The Impact of the Single European Market on Pay and Collective Bargaining

The impact of the internal market on pay and collective bargaining

Employment & social affairs

* * * * . * * * * *

European Commission


IDS Incomes Data Services Ltd

Employment Sc social affairs Employment and labour market

European Commission Directorate-General for Employment, Industrial Relations

and Social Affairs Unit V/A.2

Manuscript completed in August 1996

This report was prepared by David Shonfield in collaboration with Pete Burgess, Ken Mulkearn, Tony Morgan, Kevin Doogan, School for Policy Studies, University of Bristol.

This report was financed by and prepared for the use of the European Commission, Directorate-General for Employment, Industrial Relations and Social Affairs. It does not necessarily represent the Commission's official position.

A great deal of additional information on the European Union is available on the Internet. It can be accessed through the Europa server (http://europa.eu.int).

Cataloguing data can be found at the end of this publication.

Luxembourg: Office for Official Publications of the European Communities, 1997

ISBN 92-828-1802-0

© European Communities, 1997 Reproduction is authorised provided the source is acknowledged.

Printed in Belgium

Contents

1. Introduction 1

2. Methodological approach 4

3. Summary of the main findings 8

4. Company views: the IMP and corporate personnel policies 11

5. Survey of employers' organisations and trade unions 15

6. The impact of the IMP: an inter-sectoral analysis of pay statistics 20

7. Indexation, inflation and pay: the impact of the ERM 33

8. The IMP and pressures for decentralisation 37

9. 'Marketisation' and the growth of variable pay 55

10. The impact of foreign direct investment 67

11. The impact of the IMP on small and medium enterprises 77

Appendix I: Location 85

Appendix II: The impact of liberalisation in air transport and 99 telecommunications

References and additional sources 109

1. Introduction

This report examines the development of nominal wages and the collective bargaining process in the EU Member States. It is based on a review of changes in pay and bargaining over the ten-year period 1985 to 1995 and an assessment of the extent to which these changes have been influenced by the Internal Market Programme (IMP).

There is, by definition, no direct impact from the IMP on pay and bargaining. Specific IMP measures have had a substantial impact on individual sectors, two of which - air transport and telecommunications - are the subject of case studies appended to this report. But in general this report is about the indirect impacts of the IMP as a whole on pay and bargaining developments. From an early stage it has been clear that analysis of quantitative data would produce only limited results. This report therefore relies to a large extent on a qualitative analysis of change in bargaining, supported by our own and other surveys of companies and representatives of employers' organisations and trade unions.

Structure of this report We begin with a review of the main literature which has helped in identifying the themes of this report. We then outline a number of hypotheses about the possible impacts of economic integration on pay and collective bargaining and set out the four key hypotheses we have used to test for the impact of the IMP. We follow this with a summary of our conclusions, before going on to review our findings in detail.

The impact of economic integration The starting point for our research is the work carried out by two study groups set up by the Commission in 1989 and 1991. These exercises reached a number of conclusions about the possible impact of economic integration on European labour markets. We have drawn on these to arrive at a series of hypotheses from which we have selected four main theses to be tested.

This earlier research (Marsden et al 1992, 1992a) concluded that pressures on labour markets from increasing integration came from four main directions: the easing of trade restrictions; increased possibilities for labour mobility; greater capital integration; and progress towards monetary union.

Five main sets of problems of pay adaptation were identified: the imbalances in direct labour costs and social charges; inflationary expectations and their embodiment in bargaining practices; wage structure pressures of economic integration; rigidities in public sector pay; and pressures caused by the introduction of new systems of management and work organisation.

The findings suggested that a number of developments were necessary for the successful transition to the Single Market.

1. There was a need to change the 'speed of adaptation of wage expectations', specifically to move away from indexation and quasi-indexation towards pay increases based on productivity.

2. There was a need to change the pay 'linkage' between sectors, to avoid the damaging effects of comparability - particularly in the low-wage economies.

3. Greater decentralisation of the bargaining process would both aid in weakening existing sectoral and occupational linkages and encourage pay arrangements linked to performance.

4. The development of different types of performance pay would blur the edges of distributional conflicts, giving the parties involved a greater number of registers on which compromise could be negotiated.

5. In the public sector, systems building automaticity into the evolution of pay - such as implied indexation and increments related to age or seniority - would require revision.

Some of these developments were already partly in place, some were anticipated and others required policy changes from governments, employers and trade unions. In general, the conclusion was that 'the scope that governments and employers have to buy change from employees' was being constrained by the move to the Single Market - particularly the economic and financial convergence criteria agreed at Maastricht. However, the effect was at least partially offset by the reduced bargaining power of employees and hence the lower price employers have to pay for changes in working practices (Marsden 1992a).

There was thus some optimism that the increased competitive pressures from the move to the Single Market could be contained without a severe rupture in industrial relations.

Other themes The literature on the possible impacts of economic integration is copious on the question of monetary convergence and union, but virtually silent on the question of the IMP. The other themes of relevance to this report are outlined below.

Pay and inflation As far as monetary union is concerned, the issue examined in this report is whether the disciplines of the ERM (and subsequently the EMU convergence criteria) have changed the attitudes of pay bargainers to inflation. The hypothesis (Giavazzi et al 1988; Barreli 1990) is that the previous lack of credibility of government policies on exchange rates and inflation was replaced by an ERM-induced credibility, and that this in turn caused a change in inflationary expectations. We examine this issue in Section 7.

The impact of EMU Boyer (1993) argues that the move from 'National Labour Standards' to a 'European Monetary Standard' means that pay-setting will become a key variable in determining the competitiveness of different regions. He postulates a number of alternative wage-setting systems which might be compatible with EMU, ranging from the complete decentralisation of pay negotiations to sectoral agreements at European level. However, despite some evidence of convergence of nominal wages in the 1980s, under the discipline of the ERM, there is no evidence of general transition to pay regimes suitable for full monetary union. Reviewing the literature on pay and the possible effects of economic integration, Boyer's realistic, if somewhat downbeat, conclusion is that 'The acceleration of European integration ... shows starkly that economists do not yet have theories and models at their disposal which allow them to be sufficiently clear about the stakes involved in changing an economic and financial regime.'

Flexibility and decentralisation A more flexible and decentralised regime of pay determination at company level (Weitzman 1984) is seen by Boyer as one possible development. And this is a key element in the evolution of a 'European Model' of wage bargain outlined by Vaughan-Whitehead (1990). On this view there is a broad convergence of pay structures on systems characterised by four main components: a basic

wage fixed at sectoral level; an element to reward individual performance; a share in company profits; other benefits accentuating the diversification of benefits. We look in more detail at these issues in Sections 8 and 9.

Social dumping One persistent theme of discussions on the impact of economic integration is the variation in labour costs and labour regulation in Member States and the spectre of'social dumping'. Social dumping has been used to describe a variety of phenomena. As defined by Buigues et al (1990) social dumping is 'the recourse to working conditions and social standards which are below the levels which the productivity of the economy could normally justify, with the purpose of increasing market shares and improving competitiveness. Member States with better working conditions could be forced to reduce or, at the very least, to halt the process of improvement, for fear of activities relocating to countries with inferior conditions'.

Such a process is almost impossible to measure objectively and thus, not surprisingly, social dumping has become more a term of political abuse than a description of actual economic effects. For this reason we have essentially excluded the question of social dumping from this report.

Occasionally, however, the issue has become a matter of the public policy of Member States. In 1993, for example, the UK government placed advertisements in the German business press arguing that German firms could 'profit from making Great Britain your place of business' because of significantly lower wages and social charges. The advertisements coincided with the political controversy over the decision by Hoover to relocate production from France to the UK, closing its factory in Dijon and negotiating reduced terms and conditions of employment in Glasgow. This event was seen as a portent of competitive undercutting of pay and conditions as international firms took advantage of the need for jobs in depressed areas. A case study of the Hoover relocation has therefore been included as an appendix to this report.

Another, more important, aspect of the debate is the way some companies have used differences in labour costs and, especially, in working practices as a bargaining counter in negotiations involving new investment. This is not a new phenomenon, but it has been of particular important in recent years in one country - Germany - and one sector, the motor industry. A further case study therefore examines the most important example of this approach to collective bargaining, at Mercedes-Benz.

2. Methodological Approach

The central aim of this report is to determine whether the Internal Market has had particular effects on pay and bargaining developments which can be distinguished from the other pressures which have operated during the period. This task is particularly hard because of the slippery and subjective nature of many of the issues involved - above all changes in the attitudes of employers and unions -and the overwhelming importance of the general pressures of increased international and national competition and technical change. In addition one has to bear in mind the specific impact of German unification and the general effects of the recession of the early 1990s.

To disentangle these factors - or at least to clarify the areas where an IMP effect might be identifiable - we constructed a diagram of possible effects on European integration on pay and collective bargaining (see Chart). The different elements in this flow-chart are derived partly from earlier research carried out for the Commission (Marsden 1992; 1992a) and partly from some of the sectoral studies carried out during the general review of the impact of the ΓΜΡ. The sectoral studies on air transport, telecommunications services and equipment and the automotive industry proved especially useful in focusing research. In addition, we have benefited from the experiences of the companies consulted for this research and in previous assessments of trends in pay and bargaining (IDS 1988; Shonfield 1992).

In establishing the possible linkages between the IMP and changes in pay and bargaining, the chief difficulty is that the effects noted in the diagram can be attributed to the general increase in competitive pressures during the period. Those directly involved in the bargaining process are adamant that it is these general pressures which are responsible and not the IMP. Employers and unions agree that increased integration has altered the 'mindset' of negotiators in various ways, but point out that the IMP was itself the result of the general world-wide increase in competition during the 1980s and the awareness of the danger of'Eurosclerosis'.

The dynamics of change involved a combination of political, economic and technological factors.

Political factors included the 'backlash' against regulation and union power, which began in the United States and the UK at the end of the 1970s but exerted a powerful general influence on policy makers throughout the 1980s. In addition there were more specific political priorities to be addressed such as the transition to democracy in Spain; the 'crisis of institutions' in Italy; and, most notably, the consequences of German unification. Al of these have had a substantial continuing impact on the social and industrial relations climate.

For many large companies there was a crisis of management. Established structures failed to respond adequately to the recession of the 1980s and to the challenges of new technology. Speed and flexible response to market signals became crucial competitive attributes for a large number of businesses. The result was a massive and sometimes continuous overhaul of management systems, together with the introduction of new techniques (and the re-invention of old ones). This was an uneven process, most notable in the Anglo-Saxon economies, but also increasingly important in countries such as France and Italy.

Al of this meant that flexibility was the buzz word of the 1980s, well before the IMP. Disentangling cause and effect is a largely fruitless exercise. To some extent, therefore, the methodology employed here has consisted in working backwards from a number of observed effects to draw out the possible linkages which connect to the IMP measures.

The diagram is largely based on trends in larger finns and in high-technology manufacturing industry. This was necessary to avoid blurring a picture that was already complicated. We have distinguished in the diagram between IMP measures and the impact of the ERM (and the anticipatory effects of EMU) by the use of rounded boxes to define the latter process.

Inevitably a diagram of this type involves some shorthand. The main argument is that the increased competition, investment flows, merger and acquisition activity and concentration of production which accompanied the IMP have led to new pressures on national systems. This one might term a 'large firm' effect. At the same time the IMP presented smaller enterprises both with increased opportunities for expansion and trade and with a sharp increase in competitive pressure. The effects do not all point in the same direction, indeed a number of them have been contradictory. The combination of competitive pressures, accompanied by the disciplining effects of the ERM, led to something of a 'pincer effect', with both upward and downward pressures on pay.

Four hypotheses From the possible effects outlined in the diagram we defined three initial hypotheses: on the decentralisation of bargaining, the 'marketisation' of pay, and the linkage between pay and inflation. During the course of the research we decided to include a fürther hypothesis on the impact of increased foreign direct investment (FDI). The four hypotheses are as follows:

1. The IMP has encouraged the decentralisation of wage-setting and bargaining processes.

2. The IMP has encouraged the 'marketisation' of pay, above all the development of pay systems linked more closely to the performance of the enterprise.

3. The IMP has encouraged FDI, producing pay pressures in 'host' countries and a spread of'new' personnel policies and reward practices

4. The disciplines of the ERM/EMS and the Maastricht convergence criteria have severed the automatic linkage between pay and inflation.

These four hypotheses form the core of our assessment of the impact of the IMP and form the subjects of Sections 7 to 10 of this report.

The evidence The earnings data used in this report come from Eurostat and officiai national sources, and details are as noted in the text. Data from Italy are provided by surveys conducted by two employers' associations: Confindustria and the Associazone Industriale Lombarda. Additional material on France was provided by the Union des Industries Métallurgiques et Minières.

To test our hypotheses we also gathered evidence from the following sources:

1. An EDS survey of international companies operating in Europe. This survey focused on whether the IMP had in any way affected personnel and pay policies, either directly or indirectly, and on the use of labour cost comparisons in pay negotiations. Details of the responses and results are set out in Section 4.

2. An IDS survey of the main employers and trade union organisations in EU Member States. This survey focused on the main factors influencing bargaining, the linkages between different sectors and between company and sectoral bargaining and the main trends in pay and bargaining during the period of IMP. Details of the responses and results are set out in Section 5.

3. The 1992 and 1995 surveys of company bargaining conducted by Cranfield School of Management in association with a number of leading business research establishments. The surveys cover both private and public sector organisations employing 200 or more people. The data we use here are for the private sector only, unless otherwise stated. The 1992 survey (in association with Price Waterhouse) covered some 4,700 organisations in 12 countries. The results were published two years later (Brewster and Hegewisch 1994). The results of the 1995 survey, covering some 4,800 organisations in 13 countries, have not yet been published and are due to appear later in 1996. We have been given access to the data by the Cranfield researchers for the purposes of this report. The 1992 survey has provided some evidence for corporate attitudes to the IMP, in Section 4. Data for both 1992 and 1995 have been used extensively in Sections 8 and 9.

Note The period covered by this report includes the unification of Germany. To enable consistent comparisons all earnings and survey data for Germany relates to the former West Germany only.

DIAGRAM OF POSSIBLE EFFECTS OF EUROPEAN INTEGRATION ON PAY AND COLLECTIVE BARGAINING

Removal of barriers

Technical harmonisation

\

Increase in FDI

and reinvestment

Increased possibility of

relocation and shins in

investment Increasing pressure

for flexibility on

pay and. work

Increased trade

Economies of scale

M&A activity

MNC rationalisation

Liberalisation

measures

Concentration of

production

Public procurement

measures

ERM/EMS:;

Convergence criteria

post1992

Increasing competition

Higher productivity

Rationalisation of

supply chains

Single sourcing

Outsourcing

Increased

specialisation and

potential for

rentsharing

Increased scope for

national firms

Spread of "best

practice"

Competition in

sectors previously

protected. Services

more international

Opportunities and

competitive

pressures for SMEs

Potential for transfers

of lessskilled low

paid workers.

Upward pressures

on pay in advanced

firms. Downward

pressures on

suppliers.

Downward pressures on

pay and especially fixed

labour costs in SMEs

Enhanced credibility for national

monetary and fiscal policies

Potential for greater consensus on

national policies to control inflation

M ...EFFECTS

Companylevel

♦ variable pay

• more labour cost awareness

♦ sensitivity to nonwage :COStS. ;'.

• MNCs intracompany

mobility more compatible

svstems

Sectoral level

• pressure on skill

differentials

• divergences between SMEs

and MNCs

• greater divergence within

sectors

• divergences between

dynamic and sluggish

sectors

• emphasis on subsidiarily

decentralisation

Public policy

pressure to control NWLCs

pressure to hold down

e sector pay

links between pay and

inflation broken or modified

• segmented pay round

3. Summary of the main findings

There were several major changes to pay determination and the pattern of collective bargaining between 1985 and 1995. These reflected a variety of international and domestic pressures in the different countries. There is no identifiable general Internal Market Programme effect. Responses from a survey of employers and trade unions across Europe point to some impact from the IMP and the ERM in smaller countries: Belgium, Ireland, Portugal and Austria.

The impact of the Single Market on corporate personnel and pay policies has generally been limited. The numbers of staff* being transferred between countries has increased and company remuneration systems are tending slowly to converge for this reason. The main indirect effects of European integration at company level are: an increased concern to control labour costs; changes to grading or classification of employees; and links between pay and performance. Some companies are concerned that European Works Councils will inevitably lead to increased pressure for pay comparability and upward harmonisation.

There has been a significant change in attitudes to pay and inflation in a number of countries. With the outstanding exception of the UK, there has been a distinct shift in the reference point. Inflation forecasts have become more important as a point of reference in pay negotiations than backward-looking informal indexation. The increased credibility of national economic policies and institutions because of the disciplining effect of the ERM and economic convergence criteria appears to have played an important part in this. There are some indications of a more fundamental change, namely the signs of a breakdown of'national autonomy' in wage-setting in countries such as Belgium and Ireland.

Against this there do not appear to be any major changes in the linkages between different sectors. A survey of trade unions and employers and analysis of sectoral pay movements both indicate there is considerable continuity in bargaining and there are no general signs of any segmentation in the bargaining process. Public sector pay has, however, declined as an influence on the private sector. Sectors such as textiles and construction are less influential. The survey evidence suggests that economic factors, such as growth, employment levels and productivity, are a more significant influence on pay bargaining than they were before the IMP.

Major reforms of collective bargaining have taken place in two countries, in Italy in 1992/93 and in Spain in 1994. Both of these reforms were partly influenced by the European integration process.

The Italian reforms - principally the abolition of indexation and the allocation of separate roles for industry-wide and company bargaining - were the result of a long process of change in which the ERM played a significant role in modifying inflationary expectations. The reforms also reflect a period which saw a significant decoupling of pay from nationally-determined elements, at least in the more advanced sectors of manufacturing. The Single Market seems to have played a part in this, at least to the extent that reform would have been more arduous had the IMP not existed.

The reform of the Workers' Statute in Spain liberalised and deregulated industrial relations in a number of ways, mainly promoting collective bargaining as a replacement for the courts and labour ordinances. The new Statute recognised the importance of reform as a consequence of European integration. The subsequent period of collective bargaining saw major new agreements concluded at the start of 1996 in the banking and telecommunications sectors. In both sectors there is explicit

recognition that increased competition stemming from IMP measures was a decisive element in forcing changes to working practices.

The coverage of collective bargaining has not altered in the IMP period. Union density has declined but is generally high by world standards. Sectoral bargaining continues to be of great importance in most countries. The direct intervention of government in collective bargaining has declined, although it continues to be quite active in about half the Member States.

There has been significant decentralisation of bargaining in many EU countries, in which heightened international competition has played a key role. Great diversity remains but there has been some degree of convergence. Most countries do appear to be evolving their own particular solutions in order to achieve greater scope for local negotiations. There is no single common strand to this process, although in general there seems to be a greater degree of 'subsidiarity' in the bargaining process: the content of central and sectoral agreements is changing even where the form remains the same. The IMP has evidently had some influence in this, but decentralisation began several years before the Single Market process and was by no means an 'EC phenomenon'. It took place elsewhere in Europe (notably Sweden) and in other parts of the world. Decentralisation was in some cases driven by domestic factors - as in the UK and France - and there were other cases, Ireland and Spain, where European integration had an opposite effect, reinforcing the need for a more co-ordinated approach.

Variable pay seems in general to be on the increase, but this is not a development peculiar to EU countries. The same tendency can be seen elsewhere. Companies are introducing these systems for various reasons, above all to motivate employees but also to relate pay more closely to productivity. It appears that variable pay may have developed earlier in the older EU Member States, but this is not an IMP effect.

Payment systems related to company performance are becoming more widespread in some countries, including France, the UK, the Netherlands and Italy. However, there is nothing to suggest that finns are favouring this form of remuneration over other systems, such as individual or group incentives. There is very little sign that a European Model of remuneration is developing. There are nominal profit-sharing arrangements in some countries which do not seem to be related to company performance: examples are Spain and, to a degree, the Netherlands. Finally, there are two countries where profit-sharing has become widespread during the period under review, the UK and France. In both cases, fiscal incentives, introduced or extended in the mid-1980s, have proved to be the decisive factor. Thus these developments are, by definition, based on national factors and not European integration.

At a sectoral level, the liberalisation measures in the air transport and telecommunications sectors have increased competitive pressures. In air transport, low cost competition has emerged on some routes (mainly domestic) but with the exception of Ireland this had very little direct impact on bargaining in established airlines. The general need to reduce labour costs to compete internationally has been more important. In telecommunications, the impact of liberalisation measures has still to be felt in most countries. The exceptions are the UK, where liberalisation began independently of the IMP, and Spain, where important changes to working practices (not pay) have just been agreed. In France, Germany and Italy a two-tier approach to employment conditions either has been adopted or is being prepared. This will mean future employees will not enjoy the same job guarantees and pension rights as existing staff.

As regards the impact on Small and Medium Enterprises, only in Germany does there appear to be a distinctive 'Single Market effect', and this is confined to the problem of the employment of foreign workers in the construction industry. There is broad agreement that the situation needs to be regulated, but there has been some disagreement about the measures to be adopted. This issue clearly has implications for the EU, in that some of the workers involved are from Member States with much lower wage levels - the UK, Ireland and Portugal. However, the great majority of the workers concerned are from countries outside the EU, such as Poland and Russia.

There are some signs of increased friction between SMEs and larger firms in countries such as Ireland and Italy, but existing collective bargaining arrangements have been sufficiently adaptable. Overall, there may have been some easing of wage pressures because of restructuring in large firms.

In general, some of the fears about the impact of the IMP appear to have been unfounded. The widespread view that the economic 'core' would be enriched at the expense of the peripheral countries or regions has not so far proved correct. Foreign Direct Investment appears to have pushed up pay in Spain and in the UK. The opening up of the Spanish market resulted in severe competition for qualified staff and managers, widening pay differentials in domestic firms. The pay effect of FDI in the UK is less than in previous periods because of the shift in inward investment patterns away from the US towards Europe and Japan. Japanese investment has had a major impact on working practices and productivity in parts of UK manufacturing. The evidence of new pay pressures in Ireland is inconclusive: an increasing proportion of manufacturing employment is in non-union electronics firms which are outside the scope of collective bargaining. Across the EU as a whole, the impact of increased FDI on pay and bargaining has been very small.

The dangers of 'social dumping' have been exaggerated. There are only isolated examples of competitive undercutting of pay and conditions by firms exploiting labour cost differences between countries. On the other hand, there is evidence from Germany that firms are increasingly using the possibility of relocation as a bargaining counter to achieve changes in working practices at home.

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4. Company views: the IMP and corporate personnel policies

The evidence on corporate behaviour suggests that the IMP has had little impact on personnel

policies. The 1992 survey conducted by the Cranfield School of Management, covering nearly

4,700 organisations in 12 countries, found that only a small minority of private sector employers -

on average some 6.5% in the eight Member States in the survey - had developed a formal (i.e.

written) personnel strategy in relation to the Single Market (Table 4.1). A somewhat larger

minority stated they had an 'unwritten' strategy. These overall figures lead to the conclusion that

the large majority of firms regarded the Single Market as essentially irrelevant to personnel issues.

Table 4.1 The impact of 1992 on corporate personnel policy 'Has your organisation developed a human resources strategy in response to the Single European Market?'

% of organisations, private sector only

EU members

Denmark

France

Germany

Ireland

Netherlands

Portugal

Spain

UK

Non EU members

Finland

Norway

Sweden

Yes:

Written

■Yes:

Unwritten

No

7

8 - 1

5

7

6

8

9

12

14

12

15

9

30

20

17

77

72

79

70

79

55

65

70

6

6

.1

14

8

10

79

81

86

Source: Price Watcrhouse/Cranfield Survey, 1992

This pattern was not entirely the same across all Member States. A wider strategic response was

most commonly reported from employers in Spain and Portugal, particularly from the major private

sector employers. This seems, however, to have been more the effect of entry into the Community

than a specific response to the IMP.

Changes to corporate personnel policies in the mn up to 1992 (IDS 1988; Marsden et al 1992)

were essentially focused on transfers of professional and managerial staff between countries. There

were two broad aims. One was to facilitate the creation of teams of professionals and executives

from different countries. The other aim was the development of a European management cadre,

capable of switching from country to country. This was particularly evident in US-owned firms and

in those sectors, such as chemicals, which already treated Europe as a Single Market, or which

were adopting a pan-European product strategy.

Two changes were identified as important in this process. The first was to bring systems such as job

evaluation more into line in different countries - making them more compatible, if not identical. The

second was to change the approach to transfers between different countries, moving away from an

'expatriate' package, with staff paid their home country salary plus extra elements to compensate

for the transfer, housing costs etc. Staff transferred between European operations would henceforth

be paid in line with local practice.

However, there was no evidence at all of any change in policies below managerial and professional level. The vast majority of companies continued to take the.view that pay and collective bargaining were a responsibility of management in local countries and business units. Some firms stated they were monitoring the outcome of collective bargaining more closely, but in almost all cases central controls were applied to only a small minority of key positions. Labour cost comparisons between different countries were seen as having very limited relevance to pay negotiations.

Research carried out in 1993/94 on the personnel policies of the largest international companies in Europe (Lester 1994) broadly confirmed the picture of a gradual move to a more 'European' approach. However, this later research argued that companies were tending to keep expatriates on the home country payroll 'in spite of the Single Market'. This finding probably reflects the response of companies (especially in the UK) to the sudden movement in exchange rates following the ERM crisis in 1992.

Results of company survey To assess the current position we surveyed a small number of international companies to identify:

a. whether any specific Single Market measures had a direct impact on personnel policy

b. whether there were indirect effects on personnel policy from the Single Market or moves towards monetary union

c. whether there had been changes in the use of labour cost comparisons.

A short questionnaire was sent to 50 companies, producing 19 responses. These were combined with the results of three in-depth interviews. The companies which responded are based in 10 different countries, are mainly involved in manufacturing, and employ a total of around 280,000 people in the EU.

Main findings Bearing in mind the limited number of companies, the main points to emerge from this research are as follows:

1. Very few companies thought the Single Market had a significant impact on industrial relations, although a majority believed it had been a factor influencing change. Most companies said that there had been no direct impact on personnel policies.

2. The number of transfers between different EU countries has increased, in some cases dramatically. Companies have installed comparable management pay structures and performance schemes in response, as well as moving away from the traditional approach to rewarding expatriates.

3. The main indirect impacts of the European integration process, identified by a minority of companies, were: increased control of labour costs, changes to the grading or classification of employees, and links between pay and performance.

