macron's string of reforms Source: The Telegraph, 22.03.2018.