Wage effects of works councils and opening clauses: The German case

Abstract

German employment relations are characterized by a distinct dual system. First, working conditions and wages are determined by industry-level collective bargaining agreements. Second, on the establishment-level, the works council is responsible for employer–employee negotiations. However, since the mid-1980s, an increasing number of areas of regulation have been transferred from the industry- to the establishment-level using so-called opening clauses. The analysis in this article relies on rich German establishment data and reveals new insights into the institutional machinery of wage bargaining. While the existence of such clauses is related to higher wages, their application results in wage cuts of roughly the same size. The results also suggest that works councils, on average, are able to prevent the negative wage effects of opening clauses.

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