4. Use of labour cost comparisons in pay negotiations had increased a little since 1990, but only one company stated that such comparisons were used 'always or often'. Unions tend to focus

12

exclusively on labour costs in different EU countries. Companies are more concerned with relative costs in North America and South East Asia.

5. In several cases the Single Market had led to the relocation of indirect functions, such as customer service and order processing, although it was pointed out that these decisions were not necessarily made on purely economic grounds.

6. The issues of greatest current concern were the costs and possible impact on collective bargaining of European Works Councils.

Observations by individual companies Comments were invited on the subjects covered in the questionnaire. Some of these are reproduced below:

Direct effects 'There has been no direct impact on personnel policies. The Single Market programme is still so far from any practical personnel changes that we do not see any impact before social systems, taxation, pensions etc are uniform' (Petrochemicals company).

'The failure to totally free up pensions, their transfer, elimination of taxation on private or corporate plans remains a serious barrier to the mobility of skilled people' (Paper company).

'Directives on telecommunications and the deregulation of this sector have had and have a major influence on personnel policies: mainly on productivity, re-engineering processes, reducing redundancies and flexibility. These are already areas of improvement in human resources policies but we have had to speed our measures' (Telephone company)

Indirect effects 'It is now even more important to divorce pay discussions from central union/EWC negotiations or there is a threat that all countries will end up paying the maximum level of salaries and benefits. It is not easy to see remuneration being harmonised at the lowest common denominator! Therefore central unions are banned from our EWC and we are approaching wage and salary negotiations on a more decentralised basis' (Paper company)

'Grade restructuring to give greater flexibility. Management by objectives to provide a link between pay and performance. Discussion groups on labour costs' (Tobacco company)

'Productivity improvement programmes. Widened population eligible for variable pay' (Food company) 'A reorganisation of sales and logistics took place in the last 214 years leading to a single warehouse for Europe and major changes in business procedures; this leads to different notions of profitability in the remaining structure with direct consequences on remuneration which we are still evaluating' (Electronics company)

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General comments 'Our business is multinational, not European specific. Within Europe, national characteristics tend to dominate (legal and cultural considerations) despite an international approach by our company to sales and marketing, distribution and production rationalisation. Labour costs are a major factor in business decisions, but all bargaining is at national level. The Works Council Directive could herald the start of a major change. Unions and many politicians will wish to go beyond 'Information and Consultation' and enter into international negotiations. We would resist such temptations!' (Tyre company)

'Where the possibility exists for reducing labour costs on activities which do not directly impact on our customers, consideration is being given to the most suitable EU country, or wider Europe (this is a difficult subject)' (Automotive components company)

'We are moving to a more consistent approach. Where subsidiaries make changes in the personnel field we seek to ensure that these are convergent rather than divergent. The increasing number of international teams in our business has led us to organise a programme to make systems and allowances simpler and more consistent to avoid friction caused by companies treating staff differently. We are also progressively extending a common job evaluation system throughout the company. The main force for change is globalisation of the markets for our equipment, rather than developments in Europe. However, Europe is more implicated because there is a greater number of European teams and the number of transfers of staff runs into thousands (Telecommunications company).

14

5. Survey of employers' organisations and trade unions

The aims of this survey were to gain the views of the major representatives of employers and employees on recent changes in pay and industrial relations and, specifically, on the following issues:

1. The relative importance of inflation, pay comparability and general economic factors in pay bargaining and how these influences had changed since the mid-1980s.

2. The relative importance of particular sectors in the bargaining process and how sectoral influences had changed since the mid-1980s.

3. The role of company-level bargaining and the influence of prominent firms.

4. The pattern and length of the pay round.

A questionnaire was sent to 63 organisations: the central employers' and trade union confederations in each country plus the organisations responsible for collective bargaining in several key business sectors, mainly engineering/metalworking, chemicals, textiles/clothing and banking/finance. Questionnaires were also sent to tripartite organisations where appropriate.

Al EU countries were included in the survey, with the exceptions of Finland, Luxembourg and the UK. The UK was excluded both because of its uniquely fragmented bargaining arrangements and because an extensive survey of UK companies had already been carried out in July 1995. A summary of the findings for the UK is reproduced at the end (see Box).

There were 33 responses, with replies from all the countries surveyed except Greece. The number of responses was divided roughly equally between employers and unions, with the largest number coming from Denmark, Sweden and Spain.

Analysis of the main results (see Tables 5.1-5.4) produces several conclusions. The overall impression is there has been considerable continuity in bargaining during the IMP period, but that certain significant changes have taken place. In particular, there has been a modification of the relationship between pay and inflation, and associated with this a greater impact from general economic factors, such as employment and productivity. There also seem to have been changes in the pay 'linkages' between different sectors.

The areas of continuity 1. Inflation, along with economic growth, remains the strongest factor influencing pay increases. Nearly all respondents (with some exceptions in Denmark and Sweden) saw inflation - either past, present or future - as an 'important' influence.

2. Pay increases agreed at sectoral level continue to exert considerable influence. There are no general signs of greater segmentation in the bargaining process. Opinion is divided equally between those who think that pay comparability has become more important and those seeing it as less important. The consensus view is 'no change'.

3. Company pay agreements are still a relatively insignificant influence in most EU bargaining systems, the outstanding exception being the UK (see below).

15

4. Metalworking/engineering continues as in the past to exert a unique leadership role in pay

bargaining, mentioned by over 70% of respondents.

Table 5.1 What factors influence pay increases? Which of these influences are the most important? Respondents were asked where possible to identify three main factors. In some cases more than three were indicated.

'Inflation factors'

Past inflation

Current rate

Inflation forecasts

'Pay increase factors'

Prominent sectors

Prominent companies

Public sector

'Economic factors'

Employment levels

Productivity

Economic growth

Totals

'Inflation factors'

'Pay factors'

'Economic factors'

Influence Impo liant

Influence

Number of respondents

Important

Influence

Rank order

'■ ' : - i ' - . " . .

10

9

6

5

10

18

4=

1

8

4

6

12

3

4

3

9

14

11

9

10

17

4=

2

25

18

34

33

19

36

Table 5.2 Do pay increases in any of these sectors exercise pay leadership on other sectors?

Rank order of importance

Metalworking/engineering

Public sector

Chemicals/Oil

Conslmction

Electronics

Banking/finance

'Other'*

Tourism

Clothing/textiles

Importiini

24

13

10

9

9

9

3

0

0

Not

Important

1

11

8

9

9

11

-

16

16

* The three other sectors mentioned were: Puper, Food, Transport.

The areas of change

1. The most significant change is in the relationship between pay and inflation. It is widely agreed

that past inflation has become far less of an influence and that inflation forecasts have become the

most important factor.

16

2. While inflation and general economic factors remain roughly comparable as influences on pay, economic factors have clearly increased in importance while the impact of inflation has declined. Economic factors were cited twice as often as inflation as a growing influence on pay bargaining.

3. While public sector pay continues to be seen as an influence on the private sector (cited by more than a third of respondents), this has declined in importance compared to other factors. When asked to choose between different factors, fewer than 20% of respondents mentioned public sector pay increases.

4. 'Traditional' sectors such as textiles and clothing and the construction industry are less influential on pay changes in other sectors than they were. The decline in importance of construction is especially marked. By contrast the finance sector has become more influential.

Table 5.3 Thinking about the pattern of pay bargaining over the past ten years: have any of these influences become more or less important?

'Inflation factors' Past inflation Current rale Inflation forecasts ' Pa v i ncrease facto rs ' Prominent sectors Prominent companies Public sector "Economic factors' Employment levels Productivity Economic growth Totals 'Inflation factors' 'Pay factors' 'Economic factors'

.Moret·:: Less No Change

Number of respondents

6 5

12

18 8 7

7 15 14

9 4 3

7 6 5

14 15 17

18 12 15

2 3 2

9 14 15

23 16 45

33 16 7

36 46 38

Table 5.4 Thinking about the pattern of pay bargaining over the past ten years: have any of these sectors become more or less important?

Rank order of increase in importarne Banking/finance Mclalworking Electronics Public Sector Chemicals/Oil Clothing/textiles Tourism Construction

More

7 7 4 4 3 2 0 0

Less

5 6 3 4 5 7 4

10

. No :'. Change

12 14 16 18 16 16 19 14

17

Inflation forecasts: the role of government The modification of the link between inflation and pay reflects a number of factors, among them the general decline in inflation. We look at this subject in more depth in Section 7. One significant point to emerge from the survey is the importance of government forecasts. Where inflation forecasts were used, government figures were almost universally seen as important. The exceptions were Belgium (where there is still partial indexation) and France. Much less weight was given to Central Bank or independent forecasts and even less to 'in-house' forecasts.

There was, however, far less unanimity on whether such forecasts act as the basis for consensus between the social partners. The responses from Spain, Austria and Italy indicated that this was the case. Elsewhere - for example Denmark and Ireland - there were differences of opinion.

Company bargaining When asked whether company bargaining has a general influence on pay increases, a substantial minority (around a third) said that it did. This is a higher proportion than might have been expected, given the traditional low profile of company bargaining. However, when asked whether pay increases in prominent companies were an important influence, fewer than 10% of respondents agreed.

The clearest signs of the increasing influence of company bargaining came from Denmark, Sweden and the Netherlands - reflecting some significant decentralisation of the bargaining process in the last few years. In each case, large exporters and internationally-oriented firms are seen as setting the pace: Philips and Unilever in the Netherlands; Volvo and Ericsson in Sweden; Novo and Danfoss in Denmark. In general the most influential companies are concentrated in three main sectors: cars, telecommunications and petrochemicals. The car industry has traditionally played a leading role in the pay round and this was much in evidence in responses from France, Germany, Italy and Sweden. There were some indications that the role of the car industry has become weaker in recent years in France, as it has done in the UK. In the case of Italy, Fiat continues to exert a great influence - on industrial relations rather than pay.

The pay round Nearly three-quarters of respondents stated that there was a recognised order of pay bargaining - a 'pay round' - with the normal cycle of bargaining being either annual or every two years. There seems to be no clear pattern of one sector 'leading' the pay round, despite the acknowledged importance of the engineering sector. In most countries the pattern seems to vary from year to year.

Bargaining reforms and the impact of European integration The survey did not reveal any general bargaining trends which can be related to the IMP. However, respondents did point to some relevant developments in particular countries:

1. In Belgium, a trade union commented there was a tendency towards decentralisation to company level but the 'social partners resisted together the push for decentralisation that was attempted by the Government with the Plan Global' - the programme of wage restraint introduced in November 1993 following the breakdown of negotiations between employers and unions.

2. In Denmark, an employers' organisation observed that the long-term trend towards decentralisation needed to be seen in the context of the 'general economic climate with more international competition (which) has more influence on the overall level of pay-rise expectations in all sectors'. However, 'the pattern and structure of bargaining are unchanged by the internal

market, whose effects are only marginal in the process. International competition sets the level of expectations and national structures determine the distribution of wage increases'.

3. In Spain, the newly-agreed reform of job classification in the engineering industry - replacing 142 job categories with seven grades - was noted as an example of a new type of agreement which would probably make it easier to remove fixed elements, such as seniority, and put greater emphasis on variable pay, linked to productivity.

4. In Ireland, it was emphasised that bargaining over the tenns of national agreements now takes place within the parameters set up by European-wide inflation, in particular the rates of inflation and pay growth set by 'competitor countries'. Competitive labour cost pressures in both metalworking and textiles have exerted a downward pressure on central negotiations.

5. In Austria pay increases in the public sector and in textiles and banking were seen as more influential than before - an effect associated with 'the opening of markets during the integration process'.

6. In Portugal, a union pointed to the way that the convergence criteria for EMU had been used by the government to justify a policy of income restriction and to call for wage moderation in the name of controlling inflation and improving competitiveness. Unions had felt their power to protest reduced by rising unemployment in 1993 and 1994, with some sectors, such as public administration, suffering a decline in real pay. However, the tripartite accord agreed in January 1996 between the government and the social partners was seen as a promising sign.

Pay benchmarking in the UK The fragmented nature of pay arrangements in the UK means that the issues of inflation and pay linkages require separate analysis. IDS research on pay benchmarking in the UK (IDS 1995) shows that:

1. The current rate of retail price inflation remains the principal influence on pay increases. This applies both to settlements determined by collective bargaining and to those which are based on perfonnance. An analysis of over 2,000 salary reviews for executives since 1990 shows that the average increase tracks movements in the current inflation very closely. This applies bolli to 'general' and 'all-merit' increases.

2. Although inflation forecasts are used by employers in setting pay budgets, the influence of such forecasts on collective bargaining is very limited compared to elsewhere in Europe.

3. Surveys by the Confederation of British Industry show that pay comparability pressures have declined significantly since the late 1980s. Sectoral pressures are consistently stronger in the service sector than in manufacturing.

4. The fragmentation of wage-setting and the abolition of minimum wage legislation has been accompanied by a huge growth in the number of pay clubs and surveys, especially in sectors with weak collective bargaining.

5. An IDS survey of companies in July 1995 found thai the main influences on bargaining apart from the current rate of inflation were, first, pay increases within the relevant business sector and. secondly, the 'going rate' in large finns. Pay settlements in the public sector were also seen as an important general influence.

19

6. The impact of the EVIP: an inter-sectoral analysis of pay statistics

A number of possible sectoral pay effects might be expected from the ΓΜΡ. If the ΓΜΡ has required labour market adjustments then one would expect to see changes in the dispersion of earnings in different sectors over the period. Such effects might include:

• greater divergence between dynamic and sluggish sectors; • relative depression of earnings in sectors most exposed to international competition; • relative increases in earnings in capital-intensive industry.

In individual countries one might expect to see evidence of change where the Single Market stimulated growth in certain industries or where relatively small industries expanded because of access to new markets or because of new investment.

In order to test for such effects, and for possible variations in different countries, we conducted a review of pay trends since 1985 in eight sectors. The sectors chosen for an analysis were as follows:

Manufacturing

Ceramics Chemicals Clothing Footwear Motor Vehicles/parts Textiles

Services Finance Retailing

Industrial Classification (NACE)

248 25 435/4 451/2 35 43

812/3 64/653-6

Data were collected for the period 1984/85 to 1993/94. In most cases the data were provided by Eurostat sources, supplemented by national statistics and ILO data where necessary. In addition data from some industry sources (for footwear, primary textiles and motor vehicle assembly) were analysed to provide a cross-check on earnings movements and relativities.

The sectors provide data for nearly every EU country, although in some cases comparable information is not available for particular years. The major omission is Italy, where there are no comparable data available. We have included comments where there is relevant information available from industry sources. Data for Sweden have been included for selected years to provide a benchmark for the three Member States which were not members of the Community during the period.

Characteristics of the sectors The aim in choosing these eight sectors was to look at pay developments in a cross-section of industry and commerce, with a range of different and contrasting characteristics. These characteristics are summarised in the Chart, which also identifies particular national factors of relevance.

20

Summary of Sectoral Characteristics: Manufacturing

to

Business characteristics

Capital/Labour Intensity

Employment trends 1984-9-1

Other relevant characteristics

Wage levels and patterns

Trade union characteristics :

Industrial relations and bargaining

Single Market impacts on sector

Ceramics Varied. Strong SMI: presence. Usually localised but intra-EU trade long established.

Mainly highly labour intensive. Fell by 20%, mostly after 1990.

Relatively important in Spain, Italy and Portugal. Largest employers are in UK and Germany.

Varied. Sensitive to market. Well below average in UK and Germany. Piecework is common. Mainly weak. Strong local traditions, especially in Italy.

Mainly stable: local workforce loyal to industry and firms.

No special factors identified.

Chemicals Very international. Concentrated. Strong emphasis on swapping and sharing capacity.

Mainly highly capital intensive. Fell by 9.5%, mostly 1992-94, after rise in late 1980s.

The three leading German companies employ about 25% of total EU workforce.

Leading sector. Pay in major companies boosted by need for flexibility and enhanced skills. Strong. Close relations with employers.

Stable employment tradition. Industry has led the way with bargaining reforms in several countries. Intense M&A activity in runup to SEM. Restructuring and economies of scale.

Clothing & '.Footwear Very fragmented. Great pressure from low-cost competition. Increasing use of subcontracting. Italy is leading producer; relatively more important in Portugal. Labour intensive.

Fell by 24% (30% in Footwear).

Large numbers of women workers. Part-time work in clothing is significant in the Netherlands and in smaller Danish and German linns. Typically lowest pay levels in manufacturing. Usually piecework.

Weak.

Traditional (but see Textiles).

Freer movement within EU offset by increased import penetration from low-cost countries.

Motor Vehicles Pan-European, but with strong national markets. Overcapacity and lack of profitability. Large firms exerting cost and quality pressures on suppliers. Increasingly capital intensive. Fell by 22% in vehicle assembly; rose by 9% in components sector before decline to earlier level. Gemían employment rose to 1991, then fell faster than elsewhere. Japanese investment in UK a major influence. Leading sector in nearly even' country, but in some cases less than in the past.

Typically strong, but less so in new plants and satellite finns. Typified by conflict, but new-working practices and innovation have led to greater consensus. Growth of FDI from both within and outside EU, with new plants driving restnicturina.

Textiles Still fragmented with large number of SMEs. Overcapacity and falling investment. Increasing low-cost competition.

Relatively capital intensive.

Fell by 30%, more sharply after 1990.

Regionally concentrated in larger EU states, principally Italy.

Generally below average. One of leading negotiating groups in Italy.

Varies from country to country.

Some innovation, hi Italy bargaining in textiles and clothing is closely linked.


IO ι J

Sources: Panorama of EU Industry; industry and company sources.

Summary of Sectoral Characteristics: Services

Business characteristics

Capital/Labour Intensity Employment trends 1984-94 Other relevant characteristics

Wage levels and patterns

Trade union characteristics

Industrial relations and bargaining Single Market impacts ori sector

Finance Both global and national. Rapidly changing markets with integration of different segments driven by liberalisation and technical chanae.

Labour intensive, although with increasing automation. Rose by around 15%. After rapid rises during the 1980s, employment stablised in the earlv 1990s. Focus of late 1980s boom in the UK following deregulation in 1986. Major employer of women workers, especially in northern EU stales. Significant proportion of part-time workers in Denmark. Leading sector, especially in Italy, Belgium , Spain and Portugal. Outside the major countries pay levels in smaller finns are often above average for the sector. Varies from country to country. Tendency to act independently of "mainstream". Traditionally conservative and stable in most countries. Some breakdown of consensus with rapid changes in the sector and declining job security. Restructuring and M&A activity, usually with the aim of reinforcing positions in national markets.

Sources: Panorama of EU Industry: industry and company sources. Note: Employment trends for these two sectors are estimates because of changed definitions.

Retailing Great variations between fragmentation and concentration. Large numbers of self-employed in southern states. Increasing control of suppliers by large retail chains. Labour intensive. Rising employment in late 1980s (nolablv in France) partly offset bv falls in 1990s. Big supennarket chains concentrated in France, Germany and UK. Large numbers of women workers. High proportion of part-time workers in Netherlands, Denmark and UK. Usually low. UK.

Pay in larger linns a little higher, but not in France and the

Weak with execeptions such as Sweden and Ireland.

fraditionally conservative. High labour turnover.


Manufacturing sectors The main statistical evidence for the six manufacturing sectors is presented in the Tables at the end of this section. In each case the figures show the average hourly earnings of manual workers as a percentage of the national average for all industries (NACE 1-5). The general picture is of broad stability over the period, but there are some significant exceptions to this pattern. As Marsden and Silvestre point out (Marsden et al 1992) normally 'the structure of relative wages between industries displays a great deal of stability both in the short-run and over longer periods'. The main reasons for this are that differences in skill-mix and working patterns are more or less fixed. Given that this is the normal pattern - and one which holds good not only for the EU but for other industrialised economies such as the United States - any degree of variation which is sustained for more than one or two years is likely to be of significance.

As a general observation it should be noted that earnings rose in real terms over the period in all countries except Greece. Elsewhere, increases were well above inflation in most sectors, the exceptions being clothing and footwear in France and footwear in Belgium.

An analysis of the individual sectors produces the following observations:

Ceramics 1. Against a pattern of broad stability in most countries (the data for Ireland are probably unreliable). Both Greece and Portugal, have increases in relative earnings over the 1988-1993 period. There seems to be a similar development in Spain, cut short by the recession in 1993.

2. The absence of data for Italy prevents a comparison with Spain and Portugal, the two other countries where the industry is most important, but reports from industry sources in Italy (// Sole 1996) indicate a virtual absence of unemployment in recent years, accompanied by high earnings from piecework.

3. Other data (for monthly earnings) show relative pay in Germany and France is lower than these figures suggest. German pay levels, unusually, show some decline: over the last few years parts of the industry have been hit by severe job loss because of low-cost competition from eastern Europe.

Chemicals 1. In general relative pay is fairly stable, with the industry predictably ahead of the average and in some cases moving further ahead. Stability is especially marked in Germany, the dominant force in the European chemical industry.

2. The relative importance of the chemical industry as a wage leader in smaller countries is seen in the figures for Portugal and Ireland. In Ireland the industry is highly unionised and it is the one sector where pay rises have tended to breach the terms of national agreements.

3. The figures for Belgium show a significant increase at the end of the 1980s and again in 1993. The chemical industry is the one sector in Belgium where company-level bargaining predominates. The sectoral agreement for chemicals only sets a minimum rate.

4. There have been huge changes in employment and skill-mix during the period (and major increases in productivity levels) which are not reflected in these figures. For example, pay per head in the UK chemical industry increased by 30% between 1990 and 1992.

23

Clothing 1. The general picture is of almost total stability, with the industry consistently at the foot of the (industrial) earnings league year after year. The exception is Greece, but the figure for 1985 is taken from a different source. Other data (for monthly earnings) show earnings in Greece are relatively lower than these figures suggest.

2. A striking feature of this set of data is the way that completely different bargaining arrangements - for example Belgium, Denmark, Germany and France - produce the same pattern of consistency. Earnings in the UK were relatively lower than in any country other than Ireland. Ironically, clothing was the only significant manufacturing sector covered by minimum wage legislation in the UK until the abolition of the Wages Councils in 1993.

3. Data on monthly earnings from the late 1980s suggest that earnings in Italy are relatively high.

Footwear 1. The overall pattern is less stable than in the clothing industry.

2. There are clear signs of a relative decline in earnings in Belgium and in Germany, where the industry rivals clothing at the foot of the earnings league.

3. There is some evidence of a North/South division, with relative earnings rising in southern Europe. However, in Spain relative earnings fell back sharply in 1994, from 75% to 71% of the average.

Motor Vehicles and Parts 1. Unlike the other sectors there are different tendencies at work in different countries.

2. Relative earnings in the UK and Germany show a clear upward movement since the mid-1980s. By comparison France and Belgium are stable, although relative earnings rose to a ten-year high in France in 1994. In the Netherlands there is evidence of some decline and the industry is, unusually, below the average.

3. Relative pay in Germany continued to rise despite the reversal of employment trends in 1991. Cuts in pay and hours were agreed at Volkswagen in 1994, but the signs are that changes in working practices have continued to sustain the relative earning position of workers in the motor industry.

4. Earnings in Spain and Portugal are well above the average, reflecting the pay levels in foreign multinationals. In Portugal the figures for monthly earnings from the labour costs survey confirm an upward movement between 1984 and 1988.

5. In Ireland, the decline reflects the insignificance of this sector compared to other parts of manufacturing.

Textiles 1. Overall the picture is very stable, with some convergence of relative earnings in the different countries.

24

2. There is some evidence of relative decline in Portugal from these figures (until 1992) but other sources suggest this may not have been the case.

3. The lack of data for Italy, the most important country, means that important changes are concealed. Recent years have seen relocation of companies outside Italy (and Europe), increasing capital intensity, serious job loss and the fragmentation of production units, with increasing employment in the 'submerged economy'. The 1995-99 industry agreement attempts to tackle these problems in several ways, exerting greater control over sub-contracting but allowing dispensations on minimum pay rates so that finns operating illegally can gradually bring their pay into line with industry rates.

Service sectors The main statistical evidence for the two service sectors is presented in Tables at the end of Section, which show monthly earnings as a percentage of the average for national industrial average for non-manual workers. Unfortunately comparative data are only available for eight EU countries, and for Portugal and Spain only from 1989 onwards. In making our assessment of trend, we have also drawn on data from other sources (national statistics and the labour costs survey).

Retailing 1. Earnings relativities are very stable over time and, with the exception of Greece, very similar in the different countries. Data from the labour costs survey confirm this stability for several countries (France, Germany, Greece, Italy, Portugal and the UK). This survey also suggests that retail earnings in Italy are comparatively high at around the average for manual workers. In Sweden retail employees seem to have fared rather better than average during the 1980s. In 1993, average pay was around 94% of the average for white-collar workers in production industries - a long way ahead of the EU average.

•Ό"·

2. The stable pattern is surprising in view of the significant increases in the part-time workforce between 1984 and 1992. The most notable increase was in Ireland (from 22% to 40% of the workforce) and here relative monthly earnings did decline sharply. In Germany and France the proportion of part-timers also rose, although the total remained quite low in France (21%) compared to Germany, Belgium and Denmark (around 40%), the UK (50%) and the Netherlands (60%). The 1992 figures also show an increase in part-time work in southern European countries, although from a very low base.

Finance 1. Unlike the other sectors discussed here, a substantial proportion of employment is in the public sector and has therefore been subject to pay restraint over the period.

2. The figures show some fluctuations, with relative pay rising in France and the Netherlands and falling in Belgium; and rising slightly in Germany and the UK (after deregulation).

3. There seems to be a major difference between northern and southern countries. Pay levels in Spain and, especially, Portugal are well above the white-collar average. Other data (from the labour costs survey and industry sources) suggest the same is true of Italy.

4. Greece seems to be an exception to this rule. This is surprising in view of the decisive role that the banks play in the economy. A peculiarity about collective bargaining in the Greek banks is that

25

there is no employers' federation and the agreement reached between individual banks and the union federation is legally binding on all employers in the sector.

5. In the northern countries, pay levels are around average or, in the case of Germany, rather lower. The German private banking sector is well-known for its relatively low pay levels. Earnings levels are set by the industry agreement; there is little or no supplementary pay. A similar situation exists in the French private banking sector.

6. There is some evidence of convergence to a northern European norm in the banking sector. The one exception to this pattern is Sweden, where pay in banking moved well ahead of other sectors in the 1980s and in 1993 was nearly 10% above average white-collar pay in production industries.

The dispersion of earnings To aid interpretation of these trends and to check for any changes in the pattern we examined the overall dispersion of earnings in industry during the period. The Chart at the end of the Section gives the results for 13 countries and shows the industries with the highest and lowest earnings levels for manual workers and the degree of earnings dispersion.

In terms of the industries involved the overall impression is of stability. The differences between sectors such as clothing and footwear at the foot of the earnings league are often marginal. However, the clothing industry generally appears at the bottom and oil refining at the top. This pattern is very much as expected.

There are significant differences in the degree of dispersion. Sweden, Denmark and Finland have a relatively narrow dispersion throughout the period (widening somewhat in Finland in the early 1990s). At the other end of the spectrum are the UK, Spain and Portugal.

Compared to the mid-1980s the dispersion widens in Belgium, Finland, France, Greece, Ireland, Spain and the UK. Dispersion is unchanged in Germany, the Netherlands and Sweden. Austria and Denmark have a narrower dispersion.

There is little evidence of new low-pay sectors other than in Greece.

There are some differences in the pattern of dispersion between the 'old' EU members and the three newcomers. Different industries are involved in Finland. The dispersion narrows in Austria. The dispersion in Sweden is narrower than elsewhere.

The changing earnings pattern and the impact of the IMP The picture presented so far indicates broad stability when macro earnings figures and relativities are looked at in isolation. But in other respects this impression of stability is wholly misleading. A quite different impression is gained when one examines the make-up of the workforce and the impact of technical change and new working methods on skill mix. Such changes are impossible to quantify from year to year, but over the past ten years there have been dramatic shifts. Jobs have disappeared but at the same time there has been continuous grade drift and consequent changes in earnings. Normal earnings data rarely reveal this. However, surveys conducted by some employers' associations provide the evidence.

26

The following data supplied by the French engineering employers' organisation, the Union des Industries Métallurgiques et Minières, show the extent of changes in skill mix between 1985 and 1995. The survey covers the whole of France, but we have used the figures from the largest region, Paris, as this contains the greatest concentration of advanced industry.

Table 6.1 Changes in skill mix. Proportion of workers in each grade. Engineering industry: Paris region

Grade 01 02 03 PI P2 P3 TAI TA2 TA3 TA4

1985 %

2.5 8.2

18.9 28.0 18.0 16.1 5.8 1.7 0.6 0.2

1995 ¡ %

1.5 3.5 8.8

23.2 24.1 20.2

9.1 4.4 3.5 1.8

Source: UIMM.

As Table 6.1 shows, the proportion of manual workers in the lowest - semi-skilled - categories has halved, declining from around 30% to 14%. At the same time the proportion of the workforce in the four most skilled (TA) categories has increased from around 8% to 19%. The bulk of the workforce is still concentrated in the middle, but there has been a clear increase in the proportion of more qualified workers: from 34% to 44% in the P2/P3 categories.

This may be an extreme example. Equivalent data from the Italian engineering employers' federation, Federmeccanica, shows much less movement over the period. But the Italian grading system is more flexible than the French one, and therefore the change in the mix of skills is less obvious.

Other manufacturing sectors have experienced more or less similar trends. There has been a great deal of change in the skill mix in the chemical industry, much less in sectors such as clothing, footwear and ceramics. There have also been skill changes in the finance sector, although the picture varies from country to country. The general point is that substantial changes have been taking place during the period of the IMP, with major implications for the pattern of earnings. It is impossible to filter out these changes to isolate a pure IMP effect.

With this in mind we can nevertheless point to some possible conclusions from the data discussed earlier.

Of the eight sectors examined there are five where we identified Single Market effects which might have an impact on pay: chemicals, clothing, footwear, motor vehicles and finance.

Ceramics: We could not identify a Single Market effect. Relative earnings seem to have risen in the southern European countries where ceramics is an important industry. This might reflect an increase in the market for these producers, but as we note in the Chart of sectoral characteristics, intra-EU trade was already well established.

27

Chemicals: Restructuring in the industry has helped keep pay buoyant because of changes in staffing levels, working practices and the skill mix. These developments were already taking place, but the Single Market has accelerated the process of concentration.

Clothing: The widening earnings dispersion observed in seven countries could be one effect of the increase in competitive pressures on the industry, in which the ΓΜΡ would have played a part. However, although clothing is generally at the bottom of the earnings dispersion, it has broadly maintained its position in relation to the average. The increased dispersion has more to do with buoyant earnings in the capital-intensive energy sectors than a depression of earnings in the clothing sector.

Footwear: The data do not suggest there has been any impact from the IMP.

Motor Vehicles and Parts: There does seem to be evidence of an impact on earnings from foreign investment in Portugal (although the industry is relatively small). There may also be an impact in Spain, but the expansion of this sector in Spain began well before the ΓΜΡ. Higher relative earnings elsewhere may reflect changes in skill mix rather than other factors, although this ought to have affected France as much as Germany and the UK.

Textiles: As anticipated there seems to be no distinctive IMP impact on pay.

Retailing: As anticipated there seems to be no IMP impact.

Finance: There appears to be a North/South division with the relative position of the banking sector converging in the northern European countries. There may be a tenuous ΓΜΡ effect here in that the opening up of competition has encouraged firms to shore up their positions in national markets rather than any great move into cross-border activity.

28

Pay Relativities in Manufacturing Hourly earnings of manual workers as % of national average for all industries

Sources: Euroslat; ILO; National Statistics. Note: For Greece the comparison to 1989 is for manufacturing only.

Ceramics

Belgium Denmark France Germany Greece Ireland Netherlands Portugal Spain Sweden UK

1985 96.6 99.4 94.6 85.2 96.9 85.8 89.9 85.1 na 89.5 85.8

1988 97.1 104.2 99.7 83.9 101.1 67.8 92.0 91.2 na na 85.2

Î989 99.0 104.4 99.1 83.1 107.8 na na 103.8 95.5 na 85.2

1990 100.0 103.7 100 82.3 107.6 na na 105.1 98.0 na 84.6

1991 98.0 103.1 100.4 81.8 107.8 na na 109.7 98.0 na 85.7

1992 97.9 103.7 99.3 82.8 115.0 63.8 90.5 110.9 100.5 97.2 85.6

1993 99.0 101.3 99.1 82.0 114.3 na na 108.7 94.1 96.4 86.1

Chemicals

Belgium Denmark France Germany Greece Ireland Luxembourg Netherlands Portugal Spain Sweden UK

1985 116.9 102.8 115.2 107.6 100.6 122.4 106.2 122.3 125.8 na 107.9 107.4

1988 121.6 103.8 118.4 106.3 105.1 124.0 98.8 na 132.5 122.6 — 106.2

1989 na 104.4 118.0 107.5 104.5 123.5 100.3 na 134.3 116.4 — 108.9

1990 122.7 104.7 118.0 108.5 101.8 122.5 91.3 na 134.8 120.0 — 109.4

1991 123.7 104.0 117.6 107.8 100.4 121.0 90.4 na 126.2 119.7 ~ 109.1

1992 123.2 104.1 117.3 na 99.7 121.2 92.0 121.2 133.6 123.1 106.2 109.9

1993 126.4 103.3 118.9 107.5 97.8

119.0 96.6 na 144.1 115.3 105.9 109.9

Clothing


1985 71.9 78.6 78.9 70.2 68.0 61.0 70.7 70.2 na 81.6 63.9

1988 72.1 79.1 76.8 69.9 na 62.0 63.5 na na — 63.9

1989 72.4 79.4 76.4 69.6 81.0 60.9 na 73.7 67.7 — 64.3

1990 70.8 80.0 76.0 68.3 82.3 60.9 na 73.6 66.7 — 63.8

1991 70.6 79.4 77.0 68.7 80.8 61.6 na 73.5 66.9 — 62.6

1992 71.3 78.6 77.7 69.2 80.5 60.9 73.2 70.0 67.9 77.8 63.1

1993 72.0 78.2 76.2 68.9 79.5 60.7 na 74.4 66.1 77.4 63.5

29

Hourly earnings of manual workers as % of national average for all industries

Footwear

Belgium Denmark France Germany Greece Netherlands Portugal Spain Sweden UK

1985 84.3 84.8 85.4 74.8 74.3 75.7 72.7 71.6 86.5 82.1

1988 84.3 83.6 79.9 72.5 na 76.0 na na — 81.3

1989 84.0 82.6 82.2 71.9 91.9 na 78.5 78.9 — 80.3

1990 82.5 86.3 83.1 71.2 89.6 na 79.0 75.3 — 80.0

1991 81.0 87.0 81.1 70.2 89.6 na 84.2 74.8 — 78.4

1992 79.7 85.8 81.9 70.7 93.3 na 74.4 76.6 84.5 81.9

1993 79.9 86.1 82.8 69.6 92.7 na 82.8 75.5 84.4 83.8

Motor Vehicles and Parts


1985 111.4 93.5 106.0 113.5 na 101.2 97.7 115.5 na 103.6 111.0

1988 108.3 95.0 107.1 114.9 na 107.2 95.5 na na — 114.6

1989 106.4 93.9 106.8 115.6 121.6 99.2 95.1 144.6 130.3 — 114.6

1990 109.0 93.8 107.8 115.7 104.9 101.1 93.0 146.2 133.3 --115.2

1991 111.2 94.0 105.9 115.8 110.0 96.7 92.4 142.2 131.7 « 116.5

1992 109.7 94.6 107.2 116.6 116.0 98.5 93.9 146.2 133.2 100.1 116.3

1993 111.6 93.8 108.2 119.8 121.0 98.3 91.6 144.3 137.4 101.4 116.7

Textiles


1985 85.6 88.5 82.5 81.3 84.0 84.6 89.3 89.3 na 89.1 76.8

1988 86.8 89.2 84.1 81.6 na 85.4 90.8 83.0 na — 78.3

1989 86.5 90.0 83.9 81.7 98.2 85.6 91.5 86.2 83.9 — 78.7

1990 88.0 91.5 84.1 80.6 95.9 83.7 91.5 86.2 83.2 — 78.3

1991 87.9 89.6 84.6 80.9 95.2 84.9 91.2 80.8 85.1 ~ 78.6

1992 87.9 90.3 84.5 82.0 96.0 84.6 91.6 79.9 84.0 89.0 80.0

1993 87.1 89.5 83.6 81.8 95.6 84.1 90.5 84.2 79.6 90.1 80.1

30

Pay Relativities in Services Monthly Earnings as % of national average for non-manual workers

Source: Eurostat

Banking

Belgium France Germany Greece Netherlands Portugal Spain UK

1985 105.7 86.4 80.5 na 84.8 172.4 na 99.8

WÊÊË 105.3 86.8 81.5 na 86.0 164.6 na 101.9

1988 103.0 89.5 81.5 na 87.3 153.9 na 103.7

1989 101.4 89.3 79.9 104.5 86.0 153.6 109.3 102.7

19901: 100.6 90.4 79.7 103.3 85.6 157.6 110.0 102.8

1991 97.9 89.5 80.1 102.1 86.7 154.2 111.9 101.2

1992 99.5 89.7 82.7 100.7 89.9 145.8 110.0 101.5

1993 97.1 90.7 82.2 na 92.0 155.6 110.7 101.0

Retailing

Belgium France Germany Greece Netherlands Portugal Spain UK

1985 61.0 66.8 60.1 na 64.7 na na 64.0

1987 60.9 63.2 59.7 na 61.9 na na 65.2

1988 59.9 64.5 60.1 na 61.9 na na 66.2

1989 59.6 66.7 61.3 54.8 61.8 62.0 65.1 65.5

1990 60.0 65.4 61.1 53.0 61.5 60.5 66.0 65.3

1991 58.4 66.2 60.9 52.2 61.3 58.9 66.4 65.7

1992 60.3 66.2 62.8 53.9 63.3 60.1 66.6 65.5

1993 58.8 66.8 63.6 49.2 63.4 62.8 62.8 64.6

31

Industries with Highest and Lowest Hourly Earnings for manual workers and % Difference : Low as % of High

Austria*

Belgium:

Denmark

Finland

France

Germany

Greece

Ireland

Netherlands

Portugal

Spain

Sweden***

UK

1985 :

Paper Clothing 43.8% Oil refining Clotliing 44.1%

Printing/Publishing Clothing 59.5% Paper Clothing 61.7% Oil and gas production Clothing 54.9% Oil refining Clotliing 52.6% Metals Clothing and Footwear 57.7% Drink Clothing 45.7% Oil refining Clothing 49.1% Oil refining Clothing and Footwear 36% Oil and gas Timber and furniture 40.5%** Oil refining Clothing 66.4% Oil refining Clothing 43.8%

1989

Paper Clothing 43.4% Oil refining Clothing 44.9%

Printing/Publishing Clothing 63.3% Metal industry Clothing 60.4% Oil and gas production Clothing 52.6% Oil refining Clothing 53.1% Oil and gas Aerospace equipment 44.2% Drink Clothing 41.6% Oil refining Clothing 48.7% Electricity and gas Clothing 28.3% Oil and gas Clothing 39% Oil refining Clothing 65.3% Oil refining Clothing 38.9%

11992

Paper Clothing 44.6% Oil refining Clothing 40.4%

Printing/Publishing Clothing 62.8% Metal industry Footwear 58.0% Oil and gas production Clothing 51.7% Oil refining Clothing 52% Oil and gas Office machinery 45.3% Drink Clothing 42.3% Oil refining Clothing 48.1% Electricity and gas Clothing 26.9% Oil and gas Clothing 38.6% na

Oil refining Clothing 36.9%

Latest

Paper Clothing 48.3% (94) Oil refining Clothing 40.9% (Apr. 93)

Printing/Publishing Clothing 61.3% (Oct. 93) Metal industry Footwear 56.7% Oil and gas production Clothing 51.9% (Apr. 94) Oil refining Clothing 52% (Oct. 93) Oil and gas Office machinery 42.7% (Oct. 93) Drink Clothing 41.0% (June 95)

Electricity and gas Clothing 27.2% (Oct. 93) Oil and gas Clothing 36.5% (Apr. 94) na

Oil refining Clothing 37.8% (Apr. 94)

Sources: Eurostat, ILO and national statistics. *Austria: monthly earnings. ** Spain: estimate. ***Sweden: definitions changed from 1990.

32

7. Indexation, Inflation and Pay: the impact of the ERM

European integration, above all progress towards monetary union, ought radically to affect the environment in which national labour markets operate. National autonomy is reduced; devaluation as a way of mitigating the consequences of wage growth becomes less and less of an option. Pressures for the convergence of labour costs and wage structures increase.

This section starts from the hypothesis that the ERM and the Maastricht convergence criteria significantly enhanced the credibility of national counter-inflation policies. We look at the possible consequences of this, namely the modification of attitudes to inflation and pay, and in particular whether there has been a shift from past inflation to forecast inflation as the main point of reference in pay bargaining.

The credibility effect The impact of the ERM and the anticipatory effects of monetary union on labour markets have been widely discussed (see, for example, Gavazzi et al 1998; Barreli 1990; Marsden et al 1992, 1992a; Boyer 1993; Barreli et al 1995). The main argument as far as wage behaviour is concerned is that ERM discipline, although it allows currency realignments, 'embodies a punishment mechanism whereby devaluations are not allowed to completely offset the real exchange rate appreciation of high inflation countries. If the perceived credibility of the commitment to exchange rate parity is high, then inflationary expectations will be revised downwards, reducing the costs of deflationary policies' (Anderton and Barreli 1995).

However, although inflation rates in Europe converged to relatively low levels during the 1980s this was not necessarily because of the ERM. A similar convergence occurred in other countries and other factors - such as generally tighter economic policies - might have been responsible for the same effect.

Anderton and Barreli estimate wage equations for ten European countries and test them for structural change that could be associated with the ERM. There was no evidence for systematic and statistically significant changes in Germany, France, the UK, Belgium, Denmark, Austria or Ireland. There was some evidence of structural change in the Netherlands, but this was put down to the effect of unemployment on real wages. A separate analysis of Spain found evidence of structural change as a result of the 1984 reforms which allowed widespread use of temporary employment contracts. The authors conclude that 'the most notable case of structural change is in Italy ... the necessary institutional change for reforming wage behaviour may not have been possible without the ERM'.

This is a significant finding, but it appears that Italy is the exception. Otherwise the econometric evidence for changes in behaviour is extremely thin. However, a more qualitative approach suggests that there have been effects which would support the thesis that the ERM has brought about changes in behaviour.

Indexation mechanisms and recent changes One important indicator of the change in attitudes is the fact that general indexation mechanisms of the formal type have almost entirely disappeared in Europe, the exceptions being Luxembourg and Belgium. Formal pay indexation has been forbidden in France since 1958 and is nominally illegal in Germany, although this has always been a matter of some dispute. Indexation was abolished in

33

Denmark in 1982. However, this picture needs to be balanced against the continued indexation of the minimum wage in some countries.

In Belgium, the 1993 Pimi Global (often, and misleadingly, described as a wage freeze) linked pay to a modified form of price index, the so-called index santé which excludes items such as alcohol, petrol and tobacco. The changes effectively deferred most indexation payments for at least six months in 1994. But limited indexation continues to operate through a number of different mechanisms agreed at industry level.

In Greece, the indexation arrangements which existed for public sector employees were abolished in 1991. But both the subsequent two-year national collective agreements in the private sector included an indexation clause. In 1995, for example, pay rates were increased in line with the increase in consumer prices forecast in the state budget; however there is automatic compensation if inflation exceeds the forecast by up to 30%.

By far the most important institutional change in the pay/inflation linkage has been in Italy, where the scala mobile was first modified and limited and finally abolished, in 1992. Although the process of abolition took a long time, the decisive shift occurred early on, when a 1985 referendum upheld the suspension of payments which had taken place in February 1984. Barreli (1990) argues convincingly that the ERM played a pivotal role in these initial modifications, as it was the enhanced credibility of the monetary stance of the Bank of Italy which enabled the change to take place.

Indexation and the minimum wage Indirect indexation does continue in several countries via the minimum wage, although here too there have been changes.

Indexation of the minimum wage takes a variety of forms. In Belgium and Luxembourg the minimum wage is linked to consumer prices and updated every two years. In France the minimum wage is reviewed annually. In both Portugal and Spain there is annual updating after tripartite consultation. In Greece the national collective agreements are extended by decree.

These arrangements cover a relatively small minority of people, with the exception of Greece where coverage is estimated at 20% of wage earners. However, they can have stronger effects in certain sectors - such as the construction industry in France - and they do mean that there is a continuing element of indexation underpinning the system.

France is a notable case, because of the government's pursuit of an active policy in relation to the minimum wage throughout the 1980s. By the end of the decade many sectoral agreements had rates which fell below the minimum, and this was one major factor which led the authorities to impose a review of sectoral pay structures.

By contrast, indexation of the minimum wage in the Netherlands underpins industry minimum rates which are normally 10-15% higher. Government policy has in fact extended the coverage of the minimum wage in recent years by bringing all part-time workers within its scope (previously those working less than one third of normal hours were excluded).

34

It was concern over the impact of industry rates on employment (especially for the young) which led the government effectively to de-index the minimum wage in 1992, in the hope that this would in turn bring down the industry rates.

The linkage to the index of collectively-agreed wage rates was replaced with a much less specific commitment, and the minimum wage was frozen until January 1996, when a modest one per cent rise was announced. In addition, rules were introduced which tie revisions to the minimum wage to a defined level of employment.

The full impact of these changes is not yet clear. The level of pay settlements has fallen. Lower pay rates for new starters, though only for the first 6 or 12 months, have now been incorporated in a number of sectoral and company agreements. This followed the government's threat to abolish the mechanism for extending collective agreements across a whole sector. Provisions allowing exemptions from minimum pay terms have also been agreed, although these are mostly subject to tight controls.

Indexation in collective agreements There is a straightforward relationship between the decline of pay indexation in collective agreements and the decline of inflation in the mid-1980s. Apart from Belgium, where indexation is incorporated in sectoral agreements, and Greece; where it is part of the General Collective Agreement, such clauses are now rare.

In the Netherlands, indexation was common until 1982, when a tripartite agreement allocated the money intended for indexation payments to fund cuts in working time. Since then, indexation has all but disappeared, although it still exists in construction and agriculture and the Port of Rotterdam. Certain industries - for example textiles - have agreements which specifically state that pay will not be index-linked.

In the UK, indexation clauses appear in longer-term agreements where there are sometimes cost-of-living safeguards if inflation rises by more than the specified increase in the second year.

Spain remains the one country where indexation clauses are common. This is partly an inheritance from the pay pacts of the 1980-86 period, when bargaining remained largely restricted to discussions about global percentage pay rises within a narrow band. This reinforced the tendency for pay negotiations to be more concerned with protecting previous improvements and guaranteeing minimum levels rather than promoting incentives or encouraging innovative practices.

The 1980s thus saw the virtual institutionalisation of annual pay reviews and the promotion of cost-of-living safeguards in agreements. By the late 1980s about two-thirds of employees covered by collective agreements were protected by automatic revision clauses in this way.

Despite the move away from backward-looking indexation which has taken place (see below) recent data indicate that such clauses are if anything even more prevalent today. Typically these clauses provide for one-off payment to compensate for the difference between the official forecast and the actual rate of inflation, where this significantly exceeds predictions.

35

The shift in the point of reference A key finding from our survey of the social partners (see Section 5) is that representatives of both employers and unions right across the EU reported that inflation forecasts, along with economic growth, have become the most important factor in collective bargaining. Past inflation was only seen as an important influence by 15% of organisations

This was not, of course, a universal view. Some responses - from Sweden and Austria - indicated that inflation in general had become less important over the past ten years. In Ireland there were different views from the two sides of industry.

In Italy there was a general view that both past inflation and inflation forecasts had become more important. These responses no doubt reflect the fact that past inflation has become a bargaining issue now that indexation has been abolished, even though the 1993 reforms define inflation forecasts as the point of reference. There is clearly some doubt as to whether company bargaining will be confined to productivity issues as strictly as it is supposed to be in the national agreement.

In the Netherlands, past inflation was perceived as being more important now than in the mid-1980s. Here there are perhaps two factors involved. One is that recent negotiations have focused on the theme of pay restraint in return for job creation. Unions have made it clear that where jobs are not created they will expect full compensation for past inflation. The other factor is simply that there was zero inflation in the Netherlands in the mid-1980s.

It may also be that certain responses to the survey exaggerate the extent of change. Two of the three replies to our questionnaire from France suggested that forecasts had become a more important influence than past inflation. Yet in 1992, a survey on pay decisions conducted by INSEE (Table 8.1) found that this was not the case at company level. In smaller finns, 'expected inflation' was almost the least important factor mentioned. Even in larger finns, past inflation came relatively high on the list.

With these provisos, however, there was a strong consensus about the weight attached to forecasts in the bargaining process, with government forecasts seen as by far the most important. The break with the past was emphasised in several cases, notably Spain 'where it is becoming more and more important to work with inflation forecasts in pay bargaining, as a way to be able to control inflation - instead of indexation'. Coupled with the growing importance of economic factors - mentioned twice as often as inflation as a growing influence - this adds up to a substantial shift in attitudes.

Few replies mentioned precise reasons for this shift. In both Portugal and Ireland the ERM and convergence criteria were seen as exerting an important pressure. Elsewhere - Austria and Denmark - competitive pressures on particular industries were cited. In Italy, the 1993 bargaining reforms were naturally seen as decisive.

The role of the ERM We noted earlier how econometric analysis only found evidence of statistically significant structural change related to the ERM in Italy. The authors themselves comment 'we would expect a more credible commitment to low inflation to affect both the formation of expectations and the dynamic response of wages to prices' (Anderton and Barreli 1995).

From the results of our survey, this does seem to have happened on a wider scale than the statistics suggest, perhaps because the numbers used are just too broad to show anything but the largest

36

impacts. Our survey also confirms the impression that as government forecasts have become more reliable, so negotiators have been prepared to place more trust in them.

There are important institutional factors involved in this. In both Spain and Portugal tripartite bodies have been set up in the last five years which have acquired considerable authority in policy formation and the promotion of social dialogue. In Italy, the refonn of collective bargaining took place after an unprecedented 40-day period of non-stop tripartite negotiations - although, in this case, employers and unions were forced to accept a final text drafted by the government.

There is an instructive contrast with the UK. The bargaining system is fragmented and there is thus a strong tendency to use retail price inflation as the main (if not the only) benchmark in wage negotiations. Forecasts play only a limited role. This reference to past inflation even extends to wage awards which are nominally based solely on perfonnance. Thus an extremely decentralised and market-based system of pay-setting can lead to the situation where there is no credible institution or mechanism which can exert sufficient influence to change behaviour. The UK stands out as the one country where bargaining almost always centres on catching-up.

Thus it does seem that it is the enhanced credibility of economic policies and institutions which is important in changing attitudes and modifying behaviour. In this the ERM has clearly played an important part, in some cases the decisive part.

There are some indications of a more fundamental change, namely the breakdown of 'national autonomy' in wage-setting. One sign is that smaller countries - such as Belgium and Ireland - have begun to take inflation rates in competitor economies formally into account in setting the terms of national policies on pay. Another is that the role of the Deutschmark in the EMS, and hence in shaping interest rates throughout Europe, has led to the German pay round having a wider impact, at least on neighbouring economies. The importance of the German engineering union, IG Metall, in setting the pace is reflected in the way fellow negotiators in Benelux have dubbed the union the 'Social Bundesbank'.

There are two points that somewhat weaken the case for an ERM impact. The first is that wage behaviour in the UK did not change after 1992. In fact wage pressures remained remarkably subdued in the three years following the UK's devaluation. The second is that developments in Sweden followed much the same path as they did in countries inside the European Monetary System.

This suggests that changed behaviour owes a lot to the general reduction in inflationary pressures -and that rising inflation could soon change attitudes again, at least in some countries. Recent protests about the loss of purchasing power over the past two years from trade unions in both Italy and Spain would support the view that a long-term change depends on inflation rates staying well below 5%.

8. The ΓΜΡ and pressures for decentralisation

On the hypotheses outlined earlier, the effect of the IMP on wage regulation and behaviour should be to weaken regulation and increase the pressures for decentralisation. Because centralised bargaining implies uniform costs and pay structures for finns in widely different markets and

37

economie circumstances it is increasingly inappropriate to an era of liberalisation and increased competition.

The Single Market gives larger firms much greater potential for rationalisation and economies of scale while increasing both the opportunities for and the competitive pressures on SMEs. There is greater potential for divergence between firms, with larger enterprises finding centralised sectoral bargaining increasingly inappropriate to their needs, while smaller firms seek to reduce fixed labour costs.

The outstanding example is the UK, with the abolition of virtually all statutory wage protection, the withering away of sectoral pay agreements (always weak) and the extreme decentralisation of pay-setting in the private sector, in some cases down to individual business units. Alongside these developments is the rise of individualised pay awards (merit or perfonnance pay) and the rapid increase in profit-related pay, especially in the last few years. Some similar tendencies can be observed in France, despite the continued existence of the statutory minimum wage and centralised sectoral agreements.

The UK is seen sometimes as exemplar, sometimes as a threat. But the UK is an extreme case, and the decentralisation process has had nothing to do with the Single Market. It originates in the breakdown of the centralised incomes policies of the 1970s and the subsequent crisis of manufacturing, which imposed severe strains on a system that was already very decentralised and unregulated by European standards.

Although employers generally (though not universally) have sought to achieve more independence in wage-setting - and especially in changing working practices - the impact on the different national systems has been quite uneven.

Collective agreements are invariably legally enforceable, not only when embodied in the individual contract of employment but also through the establishment of a contractual relationship between the signatory parties. The power to conclude collective agreements is seen as part of the legal hierarchy: collective agreements are a type of negotiated law, and have the force of law. In a number of countries, matters typically regulated by statute law in the UK may be regulated by national, universally applicable collective agreements, sometimes given a stamp of legality to ensure universal application.

In many countries, collective agreements concluded at national or industry level may be applied to non-signatory companies through 'extension' procedures. This means that the coverage of the workforce by collectively agreed terms is much greater than would immediately appear warranted by the level of trade union membership. Some national employer associations, for example in Germany, are extremely sceptical about the worth of such provisions, and differences of view between employers' associations in Germany have boiled over into a row about the use of such mechanisms to implement legislation intended to shield the construction industry from low-wage competition. Although the use of extension provisions may have declined in recent years, such powers are still available.

However, a high level of coverage of the labour force by collective agreements in itself is no indication either of the 'intensity of regulation' (the number of issues covered) or the 'authenticity of regulation' - the degree to which agreements represent a genuine compromise between reasonably equal negotiating parties which have a genuine and autonomous impact on the pay and

38

conditions of individual employees. In France, for example, the growth in the coverage of the

workforce by collective agreement since the early 1980s simply reflects statutorily-created

opportunities and requirements and does not correspond with a real change in the effectiveness of

trade unions on the ground.

Generally, negotiated pay increases have the force of law and have to be implemented by

employers. In practice, most companies - especially large companies - pay above agreed industry

minimum rates: this typically emerges at 10-20 per cent, but in some circumstances can be higher

still. This 'two-tier' structure creates new problems in the field of the management of remuneration

- but also scope for absorbing shocks and giving an element of management discretion over the pay

package.

Levels of bargaining and the legal precedence of diffèrent types of collective agreement (the so-

called 'hierarchy of agreements') may also be prescribed by law. Typically this gives legal

precedence to national or industry-level agreements: workplace agreements or individual contracts

of employment may not provide for a poorer provision.

Withdrawal from an employers association, derecognition of a trade union, or a collective

agreement may not necessarily immediately free an employer from agreed provisions. Collective

agreements may continue to have effect until replaced by a new agreement of equivalent legal

status, for example. A good illustration is the situation in Germany: this may inhibit and modify any

trend towards company-level bargaining.

Overview of the different systems

The following chart sets out the main characteristics of the different collective bargaining systems

of the 15 EU Member States, together with a summary of recent developments. In general:

1. The coverage of collective bargaining has not altered in the ΓΜΡ period. Union density has

declined but is generally high by world standards.

2. Sectoral bargaining continues to be of great importance in most countries.

3. The role of government has declined, although it continues to be quite active in about half the

Member States.

4. Great diversity remains - Austria and the UK, for example - but there has been some degree of

convergence. Most countries do appear to be evolving their own particular solutions in order to

achieve greater scope for local negotiations. There is no single common strand to this process,

although in general there seems to be a greater degree of 'subsidiarity' in the bargaining process:

the content of central and sectoral agreements is changing even where the form remains the same.

39

-fe. o

Characteristics of private sectorcollectivebargaining systems in the EU

Country'

Austria

Belgium

Denmark

Finland

■ France.· ■■■■■^■'y.M

Germany

Greece

Trade

union

density

45%

55%

8085%

85%

10%

37%

30% in

private

sector

Coverage by collective

agreement and extension to

nonsignatories

95%+

Extension possible

90%

Extension possible

90%

No formal extension procedures

90%

No formal extension procedures

c. 85%

Extension possible

8590%

Extension possible

Virtually all employees

Extension possible

Main level of bargaining and recent trends

Industrylevel, with occasional multiindustry nationallevel

agreements. Scope for workplace negotiation with elected

works councils on nonpay issues.

Industrylevel, with company bargaining growing in

importance. National multiindustry agreements set

framework for sectoral bargaining on nonpay issues. Also

scope for 'negotiated legislation' where national agreements

made mandatory by royal decree: e.g. on minimum wages,

collective dismissal, and equal pay.

Industry has replaced multiindustry bargaining, but one

agreement covers much of manufacturing. Most agreements

now only set minimum wage, with real pay set at workplace

level. Recent surveys suggest that real coverage of

collective bargaining is less than previously believed.

Nationallevel agreement normally sets framework for

industry bargaining. Recent move to decentralisation

(following wage freeze) proved problematic because of

number of small finns and their unfamiliarity with local

negotiations.

Industrylevel agreements provide framework, with some

national multiindustry agreements. Formal bargaining

rights at workplace have led to some decentralisation, but

companybargaining seen as weak in practice.

Industiy by region complemented by arrangements agreed

at workplace with works councils. Formal company

bargaining covers c.6% of workforce. Growing formal

decentralisation to workplace level on working time, and

informally on other issues.

National multiindustry agreement sets minimum wage and

framework for industry, company and in some cases

occupational bargaining.

Coordination of bargaining

Role of state

Tripartite consultation on price and incomes, with co

ordination on bargaining through highly centralised

national employer and employee organisations.

National tripartite and bipartite institutions for

consultation on economic and social issues. State has

played active role on pay issues, with statutory

incomes policies.

Some tripartite consultation, with institutionally

established national bipartite consultation on IR issues.

Tripartite discussion and agreement on employment

and social affairs.

Centralised system provides for minima, with limited

coordination at sectoral level.

State traditionally active in employment regulation.

Tight coordination within sectors moderate co

ordination via national employer/union institutions but

fairly narrow range of settlements. No formal

tripartism.

In the past, high degree of state intervention in private

sector bargaining but state now withdrawing with more

scope for bipartite resolution

Country

Irish Republic

Italy

Netherlands

Portugal

Spain :

Sweden

UK

Trade union

densitv 47%

38%

25%

25-30%

10-15%

80%

32%

Coverage by collective agreement and extension to

non-signatories n.a.

Mechanisms for setting pay minima in poorly organised

industries 90%+

Extension via court rulings on status of sectoral agreements

70% Extension possible

80% Extension possible

70% Extension possible but rare

80% No extension

45-50% No extension mechanisms

Main level of bargaining and recent trends

Company-level, within the framework of nationally-negotiated pay accords since 1987.

Industry-level. Company-level bargaining intended to reward performance under new arrangements introduced in 1993 following final abolition of indexation. Industry-level still predominates: company-level bargaining covers 8% of workforce, with influence of workplace regulation of tenns and conditions growing since 1980s.

Industry-level, although agreements often minimal and tied to statutory provisions. Very weak fonnal company bargaining. Industry agreements at provincial level still predominate but 1994 reform of Workers' Staute now encouraging major changes. The incidence of company bargaining has declined slightly since the earlv-1980s. Industry-level, with extensive scope for company-level implementation, especially where national agreement provides for 'kitty' bargaining.

Company-level. Industry-level bargaining much reduced since early-1980s but still important in some sectors (e.g. construction and sectors dominated by SMEs). Pay setting in large firms often decentralised to business unit level within centralised corporate financial framework.

Coordination of bargaining

Role of state Pay settlements since 1987 have been subject to a series of national tripartite pay accords. Although nonstatutory, compliance is high

State does not intervene in bargaining but brokered new negotiating arrangements: tripartite economic consultation State has reserve powers to intervene on pay bargaining - and has used influence to achieve pay pauses. Extensive tripartite consultation on non-pay issues. Tripartite consultation on prices and incomes 1984-1992, with possibility of renewal

Tripartite consultation on non-pay issues: no national pay accords since 1986. Government forced through 1994 reform.

No formal tripartite consultation, incomes policies imposed in the past, most recently in 1991/2. Previously a high degree of coordination by each side, but weakening with decline of centralised bargaining Little overt coordination of company bargaining, but leading settlements in large firms are influential. Some industry associations regulate pay. No state intervention in private sector and no tripartite consultation

Sources: IDS; OECD; national sources

The systems in practice: levels of pay determination The data from the Europe-wide surveys organised by the Cranfield School of Management in 1992 and 1995 give a more detailed view of how these systems operate in practice. The surveys ask companies about the different levels at which basic pay is determined. The options given are: (i) National/industry-wide; (ii) Regional; (iii) Company or Division (iv) Establishment; and (v) Individual. Four broad groups of employees are covered - Manual, Clerical, Professional, Management.

The figures (see Tables at the end of this Section) show the relative importance of the different levels, i.e. how widespread they are. They do not necessarily show the relative influence of these different levels on pay, as companies in the survey are invited to indicate as many levels as they see fit.

To draw out comparisons we have divided up the countries into 'old EU' (countries which were members throughout the IMP period); 'new EU' (Finland and Sweden); and, for comparison, a non-EU member - Norway. It should be noted that Germany was excluded from this section of the survey on the basis that the questions on levels of bargaining were inappropriate and would not produce useful data.

The Cranfield data need to be interpreted with care, for two main reasons:

First, the figures reflect levels of pay determination - which includes pay awards made by management as well as bargaining. This distinction helps to explain apparent anomalies, such as the extent of company pay determination in Portugal, where company pay bargaining is very underdeveloped.

Secondly, the questions in the survey can be ambiguous in certain circumstances. The figures for Ireland appear to contradict the evidence that national pay agreements have been invariably followed at company level (see below). However, these national agreements define pay increases not pay levels, a distinction which is not made by the survey.

Thirdly, questions in an international survey can inevitably become blurred in translation. This may have affected the results in some countries, such as Italy (see point 3, below).

Bearing these reservations in mind, the survey points to a number of conclusions:

1. Outside the UK and France, industry-wide agreements continue to be the most important level for manual workers and, on balance, for clerical workers as well. The influence of such national or sectoral arrangements is still surprisingly strong for more senior employees, notably in Italy (where there is a national agreement for dirigenti) but also in the Netherlands, Sweden and France. In France, industry-wide pay detennination has a wider influence for managers than for manual workers.

2. Individual pay determination such as merit or performance pay is surprisingly widespread in countries such as Denmark and Sweden with their strong traditions of collective bargaining and high union density. The spread of such individualisation is especially striking in Sweden. By contrast the extent of individualisation in the UK and France - the most 'decentralised' countries in terms of bargaining - appears relatively small.

42

One reason for this difference is that, in Denmark at least, the coverage of collective bargaining in the private sector may have been overstated in the past. A recent survey (Scheuer 1996) suggests that coverage is only around 50%. Another factor (see below) is the decisive shift towards industry agreements which only set a minimum wage.

3. Pay determination at company level is most prevalent in France, the UK and Belgium. In Italy it appears to be of negligible importance, while pay detennination at the level of the establishment is astonishingly widespread. This conflicts strongly with other, more reliable, data. The explanation is almost certainly an ambiguity in the Italian survey - the word azienda can be used to describe both an establishment and a company.

4. Regionalised pay is more prevalent than expected (particularly in Italy where officially it does not exist). The figures for Finland, which show a complete shift from national to regional level between the two years, reflect the temporary decentralisation of bargaining which has since been reversed.

Decentralisation: a country analysis

Below we summarise developments in seven Member States - Gennany, France, Spain, Ireland, Denmark, Sweden and Italy - to establish:

a. whether decentralisation has occurred during the period under review;

b. whether such decentralisation is in any way linked to the IMP or European integration.

Germany Germany appears to have one of the most centralised bargaining systems in Europe with a high degree of co-ordination within sectors. This is correct up to a point. Only 6% of employees are covered by company agreements - most notably in the oil industry and at Volkswagen and Lufthansa. But the system is much less rigid than it appears. Works councils play a major role in applying industry-wide pay and grading agreements at plant level, with the outcome typically expressed in works agreements. Although there is no formal scope for plant bargaining, in practice there is considerable scope for large firms to vary arrangements according to the market, skill requirements and so on. As a result, it is more accurate to describe Germany as only moderately centralised.

However, the system has come under increasing pressure since 1990, in part because of the challenges of unification but also because of longer-term factors which may now have attained critical mass.

The first factor is unification. Only a third of firms in the new Länder have joined employers' associations and some established firms in the west (such as the General Motors subsidiary, Opel) have remained outside in the east. It is questionable how long a system can survive if this degree of duality persists, as it shows every sign of doing.

Meanwhile, general business trends - notably the out-sourcing of services from manufacturing industry - are also eroding the coverage of sectoral agreements. New supplier-purchaser relations are squeezing medium-sized firms. Large companies are purchasing an increasing proportion of

43

components abroad. The threat of relocation has been an important factor in persuading works councils and unions to alter established working conditions, for example in the case of Mercedes (for a detailed account see the case study in the Appendix). Corporate internationalisation is weakening the hold of traditional German business culture - including employer cohesion. One result has been the weakening ability of employers to organise effective solidarity against selective strikes.

There is also a growing feeling that the system is simply too unwieldy to cater for the priorities of different business sectors during a period of unprecedented change. The most notable example is the dominant bargaining sector - engineering - which covers around four million workers. Trade associations, such as the mechanical engineering association, the VDMA, have expressed their impatience with the existing system, occasionally threatening to establish themselves as an employers' association for more narrowly defined sectors.

There has been a gradual tendency towards decentralisation of employment regulation from industry level to the company or the workplace. The 1984 agreement in the engineering industry was a landmark in this respect. Since then there has been an irreversible shift to domestic determination of working time, and this is confronting both trade unions and employers' association with the need to find a new equilibrium between industry-wide bargaining and the local level.

However, none of this has yet had a real impact on pay bargaining. And even the most recent proposals for reform have focused on the need for greater flexibility on working time and grading rather than on the issue of pay detennination itself. And given the intense pressures caused by unification, recession, and the emergence of new low-cost market economies to the east, the impact of the Single Market on pay and bargaining issues has been marginal.

The one exception concerns the issue of the 'extension' of agreements - and notably the question of the pay rates to be applied to the large numbers of foreign workers on German building sites. Here, the government proposed a measure to ensure the agreed rates were applied to all employees in the sector, irrespective of the nationality of the employer. This proposal was, however, vetoed by the national employers' confederation, the BDA and two industry associations, whose assent is required for extension to take place. The BDA's arguments were that the proposal violated the principle of free collective bargaining and that other industries were exposed to low-wage competition as well. The BDA withdrew its objections when the construction employers and the union agreed to negotiate a special rate. The subsequent formula was, however, rejected by the BDA because the proposed wage was too high.

This issue clearly has implications for the EU, in that some of the workers involved are from Member States with much lower wage levels - the UK, Ireland and Portugal. However, the great majority of the workers concerned are from countries outside the EU, such as Poland and Russia.

France In France the development of company pay-setting took off after the introduction of legislation in 1982 which was designed to relaunch collective bargaining. Firms with a trade union representative were required by law to undertake annual pay negotiations (although not necessarily to conclude agreements). The number of local agreements recorded by the Ministry of Labour rose from around 2,000 in 1983 to a peak of 6,600 in 1990. Just under 60% of these 1990 agreements were about pay and bonuses, the other major subject of local negotiation being working time.

44

This certainly represented an upheaval in French industrial relations. But subsequently the proportion of agreements on pay declined sharply, to around 50% in 1993 and 1994. Furthermore the proportion of the workforce covered of these agreements was very limited. Only 1.8 million employees were covered by company pay agreements in 1994 - little more than 10% of the workforce, and a decline compared to the end of the 1980s. The decline mainly reflects the economic cycle. Official estimates suggest that recently around a third of negotiations have resulted in no agreement. This 'disaccord' is almost always about pay.

The real change in France during the 1980s was that employers were able to assert a far greater independence than before. From 1984 onwards the central employers' organisation, the CNPF, has refrained from issuing any central pay guidelines. The engineering employers (UIMM), the most influential employers' group, stopped naming a pay target in 1987, declaring that 'firms ought to have the same freedom to manage pay that they had recovered over prices' and that naming a standard figure 'would have been in contradiction with policies aimed at linking pay movements more closely to company results'.

Although around 90% of employees work in establishments covered by a sectoral agreement, the scales set through sectoral bargaining became increasingly irrelevant during the 1980s. As a result -and because rates in the lower grades had fallen behind the minimum wage - the government set up a National Commission on collective bargaining and introduced the requirement for periodic reviews of sectoral grading structures. An assessment of this initiative published at the beginning of 1996 (DARES 1996) concluded that there were mixed results. Grading structures had achieved more coherence in relation to the minimum wage but in other respects the 'stagnation' of sectoral bargaining continued.

It should be noted, however, that for the mass of SMEs, the pay increases set through sectoral bargaining remain an important influence. A 1992 survey (Table 8.1) found that around 17% of smaller establishments (under 100 employees) used the increase recommended at sectoral level as the main criterion for detennining their own pay rises.

Table 8.1 Main criteria used to decide pay increases in French firms. 'In deciding your 1992 pay increase what was the main criterion you used to guide your decision?'

No. of employees in establishment

Expected inflation Past inflation Financial results Competitive pay Social climate Sectoral recommendation Head office directive No increase in 1992 No reply

Fewer than 20

2.1 13.1 29.3

1.3 4.3

17.2 5.1 9.4

18.2

20-40

4.6 17.2 28.0

1.0 3.6

17.3 10.5 5.1

12.7

50 - 99

6.1 16.5 25.9

1.3 3.2

16.7 13.9 3.4

13.2

100 -199

10.1 13.7 24,4

1.3 3.2

15.7 14.9 2.2

14.4

200 -499

15.1 13.2 22.0

2.2 4.8 9.9

18.4 1.9

12.6

500 +

12.2 16.6 15.0

1.2 3.9 3.7

20.6 0.9

25.9

Total

7.2 14.9 24.4

1.3 4.0

13.2 12.4 4.9

17.7

Source: Enquête Structure des Salaires 1992. INSEE.

45

Spain In Spain the increase in company bargaining took place well before EC entry. Although the number of agreements has increased, the number of employees covered by such agreements (both private and public sector) has stayed at around one million since figures were first monitored in 1982. If anything there was a slight decline in company bargaining during the period of the IMP. With foreign investors almost always choosing to fix pay at company level, this suggests a greater decline in domestic firms.

The thrust of refonn in Spain has in fact been in the direction of centralisation, particularly since the reform of the Workers' Statute in 1994. The aim was to replace the numerous, overlapping provincial/industrial agreements - an inheritance from the period of dictatorship - with streamlined collective bargaining at national level. Thus the hypothesis of decentralisation does not fit the Spanish case at all. The process is one of rationalisation, in which both European integration and the severe recession of 1993 have played a part.

Ireland Ireland is another example of a country where the IMP period has been characterised by a centralised approach. In this case national agreements have provided a stable framework after a period (1981-87) when bargaining had become increasingly chaotic. While the employers were initially reluctant to return to the centralised arrangements which had prevailed in the 1970s, they were persuaded to do so in the context of a far more wide-ranging consensus than had previously existed. Underpinning this was the government's need to address the spiralling public sector debt, so as to stay within the EMS. Each of the three national agreements which followed the general election of 1987 has been concluded with reference to reductions in the debt-GNP ratio.

There was scope for local bargaining on productivity - to a maximum of three per cent - in the Programme for Economic and Social Progress (PESP), which run from 1991-94. In some cases the productivity clause in the agreement was loosely interpreted. But apart from this both employers and unions have essentially adhered to the terms set at national level. A survey of pay deals under the PESP by the largest trade union, SIPTU, found that only 45 out of 1,000 pay settlements were above the tenns of the agreement. A recent SIPTU analysis of the first year (1995) of the current agreement, the Programme for Competitiveness and Work, found just 36 out of 480 companies had paid above the agreed cumulative increase.

There have been suggestions from trade unions and some researchers that non-union firms have not adhered to the agreements. But the one systematic survey on the subject (see Section 10) does not confirm this view. Apart from exceptional circumstances, such as the complete revision of a pay structure, the national agreements have ensured conformity for almost a decade. Any pressures towards decentralisation have been outweighed by the discipline of the EMS and the need to maintain competitiveness.

Denmark The past 15 years have seen a major shift away from central bargaining in Denmark, with the process beginning in the early 1980s. But there are major differences of opinion about the true extent of decentralisation and how pay is fixed. One Danish employers' organisation estimates that around 20% of blue-collar workers have pay set at industry level, compared to 50% ten years ago. This is a completely different picture from the Cranfield survey, where company and establishment

46

bargaining appear almost marginal in the pay determination process. Meanwhile other data suggest that the real coverage of collective bargaining is - and always has been - much less extensive than believed.

There are several reasons for this uncertainty.

1. The former national agreements were replaced by industry agreements from the early 1980s. But subsequently there has been consolidation in the industrial sector, with seven sectoral agreements incorporated into a single agreement (modelled on the engineering sector) negotiated between the industrial employers' association Dansk Industri and the union 'cartel' CO-Industri.

2. Although bargaining has been decentralised, there is still co-ordination. For agreements to be ratified they still have to meet with the approval of central organisations. In 1995, for example, the employers' organisation DA (under pressure from Dansk Industri, its largest member) rejected three deals agreed by groups of its members on the grounds that they were too expensive. In 1993 the haulage federation was expelled from the DA for the same reason.

3. Meanwhile the nature of industry agreements has changed dramatically, reflecting a desire to tie increases to ability to pay and a move to widen pay differentials. Agreements setting standard rates for different grades have largely been replaced by minimum wage agreements which leave much greater scope for local pay determination. The decisive shift in this direction occurred with the 1991-93 agreement in the engineering sector. On some estimates, fewer than 10% of employees earn the minimum wage set in industry agreements, a complete contrast with the public sector, where pay is almost completely standardised.

These various moves reflect an interplay offerees, among which international competition is clearly important. The emergence of a dominant single agreement covering the whole of industry means that the exporting sector now exerts an overwhelming authority in the bargaining process. So Denmark has arrived at a form of 'centralised decentralisation', allowing great scope for pay determination at company level but within a framework where central authorities can exert a great deal of control.

Sweden Sweden was characterised for many years by highly centralised bargaining arrangements. This tradition has been substantially eroded in recent years, especially since 1990 when government intervention restricted pay negotiations to sectoral level and the employers withdrew entirely from central bargaining on pay and conditions.

Until 1983 pay was set by negotiations at national level followed by sectoral and local bargaining. Both sides of industry had interests in maintaining this approach. The union confederation LO adopted a highly solidaristic policy which compressed pay differentials between different sectors and groups of workers. One consequence was that pay increases in the most productive industries and finns were depressed. This helped exporting sectors and provided some pay flexibility but also gave rise to pay drift. This in turn was brought under limited central control. The Swedish system came under pressure at the beginning of the 1980s for several associated reasons. The employers were increasingly concerned about high labour costs, inability to recruit skilled workers and pay flexibility. On the union side there was tension between manual and white-

47

collar unions over the erosion of differentials. The more aggressive unions, usually representing skilled workers, were also determined to press their own claims.

The first major change came in 1983 with a breakaway industry agreement in the engineering sector. Subsequently the degree of centralisation has varied. A series of incomes policies, typically offering tax cuts in return for compliance with pay norms, restricted the scope for decentralisation. But since government intervention to halt the inflationary spiral in 1990 the two subsequent bargaining rounds - in 1993 and 1995 - have seen a further significant shift to local level.

The employers' long-term aim is to have wage-setting entirely at company (and indeed individual) level. They see the current situation as a half-way house on the road to company bargaining. The grouping of general employers, Almega, is especially committed to this approach. A new departure in 1993 was an industry-level agreement concluded by Almega with the supervisors' union which devolved wage-setting totally to company-level, with no recommended increase. And while sectoral bargaining is still the focus, with the engineering industry leading the way, some employers' organisations see pay increases in the leading multinationals such as Volvo, Ericsson and SAAB as increasingly influential.

One restraint on this decentralisation process is that unions are legally entitled to negotiate pay if they have a single member in a company. This means that even the smallest firms usually join an employers' federation for support in bargaining. By doing so they are automatically bound by the industry collective agreement. Over half the membership of the SAF (the main employers' confederation) consists of companies with five or fewer employees.

The unions have faced considerable difficulty in reasserting their solidaristic approach, with the tensions between a relatively stagnant domestic market and a booming export sector. Pay restraint in the public sector is also inhibiting a co-ordinated approach as rises lag behind the private sector.

The end of the so-called Swedish model is an important example of the general tendency towards greater flexibility and decentralisation of wage-setting which took hold during the 1980s, largely because of competitive pressures and because existing centralised institutional arrangements proved incapable of adapting sufficiently. However, Sweden still remains relatively centralised compared to, say, France or the UK.

Italy The recent reform of collective bargaining in Italy differs from the other countries under discussion in that it involves an explicit allocation of distinct roles to industry-wide and company bargaining. The July 1993 tripartite framework agreement which introduced the new arrangements was the culmination of many years of argument and disputes about bargaining reform, dating back to the 1970s and earlier.

One element was the replacement of the scala mobile indexation system with an arrangement that in future the social partners would agree on projected inflation to serve as the basis for pay awards at industry level. The second element was the commitment that increases paid at company level must be tied to results or performance.

The modification of the relationship between pay and inflation during the 1980s - and the influence of the ERM in this process - is discussed elsewhere (see Section 7). But pay data for Italy suggest

48

that a parallel development took place over the same period, involving the assertion of a greater control over pay in manufacturing industry - especially in the more advanced sectors.

The changes to the Italian indexation system (endorsed by a 1985 referendum) were followed by a period of intense company bargaining in the late 1980s, when three dominant finns - Fiat, Olivetti and Zanussi - led the way in negotiating pay rises linked to productivity criteria. In the engineering sector, 4,500 factory-level agreements covering around 700,000 workers were signed in 18 months. In most cases these were the first substantive company-level negotiations in 11 years.

Although many of these agreements were of limited importance, this round of company bargaining represented a real break with the past. It was, in the words of one Fiat manager, 'an undoubted contrast with the tendency constantly to extend guaranteed aspects of income which was typical of the Italian factory tradition'.

Two sets of pay data suggest that this period saw important shifts at company level: these changes involved a widening of differentials and a change in the make-up of pay.

There have been no official earnings figures for Italy other than indices of contractual pay since 1985. Even the last (1992) Eurostat survey of labour costs does not include Italy. The data for this analysis are provided by surveys from two employers' organisations - Confindustria and the Associazone Industriale Lombarda (Assolombarda).

The pay data collected by the main employers' organisation, Confindustria, comes from a national survey of up to 3,000 firms and around 600,000 employees. The data for different industries are harmonised to give overall earnings figures for nine employee grades within the three overall categories of operai, impiegali and quadri (broadly speaking: blue-collar, white-collar and senior supervisory/technical).

Table 8.2 contains data on pay differentials taken from the Confindustria surveys. Annual earnings are expressed as a percentage of the lowest grade.

Table 8.2 Differentials of Operai and Impiegati in Italian manufacturing % differential over lowest grade

1 2 3 4 5 5S 6 7 Quadri Average

198(5 Op 100 110 113 118 128

115

Imp

107 114 121 134 147 166 221 na 153

1988 Op 100 112 121 129 135

123

Imp

107 114 125 141 154 178 230 282 168

1989 Op 100 112 120 128 140

123

Imp

110 118 127 146 161 186 238 279 170

1990 Op 100 108 119 126 138

123

Imp

116 118 129 144 159 182 231 284 170

1994 Op 100 112 122 130 141

125

Imp

119 121 129 146 162 182 223 300 185

Source: Confindnstria Surveys.

49

The figures show there was a significant widening of differentials in the late 1980s both in the

middle and towards the top of the pay structure, affecting the key groups of skilled blue-collar and

white-collar workers. This was despite the continuing dominant influence of indexation and sectoral

bargaining, both of which tended to compress differentials. The period after 1990 saw a further

move at the top of the pay structure.

Table 8.3 shows average earnings by size of finn. Again there was a change at the end of the 1980s,

when earnings in larger firms moved ahead significantly. This coincides with the phase of company

bargaining noted earlier. Subsequently the gap narrowed again in the first part of the 1990s.

Table 8.3 Earnings in small and large firms in Italian manufacturing Earnings as % of the average by size of firm

Number of employées·

20 - 49

50-199

200 - 499

500 +

20 - 49 as % of 500 +

1986

93

99

101

103

91

1988

95

98

101

105

91

1989

92

98

102

105

88

1990

93

98

101

108

86

1994

91

96

102

102

90

Source: Confindustria Surveys.

The surveys conducted by the employers' organisation for the Milan area, Assolombarda, provide

detailed earnings data for finns in five manufacturing sectors. The most recent survey covers some

30,000 employees in just under 200 companies.

Table 8.4 shows the changes in the proportion of pay detennined at national level for two

categories of employee: the top grade of skilled workers and the senior supervisory and technical

grade (quadri). Nationally-determined pay consists of the elements fixed by the relevant sectoral

agreements plus accumulated indexation payments.

Table 8.4 Nationally-determined pay as a % of total monthly pay: Milan area

Chemicals

Engineering

Food

Rubber/Plastics

Textiles/Clothing

Senior supervisory and

technical

1985

59.2

56.6

63.1

60.4

63.4

1989

56.4

49.6

52.4

55.4

49.6

1994

54.9

45.2

50.3

51.3

46.0

Top grade of skilled

workers

1985

78.7

84.3

85.6

83.3

84.0

1989

71.9

78.0

81.9

73.2

86.4

1994

72.3

76.9

69.9

70.5

76.6

Note: Nationally determined pay includes agreed contractual rates plus cumulative indexation payments. Source: Associazione Industriale Lombarda

There is evidence of a clear decline in the share of nationally-detennined pay between 1985 and

1989 (with the partial exception of skilled workers in the textile and clothing firms where the

decline was sharper in the subsequent five years). By 1994 around half the pay οι quadri was

detennined locally - either through company awards or individualised payments. For the top grade

of skilled workers the local element was lower, but still in the 25-30% range.

50

The main factor in this as far as the quadri are concerned was individualised pay as Table 8.5 shows. By 1994, the proportion of pay paid on an individualised basis ranged from around 30% in the food and chemical finns to nearly 50% in textiles. Comparable data for earlier periods does not exist because the category was not separately defined. For white-collar workers as a whole the equivalent figures for 1983 and 1988 averaged around 12% and 20% respectively.

Table 8.5 Changes to individualised pay: Milan area Individualised pay as % of total monthly pay

Chemicals Engineering Food Rubber/Plastics Textiles/Clothing

/Senior Supervisory and Technical

1989 34.8 37.3 27.4 32.8 44.0

1994 30.1 38.9 28.4 39.1 46.7

Skilled worken Grade)

1989 6.3 3.3 3.3

14.6 2.4

;(Top

1994 3.3 4.7 7.2

13.4 6.0

Source: Associa/.onc Industriale Lombarda

These figures show how the most advanced firms asserted control over their pay structures in the late 1980s, often through the use of unilateral awards to offset the effects of indexation. There was thus a considerable amount of decentralisation taking place well in advance of the abolition of the scala mobile. The 1993 reforms in effect extended to the whole of Italy a process of change which leading firms had gone through over the previous eight years.

The impact of the IMP In each of these seven countries examined there have clearly been significant changes in the bargaining climate, in which heightened international competition has played a key role. Developments in Denmark and Sweden illustrate this clearly. In both countries the reform of the collective bargaining system, over a ten-year period, has been dominated by the export-led engineering sector. The fact that similar processes took place both within and outside the Community does not, in itself, deny a possible impact from the ΓΜΡ. But it is strong evidence that there is no distinctive IMP effect and that other factors have been more important.

The ΓΜΡ has evidently played a part in increasing competitive pressures and therefore in influencing moves towards greater flexibility. An initial assessment of the impact suggested that the IMP might have speeded up the decentralisation process. But a closer examination of developments in different countries suggests that the link between the IMP and decentralisation is tenuous - where it exists at all.

The major factors encouraging decentralisation and more flexibility in bargaining systems are the general pressures of increased international competition combined with business trends such as outsourcing which inevitably erode the scope of sectoral bargaining. At the same rapidly changing technology both creates new types of business and new types of work.

The one possible exception is Italy. There is evidence elsewhere (see Section 7) of the change of behaviour during the 1980s and of the role of the ERM. Our evidence suggests that this period saw a significant decoupling of company pay from nationally-determined elements - at least in the

51

more advanced sectors. This has subsequently been incorporated in an historic reform of the bargaining system as a whole. European integration probably played a part in this - at least to the extent that reform would have been more arduous had the IMP not existed. The main period of change coincides with the Single Market process.

However, in general the conclusions are:

1. Decentralisation of bargaining began several years before the Single Market process.

2. Decentralisation was in some cases driven by domestic factors - as in the UK and France.

3. Decentralisation was by no means an 'EC phenomenon'. It took place elsewhere in Europe (notably Sweden) and in other parts of the world.

4. While decentralisation did take place in a number of EU countries, there were cases - Ireland and Spain - where, if anything, the process of European integration had an opposite effect, reinforcing a need for a more co-ordinated approach.

52

Levels of Pay Determination in Private Sector Firms

Levels at which basic pay is determined for different categories of employees % of firms reporting different levels Source: Price Waterhouse /Cranfield Survey 1992; Cranfield Network for European HRM, 1995

Manual employees

: v.:::::::v\.V: .:':.:.

III! ...

National Industrywide 1992 1995

Region

1992

al

1995

Company Division etc

1992 1995

Establishment Site

1992 1995

Individual

1992 1995 Old EU Belgium Denmark France Ireland Italy Netherlands Portugal Spain UK

-58 16 63

-80 55 43 24

67 55 15 56 88 68

-45 16

-25

8 12

--

21 8

28 25

6 9

20 6 -

19 7

-6

41 25

-29 40 26 36

42 9

42 13 4

26 -

22 36

-8

30 18

-29 4

18 38

13 8

23 18 72 12

-15 35

-11 12 8 -

29 16 3

10

18 12 11 4

14 12

-8

10 New EU Finland Sweden

85 76

20 70

7 7

84 9

4 26

18 32

26 12

23 20

15 16

18 27

Non EU Norway

Clerical and a

72 67

dministrative e National Industrywide 1992 1995

25

Tiployee Regioi

1992

17 19 28

s ml

1995


1992 1995

8 18

Establishment Site

1992 1995

22 11

Individual

1992 1995 Old EU Belgium Denmark France Ireland Italy Netherlands Portugal Spain UK New EU Finland Sweden Non EU Norway

-37 20 37

-76 41 48 12

83 70

48

55 30 20 45 86 64

-44

6

21 69

45

-9 8

10 --1

18 6

2 4

18

24 9 6 6

18 5 -

15

81 7

15

-11 51 33

-33 47 32 48

21 29

22

49 20 51 27

4 29

-29 48

24 37

30

-17 31 21

-33

7 19 38

28 12

12

14 13 24 22 74 10

-18 35

24 23

20

-48 18 25

-33 20

6 22

21 32

40

27 43 17 24 30 14

-19 21

25 53

32

53

Professional and Technical employees National Industry- ;

wide 1992 1995

Regional

1992 1995


1992 1995

Establishment Site

1992 1995

Indivi

1992

dual ï

1995 Old EU Belgium Denmark France Ireland Italy Netherlands Portugal Spain UK

-28

9 14

-45 23 29

9

38 23 20 27 76 47

-25

6

-8 9 3 --1 8 2

16 8 6 1

14 3 -4 2

-13 53 31

-39 56 34 54

55 20 52 30 4

39 -

34 52

-18 28 20

-39

5 18 28

17 16 22 26 70 12

-16 25

-58 21 45

-40 48 48 36

42 46 20 40 50 25

-49 31

New EU Finland Sweden

15 59

6 55

1 4

12 7

56 24

60 35

27 14

31 23

56 32

55 52

Non EU Norwav

Managerial en

31 31

riployees National Industrywide 1992 1995

12 10

Regional

1992 1995

28 34


1992 1995

19 22

Establishment Site

1992 1995

49

Indivi

1992

38

dual

1995 Old EU Belgium Denmark France Ireland Italy Netherlands Portugal Spain UK

-11 27 11

-29 22 12 7

19 12 24 19 72 33

-10 5

-2 3 0 --1 2 1

7 4 "1

-6 2 -2 1

-23 64 36

-38 48 27 56

54 33 60 41

-42

-25 54

-5

11 17

-38 5 9

20

15 9 8

17 30

8 -5

19

-77 34 55

-39 55 76 51

66 68 27 53 56 44

-78 43


1

56 1

49 1 5

1 5

49 31

53 41

12 11

14 19

80 52

67 68

Non EU Norway 15 13 7 2 29 38 12 18 78 61

54

9. 'Marketisation' and the growth of variable pay

An obvious test of the effect of the IMP is whether pay has in general become more related to market forces, and, in particular, whether the linking of pay to the performance of the enterprise has become more widespread. Such systems, it has been argued (Vaughan-Whitehead 1990), are an essential component of an emerging 'European model' of pay anangements.

The diagram of possible IMP effects outlined earlier identified increasing pressure for flexibility in pay and working practices as one probable outcome, with the development of systems of variable pay at company level the likely result. Therefore the two questions to be addressed in this section are:

1. Have there been moves towards more variable pay systems in EU Member States?

2. Can any such moves be linked to the IMP?

To test these hypotheses we first of all examine the evidence from the Cranfield survey on the extent of variable pay systems and their development over the past few years. We also look at data from the 1984 and 1992 Eurostat labour costs surveys which provide some evidence on changes in the levels of bonus payments. We then focus on changes which have taken place in three countries: the UK, France and Italy.

Our emphasis in this discussion is on systems linked to enterprise performance such as profit-sharing and gainsharing. We distinguish this from variable pay in general, which includes all sorts of arrangements old and new, from payment by results to merit pay.

However, we also look at other forms of variable pay, in order to assess whether there is a shift towards enterprise-based pay specifically or whether there is a more general trend towards performance-based arrangements.

A note on terminology In discussions of variable pay there is often a confusion between different terms, compounded by the use of initials. To minimise possible confusion, in this section we use the term Performance Pay (PerP) to describe systems linked to individual merit; profit-sharing to describe arrangements strictly linked to profits; and gainsharing to describe other arrangements linked to the financial performance of an enterprise or business unit. In the national context, the French system of intéressement covers both profit-sharing and gainsharing arrangements and payment systems based on the productivity of an enterprise. The term PRP is used only to describe the Profit-Related Pay schemes in the UK.

The Cranfield survey evidence The Cranfield surveys contain information on the extent of different types of variable pay system in each country; how long merit and performance-related pay strategies have been in existence; and changes in the share of variable pay. The data on payment systems are broken down into four categories of employees: Manual, Clerical, Professional and Management. The different systems are defined as: Share Options, Profit Sharing, Group Bonus, Individual Commission, and Merit Pay. The data are for private sector firms with more than 200 employees. The figures in the Tables show the percentages of organisations which responded to the survey. As in our analysis of decentralisation we have separated out the older EU states from the new members - Finland and

55

Sweden. Data from two non-Member States (Norway and Switzerland) are included for comparative purposes.

The extent of variable pay Tables at the end of this Section show the extent of the four main types of variable pay in different countries in 1992 and 1995. In general the figures point to the following conclusions:

1. There is no uniform adoption of particular systems. Systems have developed independently in different Member States and appear to be following independent trajectories.

2. Profit-sharing arrangements are very widespread in France. This reflects both the development of tax-efficient voluntary arrangements (intéressement) and the existence of compulsory profit-sharing (participation) in which all French enterprises covered by these surveys should take part.

3. Elsewhere, there is evidence of the growth of profit-sharing in the UK, with a quarter of companies reporting schemes in 1995. This reflects the growing popularity of the official tax-free PRP scheme. There has been a similar rate of growth in Ireland, without the encouragement of a tax incentive. Profit-sharing arrangements are quite extensive in the Netherlands and, at senior levels, widespread in Gennany.

4. Individualised perfonnance pay is surprisingly widespread for manual workers according to the survey. However, some of these figures conflict with other evidence. In the Netherlands, for example, the survey suggests almost a third of organisations have PerP for manual workers. However the nature of the job evaluation system and the pay structure in the Netherlands leaves little room for merit awards. The figures probably reflect systems which are nominally performance-related but actually involved carrying out additional tasks. As for Portugal, the Cranfield researchers themselves comment that the evidence of widespread merit pay in Portugal in 1992 reflects a tight labour market and the use of individualised pay to recruit and retain staff rather than any more strategic aims.

5. Individual bonus/commission arrangements are only significant for manual and clerical workers in the Netherlands and Gennany. Individual bonuses are much more common at senior levels in all countries. Group bonus anangements are more widespread. It is difficult to discern any trends here, because these categories cover a variety of payment systems.

The sectoral pattern A detailed sectoral breakdown is not available, but the Table at the end shows the different types of variable pay in manufacturing and services in 12 EU Member States in 1995. The finance sector is shown separately because of its size and because pay arrangements in finance tend to be different from the rest of service sector. A separate Table shows the same breakdown but without the UK. The main points to emerge here are:

1. Profit-sharing anangements are more widespread in manufacturing than in the service sector. There are several reasons for this. High levels of staff turnover in much of the service sector mean that more employees have short service and may not qualify. Part-time workers are also often excluded.

2. Share options are very much a UK phenomenon. A significant minority of manufacturing firms in the UK have such arrangements for their manual and clerical employees.

56

3. Merit pay is most common in the finance sector throughout the EU, and especially in the UK.

The age of schemes One important indicator of change is the age of schemes. The 1995 survey included a question on the date of introduction of merit or performance pay (PerP) systems. The result are shown in Table 9.1.

Table 9.1 Year of introduction of merit or performance-related pay strategy

1994-95 1991-93 1986-90 1976-85 1966-75 Before 1965 Old EU Denmark France Gennany Ireland Italy Netherlands Spain UK

20 7

11 15 13 13 6

10

30 20 17 12 23 34 29 27

27 33 16 28 46 24 31 41

16 25 26 28 13 23 21 15

3 10 19 12 3 2 9 5

5 5

11 5 3

14 4 1


24 16

28 33

32 31

15 11

2 6

0 5

Non EU Norway Switzerland

21 14

23 29

23 23

16 17

3 13

14 3

Source: Cranfield Network for European HRM, 1995.

This is one area where there does seem to be a difference between the older EU Member States and the new members and non-members. In general these systems seem to have been introduced at an earlier stage in the EU countries than elsewhere. In Germany, more than half the organisations with PerP systems had introduced them before 1985. Ireland, France, the Netherlands and Spain also had long-standing PerP systems.

By contrast the data for Finland and Sweden (and for Norway and Switzerland) show a major change in the early 1990s. Around 50% of PerP schemes in Finland and Sweden (and 40% in Norway and Switzerland) were introduced between 1991 and 1995.

The implication is that moves to link pay to performance occurred earlier in the Community than elsewhere. This would suggest some link to the Single Market. But this conclusion needs to be put in the context of trends in Denmark which, according to the survey, are almost identical to Sweden and Finland (and Norway). The evidence in fact seems to point to the 'late' development of PerP in Scandinavian countries, rather than any conclusions about a Single Market effect.

The share of variable pay In both 1992 and 1995 organisations were asked whether the share of variable pay had risen, declined or remained the same during the three previous years. The results show a consistent pattern of growth over both periods (Table 9.2) although around half the organisations reported no change.

57

Table 9.2 Changes in the share of Variable Pay

Increased Decreased No Change Three years to 1995 Increased Decreased No Change

Old EU Belgium Denmark France Germany Ireland Italy Netherlands Portugal Spain UK

-34 40 50 35 -33 69 49 35

-5 8 4 8

-7 6 4 8

-54 52 42 54 -55 25 44 51

31 31 35 44 33 60 35 -50 33

5 5 7

10 5 6 3

-4 6

59 55 56 44 55 24 58 -41 54


40 53

7 4

50 41

38 39

7 11

50 46

Non EU Norway Switzerland

41 -

3 -

50 -

35 56

5 5

53 38

Source: Cranfield Network for European HRM. 1995

These results are not broken down by employee groups; thus it is impossible to say whether there is a general increase or whether, for example, we are seeing a growth in the incentive element at managerial and professional level. The data also reflect responses to labour market pressures - as in Portugal. But there does seem to be a clear trend, at least among a substantial minority of companies, for the share of variable pay to increase.

Data from the 1995 survey show that increases in variable pay over the previous three years were most widespread in the finance sector. The increase in variable pay apparently persists during the recession, which suggests that variable pay (of whatever sort) is an intrinsic part of organisations' pay strategy and not a short-term phenomenon. However, it also raises doubts about whether these systems relate to the success of the enterprise.

The level of payments: the Eurostat evidence The Cranfield data indicate that variable payments are tending to increase as a proportion of wages and salaries, but this could be from a very low base. The figures for Italy suggest a huge increase, but national surveys (see below) indicate that the level of variable pay was extremely low, at least until 1994.

Statistics from the Eurostat labour costs surveys provide information on the levels of 'bonuses and premiums' as a proportion of direct earnings. Data are available for nine countries and figures for 1984 and 1992 are shown in Table 9.3. The sectors selected are the same as those examined in the inter-sectoral comparisons of pay movements (Section 6).

58

Table 9.3 Bonuses and premiums as a % of direct earnings 1984 and 1992

Manufacturing Sectors

Belgium

Denmark

France

Germany

Greece

Ireland

Netherlands

Portugal

UK

AH

Indust

1984

19.8

0.8

9.5

15.2

19.3

1.4

12.6

17.5

1.5

S e n ice Secto

Belgium

Denmark

France

Germ an ν

Greece

Ireland

Netherlands

Portugal

UK

ries V>

11992

14.2

1.7

19.9

15.3

19.4

2.0

13.4

20.0

1.5

rs

Ceram

1984

18.5

0.7

8.9

13.3

18.0

1.0

12.9

22.1

1.3

Textiles

1984

17.7

1.8

7.3

10.7

19.3

1.0

11.6

18.2

1.2

1992

7.3

1.6

14.0

12.3

19.0

0.8

12.3

19.0

1.0

ics

1992

na

na

na

13.8

20.9

na

na

20.6

na

Chemicals

1984

20.9

1.0

12.3

19.1

19.7

2.9

16.8

19.9

4.6

Motor

Vehicles

1984

24.0

0.6

10.2

21.2

17.7

0.6

12.8

21.1

2.0

1992

17.3

1.0

20.7

19.6

19.3

na

13.2

20.6

0.9

1992

18.9

1.7

22.1

19.7

20.8

3.1

16.2

20.6

3.9

Clothing

1984

15.7

0.5

3.7

9.7

19.0

0.5

11.8

17.8

0.8

Finance

1984

20.9

2.0

28.5

23.0

18.6

1.8

16.5

15.4

3.7

1992

28.9

2.6

25.9

22.2

20.3

2.3

20.5

26.3

10.2

1992

na

1.7

8.7

11.4

18.7

0.7

11.6

18.7

0.8

Footwear

1984

19.3

0.7

6.5

11.0

19.0

na

11.9

10.2

1.8

Retailing

1984

18.9

1.2

9.2

11.5

19.0

1.4

8.8

16.2

2..7

1992

20.1

1.8

19.3

12.3

na

2.8

11.5

19.9

3.0

::i9Süi 10.8

na

11.1

11.3

19.3

na

na

21.8

1.3

Source: Eurostat

These figures suggest there are very high bonus levels in some countries. However, they need to be

interpreted with care because the definition of bonus payments in the survey includes the 13th-

month and 14th-month payments (and/or holiday bonuses) which are a normal part of pay in certain

countries - and in some cases are required by law. Of the countries examined here, all except

Denmark, Ireland and the UK have such arrangements.

The 13th-month is normal in Belgium, France, Germany and the Netherlands. By law, employees in

Belgium and the Netherlands should also receive holiday bonuses worth around 7.5% of basic pay.

In Germany over 90% of employees covered by collective bargaining receive additional holiday

pay. In Greece and Portugal the legal or customary nonn is 14 months.

Thus the levels of bonus payments recorded in the statistics do not correspond to variable pay,

except in the UK, Ireland and Denmark where they are mainly very low.

However, the changes in the levels recorded between 1984 and 1992 are significant, because the

rules about additional months' pay have not altered over the period. Not all the changes will

necessarily reflect variable pay. However, on this basis we can make the following observations:

59

1. There is no overall trend which could be interpreted as a general increase in variable pay over the period.

2. All the figures for Gennany are much the same in both years, confirming the impression of relative stability conveyed by the Cranfield survey and other data.

3. In manufacturing, outside Belgium and France, bonus levels do not seem to have changed significantly. One exception is the footwear industry in Portugal.

4. In Belgium there seems to have been a decline in the bonus element in manufacturing. This is most noticeable in the weaker areas such as footwear and textiles. There are reports that smaller firms in Belgium do not pay the 13th month (although it is commonly stipulated in collective agreements) and this might be a factor.

5. In France the bonus element rose dramatically, more or less doubling throughout manufacturing and in the retail sector. This directly reflects the development of statutory and voluntary profit-sharing arrangements (see below).

6. The bonus element in UK manufacturing is surprisingly low, given the extent of profit-sharing arrangements

7. The finance sector has easily the highest bonuses in every country except Greece. There were particularly large increases in the bonus element in Belgium, Portugal and the UK.

Profit-sharing in Member States The development of profit-sharing and financial participation across Europe during the 1980s was reviewed in depth in a Commission report published in 1991 (Pepper 1991). The report concluded that there was a 'steady growth' in various forms of scheme in the majority of Member States, but there was a sharp contrast between the extent of such schemes in France and the UK and the other countries. Outside France and the UK, schemes were far less developed and often payments were only nominally linked to profits - for example in Spain and the Netherlands. There was a surge in the number of schemes in Italy, following the wave of company bargaining during the late 1980s -but the report noted that only some of these were directly linked to an indicator of enterprise performance.

Since 1991 there have been three main changes:

• In the UK there has been a dramatic increase in the coverage of Profit-Related Pay schemes.

• In France, the increase in voluntary profit-sharing has tailed off and even been reversed.

• In Italy, the collective bargaining reforms of 1993 explicitly linked company bargaining to enterprise performance.

The UK Fiscal incentives for profit-sharing in the form of company shares were introduced in 1978 and there was a steady growth in the number of registered schemes in subsequent years. By the end of 1989 there were 900 schemes registered under two different systems, with about two million employees participating. Many of these schemes were existing arrangements which had altered their

60

rules to take advantage of the tax concessions. A 1990 survey estimated that almost 5.5 million employees were covered by some form of profit-related payment.

In 1987, the government introduced legislation to promote cash-based Profit-Related Pay. Unlike other types of profit-sharing, designed as an incentive or reward for loyalty, PRP was specifically designed to become a flexible element in basic pay. The inspiration for PRP was the theory (Weitzman 1984) that pay flexibility would encourage firms to retain employees during recessions and thus reduce unemployment.

Initially PRP was largely shunned by employers. The system proved too complex and the tax concessions insufficiently generous. However, the combination of a doubling of tax relief and the publication of model rules in 1991 prompted a huge increase in PRP. Between September 1991 and September 1995 the number of schemes rose from 1,400 to 10,500 and the number of employees covered from 370,000 to 2.6 million.

The current formula allows up to 20% of pay to be tax-free, provided the scheme complies with certain guidelines. Essentially, the design of PRP schemes falls into two categories. First, there are schemes which take the fonn of a bonus arrangement, whereby PRP is paid in addition to basic pay. Secondly, there are salary conversion schemes where employees put some basic salary at risk. The development of PRP has seen a shift from the first to the second type. In the early stages many employers simply converted existing profit-sharing schemes into PRP. A survey of employers (Inland Revenue 1994) found that only 9% of schemes registered before 1992 had been salary conversion arrangements, compared to 34% in the following two years. Subsequent research suggests that this trend has continued (IDS 1996).

The trend towards salary conversion means that PRP has, in some cases, genuinely replaced part of basic pay. There is considerable evidence to suggest that the recession of the early 1990s played an important part in this process, with employers freezing gross pay and using PRP to provide a rise in net pay. Converting 20% of gross pay into PRP can provide a net increase of around 6%, depending on the individual's tax situation.

At the same time, certain employers have simply used PRP as a supplementary profit-sharing arrangement. A number of prominent firms, particularly in the finance sector, have introduced PRP on top of existing profit-sharing bonuses. In theory the tax concessions from the scheme go to employees, but some companies have retained a proportion of the tax savings. There is also scope for reductions in the gross pay bill and of course reduced social charges.

Despite the element of risk supposedly involved in PRP, there is ample evidence to suggest that employers have sought to minimise the risk involved. In some cases finns have in effect guaranteed payments, although this is not permitted under the rules. Even among businesses which have introduced salary conversion schemes, only about one third of finns say that PRP has in fact reduced basic pay (Inland Revenue 1994).

Finally, there is clear evidence that the critical factor in the spread of PRP is tax relief. The 1994 survey found that in small firms tax relief was less of an issue, but in firms with more than 100 employees it was decisive. The 1994 survey concluded that the majority of finns 'would not have introduced PRP at all, without tax relief. The scale of relief in the UK has grown into a major state subsidy. The Inland Revenue estimate of the cost of tax relief on PRP in 1995-96 is some £800

61

million. Combined with tax relief on other forms of profit-sharing the total of current relief is an estimated £1,130 million a year.

France There are some similarities between intéressement in France and PRP in the UK. As in the UK, profit-sharing in France received a major boost in the mid-1980s from legislation granting tax concessions to employees. After the rules were changed in 1986 the number of'live' intéressement agreements rose from just over 2,600 to almost 10,000 in 1990, covering around 2 million employees. As in the UK, legislation was introduced with the aim of promoting employment.

Unlike the UK, however, the French system was never intended to substitute for basic pay, and both government and employers' organisations have periodically advised firms to this effect. Again, the French system covers schemes which are not strictly related to profit. The only real requirement is that the system should link an element of reward to the overall results of an establishment or an enterprise. Many of the larger firms have devised agreements using a variety of fonnulas, involving output, quality and efficiency rather than financial results.

Another important contrast with the UK is the number of small - indeed very small - firms involved. In 1990, the peak year, almost 80% of agreements were in firms with fewer than 100 employees and more than a quarter had fewer than 10 employees. Payment levels in the smallest firms were about 8% compared to the average of less than 4%.

However, the recession took its toll. Around a third of employees eligible for payments in 1992 received no increase. Over 60% of the 3,500 agreements concluded in 1990 were not renewed three years later and the total number of agreements in force fell by nearly 30% (DARES 1996).

If the recession was one reason for the reverse in the trend towards profit-sharing, the other was changes to the law. Legislation enacted in 1990 extended the requirement for compulsory profit-sharing -participation - from firms with more than 100 employees to those with more than 50 employees. Faced with a compulsory scheme, firms have not been prepared to carry the administrative burden of a second profit-sharing arrangement, especially as a number of intéressement schemes in SMEs have fallen foul of zealous local social security authorities.

Italy The development of pay systems linked to enterprise performance has followed a quite different path in Italy compared to France or the UK. There are no fiscal incentives and such arrangements essentially date from the late 1980s, and the wave of company bargaining in the engineering industry. Company bargaining in Italy had normally focused on production bonuses, linked to past performance and locally-agreed supplements - the superminimo. The new departure in 1987-88 was the replacement of the standard superminimo with an award tied to company performance. Although there were relatively few agreements of this sort, the pioneering deals at Fiat, Olivetti and Zanussi covered some 260,000 employees.

The amounts of money involved were small, and several of these agreements fell foul of recession and profitability problems. The annual surveys conducted by Confindustria, the main employers' organisation, reveal that variable pay never exceeded an average of one per cent between 1988 and 1994. Payments in the firms concerned were normally 2-4% of gross earnings and most agreements focused on standard indicators of productivity such as output and hours worked, in effect different varieties of gainsharing. Nevertheless this round of pay bargaining did represent a psychological

62

break with the past, and coincided with the marked decentralisation of wage-setting that we discuss elsewhere in this report (see Section 8).

A survey of variable pay arrangements recently published by Intersind (the employers' organisation for nationalised industry) found that levels of variable pay tended to decrease during the 1988-92 period, both because of deteriorating business conditions and because of consolidation clauses in the agreements. The general level was about 2.5%. However, case studies found rather higher levels of variable pay- 7-10% in 1991 - in some state-owned firms (Prosperetti 1996).

The subsequent reform of collective bargaining in Italy included the final abolition of indexation in July 1992 and was followed by the tripartite agreement a year later which defined the separate roles for bargaining at industry and company level.

The terms of the clause on company bargaining were among the most controversial issues in the agreement. Con/industria initially opposed the recognition of company bargaining under pressure from its smaller member firms. Eventually a formula was accepted which requires pay increases at company level to be 'closely linked to the results attained in agreed plans aimed at increasing productivity, quality and other elements of company-level competitiveness... over and above those used to detennine pay increases at the level of the national sectoral agreement'. Company bargaining should also be linked to 'results related to company economic perfonnance'.

The outcome of this agreement has yet to be fully tested, as the first round of company bargaining is currently in progress. However, all the evidence thus far suggests that the tenns are being followed, at least as far as larger firms are concerned. A somewhat different picture is emerging in smaller firms. Here the indications are that many agreements are linked to attendance at work rather than to any defined productivity improvement.

As before, companies have devised a variety of indicators to measure perfonnance, depending on their targets for improvement. Very few agreements are linked solely to profits. The most influential agreement, at Fiat, links rises to three indicators: group perfonnance, return on investment and quality targets. This much the same formula adopted in the pioneering agreement of 1988, and there is a similar mix of elements elsewhere. As set out in the 1993 refonns, all these agreements are valid for four years, unlike industry pay agreements which have a two-year duration.

The impact of the IMP The statistical evidence and individual country studies point to some clear conclusions on the issue of variable pay:

1. Variable pay seems in general to be on the increase, but this is not a development peculiar to EU countries. The same tendency can be seen elsewhere in Europe (and, for that matter, in North America and Australia). Companies are introducing these systems for various reasons, above all to motivate employees but also to relate pay more closely to productivity.

2. It appears that variable pay may have developed earlier in the older EU Member States, but this is not an ΓΜΡ effect.

3. Payment systems related to company performance are becoming more widespread in some countries, including France, the UK, the Netherlands and Italy. However, there is nothing to

63

suggest that firms are favouring this form of remuneration over other systems, such as individual or

group incentives. There is very little sign that a European Model of remuneration is developing.

4. There are nominal profitsharing arrangements in some countries which do not seem to be

related to company performance: examples are Spain and, to a degree, the Netherlands.

5. In Italy, gainsharing emerged as a company strategy at the end of the 1980s. It has subsequently

been adopted as a central plank in the reform of collective bargaining agreed in 1993. Competitive

pressures (among them the IMP) played a part in this reform process, but the definition of the roles

of industry and company bargaining was a core issue in Italian industrial relations for many years.

And in the case of the main protagonist of reform, Fiat, gainsharing was part of company planning

from the late 1970s.

6. Finally, there are two countries where profitsharing has become widespread during the period

under review, the UK and France. In both cases, fiscal incentives, introduced in 198687, have

proved to be the decisive factor. Thus these developments are, by definition, based on national

factors and not European integration.

Variable Pay

% of firms reporting different types of variable pay arrangements in 1992 and 1995

Note: Results for France are for 1990 and administrative staffare included with professional and technical. Source: Cranfield Network for European HRM, 1995.

Merit Pav

Manual

1992 1995

Clerical

and administrative

1992 1995

Professional

and

technical

1992 1995

Management

¿:1Μ2.ΐΐί 1995 Old EU Belgium Denmark France* Germany Ireland Italy Netherlands Portugal Spain UK

20 43 36 18

27 64 27 26

31 14 36 38 16 26 31

29 27

55 *

39 36

22 66 41 50

45 8

48 38 45 30 30

41 50

57 63 43 55

25 68 59 59

55 13 56 39 63 52 42

57 59

65 74 21 64

21 64 55 64

63 15 70 19 71 42 39

50 64


23 30

39 32

27 8

41 11

35 8

37 11

37 14

35 16

Non EU Norway 15 17 13 11 22 17 21 20

64

Profit Shariii S Manual

1992 1995

Clerical and administrative

1992 1995

Professional and technical 1992: 1995

Management

1992 1995 Old EU Belgium Denmark France Germany Ireland Italy Netherlands Portugal Spain UK

4 64 11 13

30 20

8 20

10 6

71 15 17 10 29

5 25

5 75 12 15

32 22

9 24

11 6

84 19 21 10 30

7 31

6 76 22 15

37 23 11 27

11 6

84 29 23 12 33

9 33

9 78 67 20

38 33 18 35

20 8

85 72 30 16 35

15 38


16 18

14 16

18 22

15 19

18 15

18 16

14 26

16 20

Non EU Norway 4 10 4 11 5 11 5 12

Group Bonus Manual

1992 1995


1992 1995

Professional and technical 1992 1995

Management

1992 1995 Old EU Belgium Denmark France* Germany Ireland Italy Netherlands Portugal Spain UK

27 28 15 20

7 12 -, .1

23

7 20 15 15 25

6 8

3 19

6 * 5

15

6 8 1

19

8 6

17 7

25 14 6

4 20

8 32 6

18

10 14 5

23

16 9

19 5

24 10 8

11 25

9 37

2 21

7 12 10 32

22 8

27 1

28 10 6

14 36


41 40

17 34

29 20

22 23

25 18

16 23

7 20

9 24

Non EU Norway 25 25 18 20 23 21 17 18

65

Individual Bonus or Commission Manual

1992 1995


1992 1995

Professional and technical 1992 1995

Management

11992 1995 Old EU Belgium Denmark France* Germany Ireland Italy Netherlands Portugal Spain UK

8 19 33 17

35 11 2

13

5 6 1

38 4 4

42

3 4

6 -

52 11

36 7 4 7

9 5 3

59 7 8

44

7 7

16 34 67 22

59 19 32 27

23 16 9

66 18 10 65

45 23

20 44 48 28

59 18 36 32

20 26 17 38

9 8

61

43 13


11 8

7 5

13 1

18 3

29 3

33 7

36 26

42 40

Non EU Norway 12 7 3 8 10 20 12 28

Extent of Variable Pay Systems in EU Countries in 1995

% of firms reporting different systems Note: Data do not cover Austria, Luxembourg, Portugal. Source: Cranfield Network for European HRM.

Share options Manufacturing Services Finance

Profit sharing Manufacturing Services Finance

Group bonus Manufacturing Services Finance

Individual commission Manufacturing Services Finance

Merit pay Manufacturing Services Finance

Manual Clerical and administrative

Professional and technical

Management

12.3 8.5 6.2

13.0 12.8 13.1

14.2 14.7 14.5

21.0 22.7 23.5

23.9 15.2 18.0

25.4 23.3 32.3

27.3 26.4 35.5

37.3 33.6 43.3

20.0 10.5 8.3

12.2 15.7 18.7

15.4 17.1 18.9

19.7 19.0 19.4

8.5 10.5 10.8

12.8 16.4 22.4

27.5 29.6 38.0

26.3 27.2 32.0

32.6 23.8 25.6

38.6 38.3 49.5

45.7 46.8 58.3

43.9 49.4 59.0

66

Extent of Systems Excluding the UK

Share options Manufacturing Services Finance

Profit sharing Manufacturing Services Finance

Group bonus Manufacturing Services Finance

Individual commission Manufacturing Services Finance

Merit pay Manufacturing Services Finance

Manual Clerical and administrative

Professional and technical

Management

6.7 4.6 4.6

7.2 8.0 8.0

7.8 8.7 8.7

13.0 14.2 14.2

24.0 12.2 14.2

25.2 20.2 27.8

27.6 23.6 31.1

39.0 31.1 38.7

19.6 7.5 6.0

11.1 12.4 14.2

13.8 12.2 12.6

15.6 11.0 10.3

10.9 11.2 13.6

16.3 18.9 27.2

29.0 32.4 40.4

30.9 32.4 38.1

34.6 21.7 20.9

36.4 31.3 40.7

42.5 40.0 50.3

38.3 40.2 51.0

10. The impact of Foreign Direct Investment

The Single Market, in particular measures to remove barriers and promote technical harmonisation, has led to an increased flow of investment between Member States and from outside the EU. This involves both new start-ups and an increase in mergers and acquisitions. The central hypothesis to be tested here is that this process affects pay and collective bargaining in three inter-related ways:

1. Companies investing internationally tend to be more dynamic and technically advanced, with higher productivity than those geared to the domestic market. Their use of 'best practice' techniques and systems (particularly in manufacturing) will tend to be accompanied by more innovative pay and bargaining practices, increasing tendencies to link reward to performance and to erode or break with established bargaining arrangements.

2. In turn, such companies will tend to recruit towards the top end of the labour market and to adopt pay and reward policies above the norm, at least matching market leaders in the sector or the economy concerned. Along with pressure for greater flexibility on the part of employees comes some potential for an element of 'rent-sharing', especially where there is a need to invest in and then retain company-specific skills. For these reasons increased FDI flows ought to produce evidence of a relative rise in the pay levels of foreign firms.

67

3. These processes could produce a number of knock-on effects. For example:

a) pressure on skill differentials;

b) greater divergence between the SME sector and larger finns;

c) divergence between dynamic and sluggish sectors;

d) spread of'new' personnel policies and reward practices.

Three countries were selected to test for evidence of the impact of FDI on pay: the UK, Ireland and

Spain. These countries were selected because of their levels of inward investment during the IMP

period. They also provide a contrast between small and large economies and quite different

bargaining systems and trends:

• in the UK - increasingly fragmented with unlimited scope for new pay systems

• in Ireland - company bargaining within a centralised framework

• in Spain - industry/provincial bargaining but with national agreements and some company

bargaining in more advanced sectors and larger firms.

The Impact of recent FDI in the UK

The UK has received the lion's share of external FDI in the EU during the period in question. While

UK manufacturing employment has contracted, the number of employees in foreign-owned

manufacturing finns grew by more than 100,000 between 1985 and 1992. Foreign-owned

enterprises accounted for 18% of UK manufacturing employment in 1992, compared to 14% in

1985.

Normal earnings data for the UK show no sign of any general FDI impact on pay levels. There are

no signs of fluctuations either regionally or at sectoral level which can be linked to foreign firms.

Data for the engineering industry (see Table 10.1) which might be expected to show increases in

the dispersion of regional earnings consequent on major investments in northern England and

Scotland, instead point to a significant convergence - despite the collapse of national pay

bargaining in the industry after 1989. The changes in pay levels which have taken place illustrate the

impact of declining employment in heavy industry and suggest that any influx of new companies has

been more than outweighed by this decline.

Table 10.1 Average Earnings of Skilled Manual Workers in British Engineering

Regional earnings as percentage of the average

EEF-'Regions

Scottish

Northern

Yorkshire/Humbcrside

Sheffield

East Midlands

West Midlands

South

East Anglia

Mid Anglia

Western

1985

101.0

101.0

93.8

106.5

96.4

104.7

99.7

93.6

99.0

101.5

1990

95.7

99.1

93.6

98.9

95.7

107.1

103.2

95.4

102.7

98.9

■:::1995ii:;'

96.0

100.5

99.4

96.1

98.3

103.1

100.4

99.0

104.0

101.2

Source: Engineering Employers' Federation

68

However, the annual Census of Production (though published three years in arrears) does provide

data which allows some comparisons to be made between UK and foreignowned finns for most of

the period in question.

The pay gap

Table 10.2 shows pay per head for broad categories of employees in UKowned and foreignowned

manufacturing finns between 1985 and 1992 (the most recent available data). It also provides a

comparison of pay per head in finns of US, Japanese and EC origin. This breakdown is important

in the light of the significant shift in the balance of FDI in the UK during the period of the ΓΜΡ (see

below).

Table 10.2 Pay per head in UK-owned and foreign-owned manufacturing firms

Relative percentage pay levels

All foreignowned

All UKowned

All UKowned with

100 + employees

European

Community

United States

Japan

Operatives

1985

100

80.9

86.2

90.7

100.2

69.6

1988

100

82.3

84.5

91.2

101.7

84.0

1990

100

82.7

84.9

92.4

105.1

80.3

1992

100

82.3

85.2

93.4

104.9

85.3

Administrative, Technical, Clerical

1985

100

85.8

89.6

95.1

102.2

68.4

1988

100

86.0

87.0

90.9

104.8

87.1

1990

100

85.2

86.2

94.4

105.2

87.3

B99ÏM 100

83.6

85.1

91.6

104.7

105.0

Source: CSO Report on the Census of Production and IDS calculations. Note: Figures for UKowned enterprises with 100+ employees arc based on the assumption that all foreign firms employ over 100.

The overall comparison of all foreignowned and all UKowned firms shows a significant pay gap

for both manual and whitecollar employees. Comparing UKowned finns with over 100

employees also shows a significant if somewhat narrower gap. From this initial comparison we can

also see that the gap has widened during the IMP period quite noticeably for whitecollar

employees.

A much more varied picture emerges from the detailed comparisons:

1. USowned firms accounting for about 40% of foreign enterprises in 1992 are consistently

out in front. This reflects the pattern of mature US investment in the UK in capital intensive high

pay sectors, such as the chemical and car industries, as well as newer investment in computers. It

should be noted, however, that these figures understate the extent of US 'pay leadership' because

oil exploration and refining are excluded.

2. Firms with parent companies in other EC countries had average pay levels much closer to the

UK average. And while relative average pay per head for manual workers in these firms rose during

the period, it may have declined for whitecollar staff although the figures are not conclusive.

69

3. In contrast, the figures for Japanese-owned finns show a sharp rise in average pay between 1985 and 1988. This clearly reflects the shift in the pattern of Japanese investment in the UK, which accompanied the initial phases of the IMP and was directly linked to European integration, above all in the car industry.

The interpretation of these figures requires some caution. They obviously reflect differences in both the size and the composition of the workforce (skill mix), as well as different patterns of investment. They also reflect acquisitions as well as start-ups. The sudden rise in the average pay of white-collar staff in Japanese-owned finns between 1990 and 1992 is a case in point. Analysis of the more detailed sectoral figures suggests this was mainly the result of the acquisition of the UK computer firm ICL by Fujitsu in 1990.

Bearing in mind these reservations we can draw certain conclusions about the impact of FDI in the UK in the late 1980s and early 1990s and, in turn, about the indirect impact of the IMP on pay.

Foreign firms as pacesetters The UK has a long history of US investment in manufacturing which has had a distinct impact on pay and bargaining. These finns - above all Ford - were usually pacesetters on pay and conditions and, latterly, have been responsible for much of the innovation on pay and working practices in the UK. The data for the IMP period make it clear that this pacesetting role continues.

But this period also saw a major shift in the pattern of manufacturing investment in the UK. While US-owned firms continue to be the most prominent single group, the number of employees in these finns fell by 10% between 1985 and 1992. By contrast, employment in subsidiaries of foreign EC countries doubled over the same period. The bulk of this increase was new jobs rather than acquisitions.

By comparison with the mature US-owned finns this new wave of foreign investment had a distinctly lower pay profile, at least initially. The period of the implementation of the ΓΜΡ shows an upward shift, because of the changing pattern of Japanese investment, but compared with US firms the relative pay levels of EC firms show a decline, especially for administrative, technical and clerical staff. One reason for this is almost certainly that European firms will tend to employ fewer staff in these categories and at lower pay levels than their US counterparts. In the past, US firms have often sited their European regional offices in the UK, which inevitably pushes up average pay levels.

The data suggests that the impact of increased FDI in the UK has been to increase the pay gap between UK and foreign firms. But the changing origin of much of this investment has restricted the overall impact compared to previous periods. The pay gap between UK and other European firms (and between European and Japanese firms) is much narrower than between UK and US firms.

Analysis of the pay practices adopted by recent inward investors in the UK tends to support this view. There have been cases of major inward investment having a disruptive effect on labour markets because of the size and prominence of the recruitment exercises undertaken. Examples of this include Nissan, Toyota and Robert Bosch. But the impact has almost always been confined to local labour markets or on demand for scarce skills such as automotive engineering.

70

The impact of FDI in the UK car industry

Beginning with Nissan in 1985, an investment undertaken in anticipation of the acliievement of the Single Market, and following the arrival of Honda and Toyota, there was a step change in productivity. Tliis has had huge effects on other UK car and component manufacturers, above all in the organisation of production and supply chains. As well as a sectoral effect, the Nissan investment had a profound regional impact, heralding a wave of FDI in the components sector and subsequently in electronics (Samsung, Fujitsu and Siemens).

For other car manufacturers in the UK, the arrival of Nissan had several effects on pay and bargaining. There were general moves to simplify grading structures lo cater for greater functional flexibility, to introduce team working and team leader grades; and to eliminate immediate supervisors and upgrade others to line management. All these factors, together with increased competition for scarce skills, tended to increase earnings (although this was offset by tighter management control ot overtime). At the same lime Nissan's pay settlements became, with Ford, a benchmark for the industry and thus a lead settlement for the rest of manufacturing.

For suppliers the picture was rallier different. "Hie Nissan investment bolli forced efficiency changes at established components manufacturers and attracted new suppliers and sub-assemblers, thirty of Ihern in the area immediately surrounding the new Sunderland factory. 'Hie company's dedicated suppliers, unlike the main company, are on the whole not subject to collective bargaining and pay rates are held at lower levels. An example is the Nissan Yamalo plant in Sunderland, one of the larger satellites with around 500 employees, which is u joint venture operation producing pressed steel parts and sub-assemblies. Like Nissan itself the company reviews pay in alleniate years, bui Illese reviews are staggered to minimise possible claims for parity.

As far as productivity is concerned, the regional impaci of Nissan and subsequent inward investment in North East England is clear to see. Value added [icr employee is around 10% ahead of any other region in the UK. However, the effect on regional pay levels seems broadly neutral.

It would be wrong to attribute the entire change in the UK air and components industry to foreign greenlield investments. Some of lhe changes (such as a two-year bargaining cycle) were already in place following the major job losses of the early 1980s. Other changes sought by air manufacturers before the arrival of Nissan - such as pay progression based on merit - have continued to be resisted by trade unions in (lie older companies despite their acceptance at greenlield sites.

The principal effect of new Fl )I in the IJK was to accelerate Uie speed of change. This acceleration effect has not been confined to the UK but has had a significant impact elsewhere in Europe, particularly with greenlield investments such as the SEAT/Volkswagen plant at Martorell in Spain and Fiat's new site at Melfi in southern Italy.

The same effect is observable in the relations between established manufacturing plants and satellite sub-assembly operations. Research on 34 component and sub-assembly plants in France built between 1988 and 1994 in proximity to'established Renault, Citroen and Peugeot sites found thai more than half the 12,400 people employed were on temporary or short-tenn contracts (Gorgeu and Mathieu (1995)). Pay progression was generally linked to merit or competence, with a combination ol individualised pay and group bonus. 'Hie survey suggests that in some aises Illese (non-union) satellite plants are used as test-beds prior to the introduction of new working practices and payment systems elsewhere.

The impact of recent FDI in Ireland Foreign-owned firms have established a decisive presence in Ireland over a period of more than 25 years, the process beginning well before the IMP. Ireland has the highest per capita level of foreign investment in manufacturing in the EU, with foreign firms accounting for 45% of manufacturing employment. Permanent employment in foreign firms supported by the Industrial Development Agency grew by a net 26,500 during the 10 years to 1996, a broadly similar figure to the rise during the 1980s. But this total greatly understates the impact of new FDI on employment in Ireland. A total of 74,500 new jobs was created over the period, principally in manufacturing but increasingly in software, internationally traded services such as telemarketing and, since 1987, offshore financial services. There was also a dramatic change in the balance of foreign manufacturing investment. In 1980 foreign firms employed around 10,000 people in the electrical and electronic engineering sector. By 1994 the numbers had increased to 43,000.

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The main conclusions from the Irish evidence are as follows:

1. Unlike the UK, there is no evidence of relative earnings rising faster in foreign finns: they appear to have followed the terms of successive national pay agreements. However the most dynamic parts of the electronics sector have relatively high earnings for women.

2. During the recent surge of foreign investment, following the relative slowing down at the end of the 1980s, an increasing number of foreign finns - above all US-owned electronics finns - have not agreed to recognise unions and are thus outside the scope of collective bargaining. However, contrary to some theories, these non-union finns do not appear to be paying a wage premium to avoid collective bargaining.

3. The establishment of an offshore financial services centre in 1987 has created an SME sector with higher average pay levels than the traditional banks.

4. There is no evidence of any knock-on effect from recent FDI in either the manufacturing or the financial services sector, partly because of the absence of collective bargaining and the use of individualised pay systems in these sectors.

Earnings data There are no data which allow for a comparison of pay levels in Irish and foreign finns. However, increases in the two key FDI sectors show no distinctive pattern. The increase in earnings in phannaceuticals since 1985 has been in line with the average for manufacturing as a whole, and lower than the chemical industry. Earnings in electrical engineering have moved in a similar way, while the increase in office and data processing machinery has been lower than almost any other sector.

When it comes to earnings levels the picture is more varied. Hourly earnings for industrial workers in phannaceuticals are relatively high for both men and women: 12% above average for women and 32% for men. In the electrical engineering sector male earnings are below the average. However, women's earnings in the most dynamic part of the electrical engineering sector - NACE 344/5, covering telecommunications equipment etc which accounts for over half the employment in electrical engineering - are significantly above average. This is especially noticeable with weekly earnings, because hours worked by women in this sector are consistently higher than elsewhere in manufacturing. Hours worked have risen along with the growth in employment, which rose by more than 50% between 1991 and 1995.

Confirmation of this varied picture comes from surveys of executive pay which cover the basic salary relativities of different sectors. The most recent (1995) survey of executive pay levels by the Inbucon consultancy found that basic salaries in the pharmaceuticals and healthcare sector were 106% of the average (in line with the chemical industry). In electrical and electronic engineering, by contrast, the figure was 86%.

Adherence to national agreements Unlike the UK, company bargaining in Ireland has been conducted within the framework of centralised agreements. So a good test of the behaviour of the foreign firms is their adherence to the terms of the three pay agreements which have operated over the past decade. A recent survey of personnel managers in Ireland suggests that, while a large and increasing majority of firms have followed the terms of these agreements, around a third of firms may have paid above the agreed

72

level at some stage. However, there is nothing specifically to link foreign finns with these apparent breaches and the Irish employers' confederation, IBEC, which conducts regular confidential pay surveys, insists there is no evidence that foreign firms have paid above the odds.

Weakening role for collective bargaining in the electronics sector A feature of recent FDI in Ireland is that the new investors are increasingly refusing to recognise trade unions and to become involved in collective bargaining. A survey by the Irish journal Industrial Relations News found that, of 51 foreign companies which established new operations in 1994/95, only 12 had agreed to collective bargaining and 10 of these already had operations in Ireland. Of the 32 companies which were setting up operations for the first time, only two had agreed to collective bargaining. This contrasts strongly with the earlier phases of FDI between 1975 and 1985, when companies frequently agreed to union recognition before they began to recruit employees.

There is a clear division in attitudes according to the origin and industrial sector of these foreign finns. Collective bargaining is very rare in the US-owned computer and electronics sector and quite widespread elsewhere.

It has been suggested that the non-union approach of these US finns is closely linked to the use of performance pay systems, which result in higher earnings than elsewhere. Employers are prepared to pay above the odds in order to avoid collective bargaining. This has been the approach adopted by some prominent non-union firms in the UK, such as IBM.

However, research on non-union companies suggests this is not the case in Ireland. A recent survey of 53 greenfield sites (Gunnigle 1995) concluded that 'non-union firms were generally not pay leaders'. A large majority of the non-union firms had basic pay levels for manual workers which were at the norm. By contrast the firms with collective bargaining were less likely to pay at the norm, some paying more and some less.

Although this research is not conclusive (it only covers manual workers and it does not take account of perfonnance-related pay or bonuses), it certainly does not support the view that FDI has pushed up pay levels in Ireland.

Change in the finance sector A unique factor in Ireland is the International Financial Services Centre in Dublin, set up in 1987 to provide a base for offshore financial services. This has expanded rapidly (notably in 1994) and has attracted a large number of small projects, around 80% from foreign finns. In 1994 the deadline for international marketing of the IFSC was extended for a further five years, with the agreement of the European Commission. Unlike the traditional banking sector in Ireland, the sector is entirely nonunion and therefore, like much of the electronics sector, is not covered by collective bargaining.

There is no specific data available on earnings in this sector but evidence from the Eurostat labour costs survey for 1988 and 1992 suggest there was a dramatic turnaround in the pattern of labour costs and earnings in the finance sector. While the relative position of the finance sector in general seems to have declined in relation to industiy as a whole, labour costs in smaller finance sector enterprises moved well ahead of the average. In 1988, monthly labour costs for the smallest size group (firms with 10 to 49 employees) stood at 88% of the finance sector average. In 1992 the position was more than reversed, with labour costs in these firms rising to 127% of the average.

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Hourly earnings for the finance sector as a whole in 1992 stood at 145% of average industrial earnings, but hourly earnings in firms with 10 to 49 employees were 175% of the average.

Eurostat data for 1992 reveal that this reversal of the normal earnings position of SMEs holds good in several countries, namely Denmark, Luxembourg and the Netherlands. This no doubt reflects the relative position of specialised banking services in these countries. Ireland is a unique case, both because of the scale of the change and because it appears to be directly linked to the opening up of a new specialised financial centre and indirectly to the general liberalisation of financial services under the IMP.

Earnings for this sector are heavily weighted by the presence of small numbers of very highly-paid specialists. According to trade union sources in Ireland, pay levels for clerical staff in these new small enterprises are no higher than the norm. Thus the influx of new high-paying companies does not appear to have had any knock-on effects on pay in the domestic banking sector or elsewhere.

Restraining role of national agreements One possible conclusion from recent experience is that centralised bargaining agreements in Ireland, a major factor in providing the economic stability attractive to foreign investors, also provide an environment where new firms do not need push up pay - and where non-union firms find it easier to operate than in the free-for-all which exists in the UK. The drawback of inflexibility in the Irish bargaining arrangements has been offset by the avoidance of the sort of competitive bargaining pressures which occurred in the UK in the late 1980s.

The negative side of these arrangement, as noted in the Commission's recent economic analysis of Ireland (European Economy 1996), is that 'while aggregate pay developments may have been appropriate for the economy as a whole, there was insufficient flexibility to take account of the competitiveness difficulties of the indigenous manufacturing sector.' This may be a factor in the divisions which are in evidence between parts of the SME sector and the main employers' organisation, IBEC.

The impact of recent FDI in Spain There have been several phases of FDI in Spain since the early 1960s, but the level of investment between 1985 and 1990, when FDI rose fivefold, dwarfs everything else. After 1990 there was a substantial decline, although this appears to have been reversed in 1994. The decline in the early 1990s was primarily in the service sector: industrial investment was less volatile. The foreign manufacturing presence in Spain is concentrated in leading sectors, notably the vehicle and components industry, chemicals, computers and electrical engineering. A breakdown for the 1988-92 period (Molerò in Economistas (1995)) shows a high level of investment in sectors such as chemicals, food and drink, and paper and publishing. This reflects considerable take-over activity as well as new start-ups and reinvestment.

Data on the relative pay levels of Spanish and foreign firms are provided by the annual review of collective bargaining in larger firms (over 200 employees) published by the Ministerio de Economia y Hacienda. One third of private sector sample, covering 482,000 employees in 517 companies in 1994, is in the foreign sector (this compares to around a quarter foreign-owned in 1986).

This high proportion of foreign companies reflects the fact that company bargaining covers only a minority of employees in Spain - one million employees in December 1993, compared to approximately 6.5 million covered by other types of agreement (mainly provincial-industrial). The

74

figures will thus overstate the relative pay position of Spanish employers as a whole, given that most foreign firms have company agreements and that these agreements usually provide pay levels 20-30% above the industry rates.

Table 10.3 Pay in Spanish-owned and foreign-owned firms in the private sector

Average pay as % of all private sector* All private sector Spanish Foreign Pay differential (Abanico salarial) Average of Category 1 : Calegory 10 All private sector Spanish Foreign Productivity payments as % of total All private sector Spanish Foreign

1986

100 na

93.4

4.0 na

3.4

5.3 na

8.7

1990

100 100.1 99.8

4.1 4.3 3.4

6.2 5.3 7.7

1994

100 99.3

101.7

4.9 5.3 3.6

6.0 4.8 8.6

Source: Ministerio dc Economia y Hacienda 'La Negociación Colectiva en las Grandes Empresas'. *Figores for 1986 arc for men only.

Table 10.3 provides major points of comparison between private sector firms for the period 1986-94. The key findings are as follows:

1. In tenns of average pay foreign enterprises caught up with their Spanish counterparts between 1986 and 1990 and overtook them between 1990 and 1994.

2. There was a dramatic widening of pay differentials in Spanish firms over the period as a whole.

3. There is little sign of innovation in pay systems in Spanish finns.

Relative pay levels Analysis of the sample of companies suggests that the change in the relative pay of foreign firms has not been significantly affected by acquisitions. The 1986 comparison is for male earnings only - and women's pay in Spanish firms was lower than in foreign companies. This means that the catch-up effect is slightly exaggerated. One other important factor is the impact of the recession of 1993/94. Overall employment in foreign firms fell sharply in both years while employment in the Spanish private sector was relatively stable. Average hours worked in foreign firms rose during the recession, although they still lagged slightly behind their Spanish counterparts.

Widening of differentials The figures are derived by comparing the average pay of employees in Category 1 in the Social Security classification - defined as 'engineers and university graduates' - with Category 10, defined as 'labourers'. A number of factors have contributed to the change:

75

1. The rapid expansion of the economy following entry to the Community confronted Spanish employers with a severe shortage of good quality recruits at a senior level, and pay levels rose correspondingly. High foreign investment kept up pressure on the relatively inadequate supply of trained managers. At the same time, awareness of the implications of the Single Market made Spanish firms more inclined to push up pay to recruit and retain staff with relevant skills and abilities. These processes were largely confined to the private sector: equivalent differentials in the public sector did not alter between 1986 and 1994.

2. Specific sectoral pressures further fuelled the demand for specialists. In finance, where earnings as a whole are relatively high, at around 110% of the average for non-manual workers, the opening up of a relatively sheltered sector was accompanied by the need to address European requirements for disclosure of company results and more stringent company law.

3. In general, the statistics suggest that the opening up of differentials took place in larger firms. Differentials in export-oriented firms also widened considerably between 1990 and 1994. The opening up of differentials appears to have continued despite the severe recession of 1993, although subsequently there have been growing signs of companies making a single pay award for the entire workforce as opposed to the previously common practice of differentiating between groups of staff

4. Differentials in foreign firms remained virtually stable - to be expected given the differences in both sectoral composition and the make-up of the workforce.

Little growth in productivity pay The data on the proportion of pay linked to productivity reveal no change in the relative position of Spanish and foreign firms, suggesting little if any effect on personnel practices from the influx of FDI.

Other data on the extent of variable pay in Spain reinforce this view. Data from Eurostat for 1992 show bonuses and premiums averaged 20% of earnings in industry. There is a remarkable sectoral consistency at this level, apart from the finance sector, where the proportion rises to around a third.

These figures reflect the pattern of 13th and 14th month payments in Spain which are included in the Eurostat definition of bonuses. Profit-sharing is also an established part of the pay packet in many Spanish companies, in many cases used to describe a 15th month payment. The low level of real profit-sharing arrangements in Spain is reflected in the Cranfield surveys: under 10% of firms report schemes for non-managerial employees. While there are some genuine profit-sharing and productivity schemes in larger Spanish finns, the overall make-up of pay is essentially unchanged. The additional elements, which can more than double basic pay, are largely guaranteed.

Overview on the impact of FDI in the context of the IMP We set out to examine the effects of the new wave of FDI undertaken both in anticipation of and consequent on the moves to a Single Market. To summarise:

1. In the UK the pay gap between domestic and foreign firms widened slightly but the increase in the proportion ofEuropean compared to US investment during the period meant that the impact on pay levels was probably less than in some previous surges in FDI. As Japanese investment has matured so pay levels have increased, but the firms concerned on average pay closer to European than US levels. In general, recent FDI has had no special impact on pay and bargaining practices.

76

Innovation has, if anything, come more from established US firms. However, there has been a major impact on pay and bargaining in the UK motor industry from the establishment of Japanese greenfield sites. This in turn has had some impact on the car industry in other Member States. The main effect has been to accelerate a process of change which was already taking place.

2. In Ireland there is no sign that the foreign sector exerts pay leadership, despite its great weight in the economy, though there have been signs of discontent with the impact of national agreements in the domestic SME sector. The new wave of investment in the electronics industry (primarily from the US) is weakening the influence of collective bargaining, but thus far this appears to be limited to a single sector. There has been a notable change in pay levels in part of the finance sector following the establishment of Ireland's offshore banking centre in 1987. However, this has had no discernible general impact on the domestic finance sector because it involves relatively small numbers of personnel in specialised areas.

3. The case of Spain is more complex because of the difficulty in separating out the effects of different aspects of European integration. Entry to the Community clearly had a decisive effect which has continued to a large extent to dominate the political and economic agenda, including pay and bargaining. Equally it would be wrong to ascribe all changes entirely to the 'Europeanisation' of the Spanish economy. In the case of widening pay differentials, for example, there were sustained domestic and regional inflationary pressures which fuelled higher pay rises for senior staff in the period up to 1992. Establishing the exact weight of growing FDI in the dynamics of change in Spain is clearly not possible. What can be said with some confidence is that the increased presence of foreign firms made a real difference in the context of the IMP. Earnings in foreign firms rose relative to Spanish companies and there were strong upward pressures on technical and managerial pay. Specific aspects of the IMP - namely liberalisation in the banking and telecommunications sectors - have played an important role, culminating in the first part of 1996 with a major reform of pay and collective bargaining in these sectors. However the influx of foreign firms does not appear to have had any noticeable effect on domestic pay and bargaining systems.

4. Overall, the three countries examined each show some (different) signs of the anticipated effects, but for the most part these appear to have had only a limited impact on the general climate of pay and bargaining. Given that the countries concerned were selected because of their high levels FDI during the period, the conclusion must be that the general EU-wide impact of the IMP in this respect was very small.

11. The impact of the IMP on Small and Medium Enterprises

The main hypothesis as regards the SME sector is that the effects of the ΓΜΡ would tend to lead to divergences between smaller companies and large finns, particularly multinationals. Competitive pay pressures from large firms would tend to be exacerbated while at the same time SMEs would be under increasing pressure to hold down costs, especially fixed costs.

This section of the report examines the SME sector in different Member States and the various competitive pressures identified by representative organisations. Because of the paucity of information the research is based heavily on interviews with various national organisations representing SMEs (for details see Appendix).

77

The main conclusion is that pay and bargaining pressures are relatively minor issues compared with other concerns. Any pay and bargaining pressures have largely been offset by other factors. The existing systems have also proved sufficiently flexible to cope.

Defining the sector The SME sector is generally acknowledged to be a crucial engine for generating employment and growth. But there is a need for some care in the statistical analysis of SMEs and a sense of proportion is required in the use of analytical categories. It is true that the average European firm employs some six people, and that 99% of firms in Europe are SMEs. But such statistics are misleading. The bulk of enterprises in Europe, some 93% of total businesses, are 'micro firms' with an average employment of two people. Although there is a vast number of these firms they still only account for 31 % of the private sector workforce in Europe. The large firms, whose average size is some 2,000, account for one per cent of businesses in Europe, but almost 30% of employment. In between are the six percent of businesses, the small and medium size firms that employ some 40% of the workforce.

SMEs are also unevenly distributed in different sectors. Large firms dominate key sectors such as Banking, Transport and Communication, Motor Vehicles, Chemicals, Electrical Engineering, as well as Extraction and Research and Development. When looking at measures of productivity, from value added estimates to turnover per enterprise, the statistics show that SMEs are significantly less productive than large firms and generally make a much smaller direct contribution to export industries.

These characteristics need to be set against the somewhat idealised views of a dynamic and responsive sector which have emerged in recent years (Acs and Audretsch 1991, 1993; Sengenberger et al 1990). That this is tnie of some sectors in some countries - notably Italy -is undoubtedly true. But the Italian industrial districts with their concentrations of SMEs, in industries such as textiles, clothing and ceramics, are far from typical of the EU as a whole. Although Italy also provides some notable examples of flexibility and consensual industrial relations (see below), a much harsher regime may be more typical of SMEs in general (Rainnie 1988).

The 'size-wage premium' There is very little information on the relative levels of pay and benefits in SMEs and larger firms. Research in North America (Brown et al 1990; Morisette 1993) identifies a 'size-wage premium' of more than 30%. Research in the United States shows that workers in large companies earn over 30% more in wages than their counterparts in small finns. Estimates for Europe by the Employment Observatory identify a similar pattern for all Member States except France.

Data on hourly earnings by size of establishment are available from the Eurostat labour costs survey for 1992. This does give an idea of the relative position, recognising that some of the small establishments in the survey are subsidiaries of large companies. Unfortunately the data are not comparable with earlier years because of changes in definitions. Nor are there any data for Italy, where the figures would be of especial interest because of the special nature of the Italian SME sector. However, the figures do show that there are important difference between countries and sectors. These differences mainly reflect national industrial structures, rather than the effects of different bargaining systems (see Table 11.1).

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Table 11.1 The 'size-wage' premium in manufacturing Hourly earnings in establishments with 10-49 employees as % of earnings in establishments with 200+ employees

Belgium Denmark France Germany Greece Ireland Netherlands Portugal Spain UK

All industries 77 93 95 78 69 66 78 65 61 78

Chemicals 70 92 89 78 86 78 87 66 70 83

...Clothing na 97 96 82 83 84 95 83 60 92

Motor Vehicles 75 97

100 69 90 na 76 55 69 62

Textiles 89 89

105 87 80 72 79 80 75 99

Source: Eurostat. Data for 1992.

With the odd exception, the size-wage premium seems to hold good throughout manufacturing, with the different levels of capital investment and labour productivity being the obvious explanations. Smaller firms also traditionally tend to employ a smaller proportion of skilled people, although this may be changing. There is a different picture in the service sector, above all in finance, where the Eurostat data show that the 'normal' relationship can be reversed, outside the major financial centres. This reflects the specialised nature of small finance companies and the high earnings of some employees.

SMEs in context There are two overriding factors affecting the position of SMEs on pay and bargaining. First, there is an 'institutional' context - the relationship to the large firm sector and, in the case of southern European Member States, the public sector. Secondly, there is the economic context and above all the different response to the business cycle in SMEs and larger firms, which tend - in general - to be more export-oriented. The European Observatory for SMEs comments in its 1995 report that:

'It appears that each stage of the business cycle has a different impact on SMEs and LSEs (Large-Scale Enterprises). The world-wide economic stagnation hit the export oriented LSE-sector first, while SMEs were affected after a time lag. During the period of recovery the opposite process occurs. Because the recovery is strongly export led, LSEs have benefited first. From 1994 onwards, however, the increased industrial and consumer confidence has had a stimulating impact on economic growth. Domestic demand, however, is increasing only slightly because of moderate growth in real incomes.'

However the response in small firms to the decline of domestic demand does not simply follow the large firm sector. In fact, contrary to the prevailing view of SMEs as more flexible (e.g. Giaoutzi et al 1989), the Observatory suggests that SMEs are 'less flexible in adjusting their stock of labour to changing demand' and maintain their competitiveness by reducing their profits to a greater extent than the large firm sector. Furthermore, the notion of a deregulated sector able to secure factor adjustments in response to market circumstances is at variance with the experience of many SMEs. As for the impact of skill shortages, the Observatory suggests that, while these might not be the critical factor limiting production in SMEs, the problem is relatively more significant for SMEs than for larger firms in many European countries.

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The concerns of SMEs The findings outlined below are based on the survey of organisations listed in the Appendix to this Section. We look first at the different competitive pressures affecting pay policies and bargaining in SMEs. This is followed by a review of the possible impact of the IMP.

At a general level, large firms and SMEs constitute the leading and lagging sectors within the labour market in many of the Member States in respect of pay policy. These differences feed through into a series of pay and labour market concerns in the SME sector, focused particularly on the need for flexibility of pay and working time, and are reflected in the demand for special recognition within the collective bargaining process.

Netherlands In the Netherlands, for instance, the SMEs are bound by national agreements and within this framework there are significant concerns with differences in 'flexible salaries', which are much more evident in the larger firms. The scope for performance or profit-related pay is greater in the LSEs and, related to this, there are growing earnings differentials between employees in large and small firms.

Sweden This view is echoed in Sweden where the large export-oriented firms, such as Volvo and Ericsson, have recently introduced bonus schemes and are increasingly seen as pay leaders, leading to concern in some quarters about the consequences of complete decentralisation.

Belgium In Belgium, the view is that there has been a reduction in large-firm pressures on basic wage levels because of corporate restructuring and the narrower dispersion of earnings that this brings about. The continued existence of indexation also places limits on basic wage differentials between large and small finns.

On the other hand, the SMEs feel pay pressures arising from bonus pay and overtime payments. The major firms such as Shell, BASF, Opel, Ford and Philips pay 13th-month and, in some cases, 14th-month bonuses. This presents difficulties, as the labour-intensive SMEs try to live with the bonus systems on offer in highly capital-intensive industries such as chemicals and motor vehicles. This is a long-standing problem, which predates the Single Market by some years. A new factor is the regulation on overtime, giving workers 50% of the hourly rate, plus equivalent time-off in lieu. The time-off provision is irksome to Belgian SMEs and the response in many quarters has been to pay additional cash sums instead.

Austria In Austria, unlike Belgium, SMEs are covered by separate collective agreements. The main concerns in Austria are with the recruitment of particular groups of employees, such as apprentices, and with the rates of overtime pay, which are seen as burdensome.

Germany Germany also has separate collective agreements for the 'craft' industries which act, to some extent, as a buffer against wage pressures from the large-firm sector. Moreover, the perception in Germany is that the pay pressures from the large firms have eased over the last ten years because of rationalisation and the tendency to move new investment outside the country. There are specific regional problems reported in key industrial areas - Hanover, North-Rhine Westphalia and

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Stuttgart - where there is evidence of larger finns asserting downward pressures on wages through the supply chains. SME representatives comment that any statistical evidence of wage differences is difficult to interpret, because differences in job content and workforce composition distort comparisons between large and small firms.

The use of low-cost foreign labour in the construction industry is of special concern to German SMEs, and one which they perceive to be a consequence of the internal market. There is a widespread view that foreign workers are claiming self-employed status, thus evading non-wage labour costs. In 1991 and 1992 there was a 21% increase in self-employment in Gennany (although the numbers are still low in comparison to other countries). Not surprisingly in these circumstances, German SMEs, unlike other SME associations, are in favour of the minimum wage as a protection from this lower-wage competition. However, in common with SMEs in other countries, there is continuing concern about the high level of non-wage labour costs.

In tenns of new developments there have been recent moves to introduce flexitime agreements, as part of a general drive to achieve a more flexible approach to working hours. Recently there has also been increasing interest in achieving greater earnings flexibility, but this is opposed by the unions and has yet to get off the ground despite political encouragement.

Ireland In Ireland the concerns of SMEs are above all about corporate tax policy and how it impacts on small companies. This is not a new issue, but it shows signs of spilling over into the collective bargaining arena as the tension between small and large firms becomes more serious. The Irish Small and Medium Enterprises Association recently split from IBEC, the main Irish employers' association, which negotiates the national wage agreements. In the view of many SMEs the national wage agreements have failed to take their interests into account and are excessively influenced by the banks and the semi-state industries such as Telecom Eireann and the Electricity Supply Board. In the two years since it was formed ISME has campaigned for special recognition in the negotiation of national agreements. However, it has advised its members to comply with the agreed rises.

Italy There was evidence of strong differences of opinion between small and large firms over company bargaining during the reforms of 1992-93. SMEs clearly felt they would be under pressure to concede higher pay once the reforms went through. However, Italy differs from most of the other countries discussed here in that large-firm pay pressures do not appear significant, at least in terms of short-term impacts. The pressure is more on prices and output. If there have been labour market pressures they have arisen because of local competition for skilled labour among SMEs, rather than from comparisons with pay levels in the larger firms.

It is also the case that the Italian system offers a considerable amount of flexibility, with a two-tier bargaining system for some sectors and, in addition, a great deal of de facto flexibility at local level. A recent series of articles in the Italian business paper, // Sole, identified a number of industrial districts employing large numbers of people where local employers' groups had negotiated flexibility agreements with trade unions. Examples included the tile manufacturing industry in the area round Modena and the textile industry in Biella, both districts employing over 20,000 people in a large number of small enterprises. The agreements mainly concern flexible hours (including Sunday working and night-shift working for women). However, it is noticeable from these examples that there is less flexibility about pay. Company pay increases, which are meant to be tied

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to results under the terms of the July 1993 collective bargaining reforms, have so far almost always been linked to attendance rather than actual perfonnance (II Sole 1996).

Portugal Finally, in the case of Portugal, although there are sectors with pay levels well above the average, such as banking and telecommunications, these are not sufficiently large to generate the type of pressures that characterise Northern Europe. There are examples of companies which exert pay pressures on their competitors, but these are in oligopolistic sectors such as the cement industry.

Conclusions from the survey 1. The evidence suggests that, in the northern EU states, competitive pay pressures are transmitted to SMEs via the large firm sector. However the relationship between the two sectors is subject both to cyclical and structural change in the economy. SME organisations in several Member States report a long-term easing of wage pressures because of restructuring in the large firm sector.

2. In some of the southern states (although not Spain) and in Ireland, direct and indirect pay pressures are more likely to emanate directly or indirectly from the public sector - semi-state industries in Ireland, public administration and utilities in Italy and Greece.

3. Only in the case of Germany does there appear to be a distinctive 'Single Market effect' on SMEs - and this is confined to the construction industry. (

4. It appears that the growth of variable pay in large firms is a significant factor. Bonuses, profit-sharing, perfonnance pay schemes (and overtime pay) arose as specific issues for SMEs which presented the remuneration package in small firms in a less than favourable light.

5. Undeclared overtime payments are in some cases being used to redress the balance. This may be particularly prevalent in Belgium, Italy and Portugal.

6. Pay pressures from larger companies appear to be significantly reduced where separate collective agreements for SMEs operate and where there is additional regional or local flexibility built into wage bargaining, as in the case of Italy.

7. There are signs that the pressure has slackened in recent years as a result of rationalisation in large companies and, in the case of Germany, relocation. As a consequence, there may have been some convergence between large firms and SMEs - in terms of basic wage differentials, although not overall earnings. O J

8. The growth of out-sourcing does not appear to have led directly to downward pressure on pay in Italy. However, there is some evidence of this in Gennany.

9. There have been no significant attempts to extend exemptions to SMEs or to break with existing collective bargaining agreements. This suggests that although SMEs express dissatisfaction with current arrangements, they also see the benefits of retaining existing frameworks.

10. In the Irish case it seems that frictions between the large companies and the SMEs has intensified in recent years, but this is focused on the issue of representation within national agreements. This finds an echo at European level where there is a lobby for separate representation in the Social Dialogue.

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The impact of the IMP There is a general risk that by specifying the possible impacts of the IMP too closely one can define the issues out of existence. This is particularly true for SMEs because our analysis has had to be largely anecdotal. There is insufficient evidence to make hard judgements. It is also the case that employers' organisations are likely to understate any possible role for the IMP on the grounds that pay and bargaining are national issues and 'not a European concern'.

That said, it does seem clear that many of the economic and institutional forces acting on SMEs either originated before the development of the Single Market, or are part of wider international market forces.

In tenns of the outcomes of recent market integration, there is no evidence of any significant employment dynamic affecting the SME sector. If one is looking for 'policy on', 'policy off effects, then the findings of this survey show that the competitive pressures on SMEs can only be linked to the IMP to a very limited degree.

If there is a discernible general effect it may be that basic pay levels appear to have converged because of restructuring in the large firm sector. When this takes the form of relocation to other European countries it reduces domestic wage pressure in the 'home' country. Conversely, there will be at least local recruitment difficulties and pay pressures for SMEs in the 'host' country when new firms arrive.

In conclusion, it should be noted that tensions between large firms and SMEs that relate to European integration usually find their expression in areas other than pay and bargaining policies. In Ireland and Sweden, the impact of European integration has been to fuel resentment over tax issues, which have become the focus of SME concerns. In Belgium there are difficulties with parental leave entitlements. In addition there is concern about the impact of the working time Directive on the Belgian constmction industry, in which SMEs are strongly represented.

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Appendix: Organisations participating in SME survey

The survey consisted of interviews with officials of national organisations representing SMEs, either the chief executive or, in the larger bodies, specialists such as economists or tax experts. The organisations taking part:

The European Observatory for SMEs

Union Européene de l'Artisanat et des Petites et Moyennes Entreprises (UAPME)

Zentralverband des Deutschen Handwerks and Bundesvereinigung der Fachverbande des

Deutschen Handwerks (Germany)

Wirtshaftskammer Österreich (Austria)

Comité National Belge des Petites et Moyennes Entreprises (Belgium)

Företagarnas Riksorganisation (Sweden)

Assemblée Permanente des Chambres de Métiers (France)

Confederazione Generale Italiana dell' Artigianato (Italy)

Associação Industrial Portuguesa (Portugal)

Economisch Instituut Voor Het Midden- en Kleinbedrijf (Netherlands)

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Appendix I: Location decisions and the Single Market

Appendix I

Location decisions and the Single Market

Mercedes-Benz and Hoover Europe

These studies look at two contrasting cases of the impact of location decisions on pay and collective bargaining. In the case of Mercedes-Benz, we look at the company's decision to build a new generation of car engines in Germany, despite the relatively high labour costs involved. In the case of Hoover, we look at the company's decision to transfer production from France to the UK, involving a significant reduction in labour costs.

At Mercedes-Benz a series of negotiations between management and employee representatives took place against a background of a downturn in the German economy which hit the Baden-Württemberg region especially hard. At the same time the company was actively looking at other sites for its major new investments in engine manufacture. The study examines the outcome of the different sets of negotiations, which led to these investments being made in Germany rather than elsewhere, and how the climate of bargaining has changed. The case illustrates the degree to which the German system has been adapting to new circumstances and the way in which both sides of industry seem to be achieving some of their distinctive objectives.

In the very different case of Hoover, a company facing severe financial pressures decided to close its plant in France and transfer production to the UK, using the occasion to introduce significant changes in pay and conditions, notably the employment of new recruits on two-year temporary contracts. The study looks at the special factors involved in the Hoover case and at the outcome in terms of industrial relations and employment. The case illustrates the extreme circumstances which can lead to competitive undercutting of terms and conditions: a form of 'social dumping'.

Both studies illustrate collective bargaining pressures which have existed for some time in Europe, but which have been intensified by the Single Market.

In the Hoover case, the timing of the decision in early 1993, and the contrasting political agendas of the British and French governments, gave the affair unique prominence. Yet in fact the Single Market had very little relevance: the pressure to rationalise predated the IMP and was exacerbated by a disastrous promotion campaign in the UK. Labour cost differences between France and the UK played a minor part in the relocation decision.

The Mercedes-Benz case typifies a much more widespread phenomenon, characteristic of recent company-level negotiations in Germany. The possibility of relocation has meant that employees in high-wage, high-technology industry have been more ready to accept changes in working practices and the loss of certain benefits. The existence of the Single Market has probably made relocation a more convincing threat and thus contributed to a change in attitudes.

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Appendix I: Location decisions and the Siimlc Market

MERCEDES-BENZ

'Das Gegengeschäft ist Standort Deutschland'1

In June 1993, Mercedes-Benz reached a major enabling agreement with its works council and local officials of the IG Metall union in Stuttgart on pay and working practices for a new engine plant. The company had been actively investigating alternative, lower-cost locations -both within and outside the EU - and the negotiations which led to the decision to invest in Germany were seen as a test of the adaptability of the German system in the face of competitive pressures. Subsequent rounds of negotiations have led to further decisions to invest in new manufacturing facilities at home, most recently in March 1996 when a new flexibility agreement was announced at the company's main site.

The series of negotiations at M-B illustrate the interplay between location decisions, labour costs and manufacturing flexibility which has characterised German industry since the onset of the current phase of economic difficulties.

However, this is not simply a question of management extracting concessions from a workforce desperate not to lose jobs. Trade unions and workplace representatives have been able to mobilise their own constituency and broader public opinion to retain sites within Germany. The terms of the new arrangements at M-B (and elsewhere in the German motor industry) reflect a compromise between the employer's demands for cost reductions and flexibility and a trade union agenda of bargaining reform, Tarifreform 2000. Works councils continue to have a considerable say under new arrangements. Moreover, concessions made in principle - for example on pay systems - have not always been implemented as management may have hoped, or within the anticipated timescale.

Background Engines for Mercedes-Benz cars are manufactured at various plants in the Stuttgart area, with a concentration of plants in the valley of the Neckar in Bad Canstatt, Untertürkheim and Mettingen. In recent years, three new engine types have been planned/developed:

1. V6/V8 engines - to be assembled at a brand new plant (a so-called 'factory of the future') at Bad Canstatt, supplying engines for M-B's assembly plant at Sindelfingen (Stuttgart) and for the new all-terrain vehicle assembly plant in the United States.

2. 4/5 in-line engines - to be assembled at a new plant to be built at the existing Untertürkheim site.

3. Small engines for the new 'A' series - won by the engine division against outside competition: to be built in a third new plant at Untertürkheim for delivery to the company's assembly plant at Rastatt, near the French border.

The company's search for alternative sites for the production of the V6/V8 engine, and for assembly of the 'A' series, marked a new phase of negotiation over concessions on pay and working conditions. In particular, the decision to site the 'A' class assembly in Germany was made dependent on pay concessions which embraced the entire M-B workforce (see below). In September 1993 - before the 'A' class agreement - an accord 'to safeguard competitiveness' had

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been agreed with the works council which provided for cuts in annual bonuses; limits on the extent to which increases at regional level would be implemented at company level; and other cuts or removals of company benefits (including a notorious grant to buy confirmation clothes for employees' children).2

Bad Canstatt (V6/V8) Plans to build the Bad Canstatt plant were announced in 1993, following a competition between various sites, including Mexico, the USA the UK, Alsace-Lorraine, Portugal, Hungary and South Korea. According to some reports, Stuttgart had a cost disadvantage of some 35% against other sites, about half of which was attributed to work organisation and wage levels. However, the decision went for Stuttgart - primarily on logistical grounds.

Interest was aroused by the innovative works agreement (Betriebsvereinbarung) concluded with the works council and local officials of IG Metall on flexible working practices, which was seen as a key to securing the plant for Stuttgart. The agreement departed from the regional agreement for the metalworking industry - hence the particular involvement of IG Metall. However, this would also be expected for a project of this size and strategic importance.

The 1993 V6/V8 agreement The four main features of the agreement', which rests on a system of teamworking,4 were as follows:

1. Working time Possible variation in shift length from 7 to 9 hours (agreed weekly hours are 35 per week from 1 October 1995), depending on demand and following notification of the works council. Individual contractual hours to be achieved over a one-year reference period (at the time this was a departure from the regional collective agreement, but no longer). Up to five days can be taken as time-off to achieve annual total (a dispensation from regional agreement). Possibility of three- shift or two-shift working with one group on permanent nights, subject to works council agreement. Teams to organise individual workers' hours on the basis of the production schedule and in consultation with supervisor.

Under the 1990 working time agreement for the industry, up to 18% of a plant's workforce may work for up to 40 hours by individual agreement: by 1993, this quota was used up for the plant, primarily by white-collar/specialist/technical employees. IG Metall agreed to a dispensation for M-B under which the new plant will be treated as a separate unit to allow this 18% to be applied separately there.

2. Grading and pay A switch from points-rated to job-ranking evaluation to save administrative costs and achieve greater flexibility of job definition etc.

Pay to be based on a premium-pay system (allowed for under regional agreement), designed to yield a variation in pay of between 100-108% of previous pay levels. The extra 8% included three incentive elements: 3% linked to individual performance, 4% tied to machine-use time, 1% for effectiveness of teamworking. The target payment was at least 5%.

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This agreement met the company's aim of moving away from payment by results (PBR) and time rates, which require either individual or collective merit-based payments. Also under the PBR system, there was no incentive to make productivity improvements, work overtime, or fix machinery once scope for achieving standard earnings had been exhausted.

The plan was to enable to company to reap the benefits of increased productivity once the new plant was through its pilot stages in 1996, without having to agree new piece rates. However, the issues were not resolved by the time the agreement was signed, and still were not finally resolved three years later.

3. Recovery breaks The agreed provisions on recovery breaks5 were softened. Employees working in teams and only engaged for a part of their working hours on assembly lines forfeited their automatic right to five minutes an hour recovery time. In future natural breaks in other activities would be offset against their entitlement. In return the company agreed to union requests for 'work humanisation' to design more variable and broader jobs, which may have a positive effect on grading, and hence on individual earnings.

4. Output targets Output targets to be settled mutually between supervisor and workgroup within an overall set of perfonnance targets. This was seen by the union as a step towards its objective of mutual agreement of perfonnance targets. The size of teams is to be assessed either annually or following technical and organisational changes. Standard perfonnance will not initially be agreed with works council, and hence this was a reduction in fonnal co-determination, but with some increase in authority of work teams. In the event of disagreements, an joint expert commission would be established to offer solutions, drawing on a range of plant data, intended to introduce an element of objectivity into resolving these differences.

Subsequent developments By March 1996, the new plant was complete, equipment was being run-in, and the first engines were scheduled for delivery to the assembly plants at Sindelfingen and Vance (Alabama) from September 1996.

However, despite the agreement reached in 1993, there were still unresolved issues - crucially on the make-up of pay. Thus the plant was put into the initial production phase with pay guarantees for employees transferred from elsewhere in the company. Negotiations were still in progress in Spring 1996, centred on guaranteed payments and whether individual supplements were in addition to basic pay or a component of it.

4/5 cylinder plant Progress on implementing the V6/V8 programme was regarded as a precondition for the decision on the smaller engine, announced in 1996 - with the conditions for investment also affecting the entire Untertürkheim site.

A provisional agreement was announced in March 1996, although a number of important issues were still unresolved at the beginning of April. The final fonn of the agreement also followed a

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Appendix 1: Location decisions and the Single Market

series of unofficial protest strikes at Mettingen, which involved some 2,000 employees and caused the loss of 1,000 vehicles.

The main points of the March 1996 agreement were:

1. A commitment by the company to maintain the head-count at the Untertürkheim site at 17,500 until the end of 2000: no compulsory redundancies.

2. In return, agreement by the works council to changes in working time arrangements - with employee representatives making a number of concessions on previous practice (although not all the company's demands were met).

3. Agreement on three-shift working where required by the production schedule; plus an additional '16th' shift in the foundry from 22.00 on Sunday to 06.00 on Monday. In return, the company dropped its request for regularly rostered Saturday 6 working. Shift length to vary between VA and 9 hours, with the reference period for individuals extended from 12 to 24 months.

4. Recovery break provisions agreed for the new Bad Canstatt plan were adopted for defined new products, such as the 4/5 cylinder and 'A' class engines, with abandonment of the breaks dependent on changes in work organisation to create natural respite.

The 'A' class Unlike the other series, the Untertürkheim plant had to compete against other potential engine manufacturers to win the investment decision. An M-B engine was not seen as an absolute necessity for this smaller range.

The car will be assembled at Rastatt, following a competition between potential sites in the UK, France and the Czech Republic. Although it was reported that the company had 'favoured other lower-cost sites ...The IG Metall engineering union had threatened reprisals if Rastatt were not chosen'.8 According to the head of the M-B central works council, the board made the Rastatt investment conditional on concessions to bridge the DM 200 million cost gap between the German site and the Czech Republic, including: the abandonment of paid recovery breaks, removal of the supplement for working a second day-shift, and the use of up to three days' holiday for training measures.

Employee representatives made a counter-proposal to accept only a partial implementation of the regionally-agreed pay increases in return for a commitment by the firm not to carry out economic dismissals.9

The final deal, negotiated in December 1993, provided for a one per cent pay offset, against company-level pay (around 40-45% above the regional minimum rates). However, it was agreed that this offset should apply to all M-B employees, with a corresponding moratorium on economic dismissals until 30 June 1995. At Rastatt itself, which was by all accounts an underutilised facility, agreement was reached on one-shift Saturday working. The company also made a commitment to take on all trainees, if need be on part-time contracts. However, substantial head-count reductions continued, mostly through voluntary severance and, in particular, early retirement.

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The wider context The negotiations at M-B need to be seen in the wider context of developments in the Baden-Württemberg region, once seen as the epitome of German economic success - engineering prowess, high skills, regional co-ordination - and more recently regarded as the archetype of the country's problems: high wages, high absolute (if not percentage) non-wage labour costs, declining relative productivity, overvalued cunency.

Baden-Württemberg is dominated by large international engineering finns, mostly with local headquarters, with suppliers which are often world producers in their own right. In addition, there is a highly developed Mittelstand of technically advanced companies, many of them also leaders in their field, often with market dominance. In the past these companies were able to charge premium prices for technically-advanced products and collective bargaining often was essentially a process of redistribution of these technological rents, either as pay or in working conditions. The regional agreement for metalworking set the national pattern for the industry and indirectly exercised a major influence on bargaining trends throughout the German economy. Regional costs were felt to be especially high within Germany, with one manufacturer citing a 30% cost disadvantage for certain operations compared with North Rhine Westphalia. Large firms pay up to 45% on top of industry minima, although this has been eroded in recent years by action at company-level to cut supplementary pay/bonuses.

The collapse of the long 1980s boom world-wide, the end of the post-unification boom in Germany in 1992/93, and the weakening of Germany's competitive position vis-à-vis important rivals following the breakdown of the ERM in 1992 - with consequence appreciation of the DM - led to a serious market and competitive crisis in 1993. Between 1991 and 1994 the region faced an almost unprecedented loss of jobs: industrial employment fell by 16%, more than in any other west Gennan region.

The corporate response Company responses to the crisis have ranged from relocation (both actual and threatened) to the reduction of company-level supplementary pay and benefits, removal of year-end bonuses and -above all- changes in working time. There has been a rapid shift in the focus of the management of industrial relations to the workplace level. Change has often been explicitly presented as Standortsichening (literally 'securing of location'). Prominent foreign investment decisions have had an impact, such as the establishment of plants in the UK and Spain by Robert Bosch and the decision by Mercedes-Benz to build its 'Swatch' car in France10'

However, there has been a degree of consensus in the process of change. This is perhaps exemplified by M-B, where there was a clear continuing commitment to maintain investment -especially in high-value products - at traditional core sites. As well as reflecting the fact that Stuttgart is the site of the corporate HQ (for the present), the need for security of supply with single-sourcing was very important, and the developed relations within the region played a major role in the decision. The M-B works council believes itself to have found a consensus with management on the issue of globalisation, accepting that the company needed to manufacture abroad for market access etc. However, there are concerns about the relocation of development activities (above all to the Czech Republic) purely on cost grounds.

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Managers at M-B and other firms point to a new basis for negotiations with trade unions. There is no longer a certainty that investment will be at home, and there is much more benchmarking with other sites, in the EU and elsewhere. Two elements were emphasised by managers:

1) logistical rearrangement of plants including incorporation of suppliers into the final assembler's premises;

2) restriction of capacity ('building the plant too small'), creating the need and pressure to push for more flexible working hours to save on capital costs.

However, as far as pay is concerned, the most striking thing is how little change there is. The amount 'at risk' in new incentive arrangements is small. Moreover, negotiations have been protracted in some plants and new facilities have been brought on stream based on pay guarantees from employees' previous jobs. This is characteristic of situations where firms have made job commitments to secure change and are engaged in redeployment of existing staff.

Pay proposals in hand in some companies are very complex, involving considerable administrative effort. One senior personnel specialist with responsibility for negotiating and introducing such a scheme said that he would favour a gainsharing model in future rather than a productivity/production based scheme.

On grading/appraisal, there is a trend to tie additional company-level rewards to more subjective assessments, causing considerable trade union concern. Up to now these have mostly been agreed with works councils in workplace agreements: however, IG Metall is keen to bring these areas into broader collective regulation.

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HOOVER EUROPE

'In deciding to shift production, many factors had been considered. The cost of labour, although one of these, was not the most important'. (Company statement)

In January 1993, Hoover Europe - part of the US-owned Maytag Corporation - announced the closure of its vacuum cleaner factory at Longvic near Dijon with the loss of 600 jobs. Production was to be switched to one of the company's two UK sites - at Cambuslang, near Glasgow. A precondition for the transfer of production from France to the UK was an agreement with the AEEU engineering union to substantial changes in terms and conditions of employment for existing employees. An extra 400 jobs were promised, but all new employees would be recruited on two-year fixed-term contracts at lower rates of pay.

The 'Hoover Affair' immediately became a major political issue on both sides of the Channel. French government ministers variously described the decision as 'social dumping', 'savage liberalism' and 'a kind of banditry'. There were calls for EC intervention on the grounds of alleged misuse of regional aid funds and pension scheme surpluses.

In the UK, Prime Minister John Major stated: 'I strongly suspect the fact that we are not going to implement a social charter, which in practice puts extra costs on jobs and employment, is one of the reasons there will be an extra 450 jobs in Scotland'.

Decisions to shift production are always sensitive, especially so when different countries are involved. But Hoover attracted particular attention for a number of coincidental reasons. The French government was facing an imminent election at a time of soaring unemployment. In the UK, the affair helped reinforce the government's shaky position over the Maastricht Treaty. As commentators in both France and the UK pointed out, Hoover was the first example of relocation to be announced since the completion of the Internal Market. Above all the company had not simply moved production and cut employment, but its move was linked to the introduction of reduced wages and conditions.

Hoover thus came to typify fears about the impact of economic integration, above all the possibility of employers taking advantage of labour cost differences to engage in competitive undercutting of pay and conditions. The UK, with its unregulated system of industrial relations and low social charges, appeared to be encouraging this approach - particularly when, shortly afterwards, the government placed advertisements in the German business press suggesting that firms should take advantage of the difference in labour costs.

However, even at the time it was noted that European rationalisation was not one-way traffic. There were job losses in the UK caused by relocation to other countries, such as Nestlé Rowntree's decision to rationalise European production which ironically involved an exact reversal of the Hoover move - from Glasgow to Dijon - and almost the same level of job loss. There were also examples of transfers of work out of the UK following Anglo-French mergers and take-overs, such as the GEC-Alsthom merger and the acquisition of Link-Miles by Thomson-CSF.

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Background In fact the background to the Hoover decision had little to do with planned rationalisation and the Single Market. It was the result of prolonged lack of profitability (which had seen intermittent job loss over a number of years) coupled with a severe short-term financial and marketing crisis.

Maytag was weakest of the major world competitors in the 'white goods' sector, which had been the subject of huge rationalisation during the 1980s. Between 1980 and 1989 the number of substantial firms had been reduced by take-overs from 22 to just five. The acquisition of Hoover in 1989 - Maytag's first move out of the United States - was the latest of these takeovers, but soon afterwards the company ran into trouble and almost 1,000 people were made redundant. Faced with a continuing problem of surplus capacity, Hoover announced a complete review of manufacturing operations in July 1992, including the possible closure of the Scottish factory. A month later, Maytag disclosed that it had set aside $95 million to scale back its European operations. Meanwhile, in France it was revealed that an internal rationalisation study had concluded that the size of the Scottish plant made it the most appropriate site to concentrate production.

Maytag had incurred a $16.2 million loss on its European operations in the first nine months of 1992. However, the company's problems were compounded by a disastrous promotion campaign by Hoover in the UK. In an effort to boost the market and profitability, the company made an offer of two free air fares to continental Europe or the United States to anyone spending £100 or more on Hoover products. The company was unable to cope with the response. More than 200,000 people eventually obtained free flights, but often after months of delay, which did huge damage to Hoover's image. The promotion cost a total of £48 million and many of the appliances purchased were immediately sold second-hand, further damaging the company's business.

The decision to close the French factoiy was thus made against the background of escalating financial problems. And in December 1992 the company negotiated a £60 million refund of contributions to its UK pension scheme. Part of this money was used to finance agreed improvements to pensions in payment and to the terms of the scheme. But in addition (and after paying tax) Hoover was able to secure a cash injection of £16.8 million.

There was a history of pension fund surpluses. Under its previous owners, Hoover had already suspended payments to the scheme since 1986, when a surplus of £27 million had been returned to the employer. The new refund of contributions had been planned since 1991. However, there was inevitable speculation that the relocation was being financed by money from the pension fund, despite the company's denials. The fact that the pension scheme changes were announced just the day before the company told the unions about the transfer of production from Dijon - and the new working arrangements required at Cambuslang - does suggest the two events were connected.

Terms of the agreement The transfer of production to the UK involved a number of concessions from the unions. New working arrangements included full flexibility between different groups of skilled workers, with those concerned being required to apply for a job within the new 'manufacturing services

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group' as if they were external applicants. Otherwise, the main changes involved an agreement to run the plant continuously through meal and rest breaks and to cease payment of overtime to workers covering during these periods. Afternoon breaks were no longer to be included in working time, in effect extending production time to 37 hours a week. Payments for three-shift working were reduced from 156% to 133%. French commentators focused on these concessions, together with certain changes to trade union representation, as the main evidence for 'social dumping'. Yet although 'concession bargaining' of this sort is unusual in the UK, the agreement did not mark a significant erosion of generally established conditions in the engineering industry. In addition, existing employees were compensated for the changes, with the 170 workers affected receiving lump-sum payments of £1,750. All employees at Cambuslang received a 'goodwill' payment of £150.

The crucial aspect of the deal was the status of new recruits, employed on lower rates and on a temporary basis. While contract working has increased in the UK, agreements of this sort are not normal. An agreement dating from 1982 provided that new recruits would serve a 'probationary' 12-month period. But acceptance of two-year fixed-term contracts was most unusual. The rate for these new recruits was fixed at £170 a week (the previous rate for unskilled employees) which was about 12% less than existing production employees. They were also excluded from the sickness absence and pension schemes.

Aftermath The period immediately following the agreement saw continued uncertainty over the company's plans. Hoover was under mounting pressure because of bad publicity over its 'free flights' promotion, leading to the dismissal of the UK managing director who was also president of Hoover Europe. It was not until the end of May that his successor confirmed the decision to close the French factory and transfer production.

At Cambuslang, 100 temporary employees were taken on under the terms of the new agreement but these jobs were only preserved when workers agreed to a one-week closure because of surplus production. There was also renewed controversy over subsidies, when it was disclosed that, in addition to a £2.5 million regional aid grant, the company had received a further £1 million from the Glasgow Development Agency to finance property improvements and training.

At the end of 1993 the company agreed to increase pay by 3%. This was the first increase in three years, following a pay freeze announced in March 1992 and a further freeze during 1993. In January 1995, a further 2% pay increase was agreed together with a new productivity bonus. These signs of recovery were borne out by some further recruitment. In April 1994 the union claimed that its agreement with Hoover had been vindicated because of improved job security and the recruitment of 240 new starters.

However, in early 1995, Maytag decided to sell its European operations and Hoover was eventually bought by the privately-owned Italian company. Candy. Subsequent developments have included several hundred redundancies and a renewed one-year pay freeze from January 1996.

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The impact on jobs It has not been possible to obtain precise figures on the number of jobs saved or created at Hoover. As already noted there was immediate recruitment of around 100 temporary staff and a total of 240 people had been employed on the new terms some 15 months after the agreement. However, the total numbers employed did not rise, and have subsequently declined. There were approximately 1,150 employees at Cambuslang in early 1991, a figure which subsequently fell to around 1,000 at the time of the agreement in early 1993. Employment then stabilised at around 950 for a period, but following the take-over by Candy the workforce has been reduced to around 620.

Thus the immediate effect of the agreement seems to have been to stave off severe job loss at the Scottish plant for around two years (at the expense of closure in France). But the 400 new jobs did not materialise. And in the longer term employment has fallen by almost 50% in five years.

The role of labour costs Hoover's internal assessment of the labour cost differential between its UK and French factories was 37%, according to French press reports. This figure reflects factors such as higher French social charges, and the differences in the mix of skills, with a less qualified workforce in the UK. But a large part of the difference was a result of the devaluation of sterling which took place at the time. Hoover's review of its European operations, which took place after the closure announcement, concluded that there was very little difference between the two sites: both were close to profitability. Ironically, it may have been the political controversy, and the resulting plunge in Hoover's sales in France, which finally tipped the balance.

The wider impact of the Hoover affair Although the Hoover affair attracted enormous publicity at the time, its impact has been minimal as far as bargaining is concerned. Neither in France nor in the UK was there any attempt to use the Hoover example as a lever in negotiations, and employers' organisations in both countries express the view that it was almost entirely an affair of politicians.

In the UK, the government's emphasis on a low-cost centre for investors in the EU has subsequently been played down. There have been no further advertising campaigns, and publicity aimed at inward investors has tended to focus on factors such as skills and flexibility. However, the lack of regulation of UK industrial relations and the ease with which employers can 'hire and fire' has continued to feature in propaganda. Some employers have argued that this lack of regulation is two-edged. It has helped to attract investment but has also made it easier to close down operations in the UK than elsewhere in the EU.

In France, employers' organisations emphasise that social dumping is not a major issue. There has been much less relocation than many people feared. However, they remain wary of the possibility. The main employers' confederation, the CNPF, has conducted an energetic lobbying campaign in favour of the posted workers' Directive in order to ensure a united response.

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In retrospect, the main lesson of the Hoover affair is how unusual such behaviour is. The company was under extreme pressure to reduce labour costs, but even so it claimed that the differential between France and the UK was 'a minor factor': the main reason for choosing Cambuslang was the factory had more spare production capacity. Low fixed labour costs and a deregulated labour market have played a part in attracting inward investment to the UK -mainly from outside the EU. But labour costs have only rarely played a significant part in relocation decisions between EU countries.

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Notes: Information for these case studies was obtained from representatives of management and employees at Mercedes

Benz and Hoover together with national and regional representatives of the engineering employers and unions in

Germany, France and the UK.

For Hoover, the following published sources were used:

IDS Report: March 1992 (No 613); July 1992 (No 620); March 1993.(No 635); January 1996 (No 705).

IDS Pensions Bulletin: March 1993 (No 63).

1RES Chronique Internationale, March 1993: F. Lefresne: 'Europe sociale: Γ affaire Hoover'.

For Mercedes, the following notes cover specific points in the text:

l'The deal is Germany as manufacturing location' the union response to the question why change was

agreed.

2 ''Lohnerhöhung nur auf 'den Tarif '', Handelsblall', 22 September 1993.

3 Betriebsvereinbarung zwischen der ¡Verkleining und dem Betriebsrat des Werkes Untertürkheim zur V6/V8

Motoren-Nachfolgenerat ion.

4 Within Gennany, MercedesBenz is held to have taken a more cautious approach to teamworking, compared

with Opel and Audi 'who have experienced internal adaptation difficulties and spiralling demand for

training as a result' (S. Roth: 'Lean production in the German motor industry', European Participation

Monitor, No. 12, 1996).

5 Under the 1973 Pay Framework Agreement for North Wfirttembcrg/North Baden, employees on assembly

line (laktgebunde) activities are entitled to 5 minutes off ever)' hour for recovery, dubbed Steinkühlerpausen

after the former General Secretary of IG Metall, then local district secretary. According to the company,

these breaks added 8% to regional wage costs compared to elsewhere in Germany.

6 This issue has been highly contentious since the late1980s. In 1988, BMW secured an agreement on regular

Saturday working as a condition for investment in a greenficld plant at Regensburg in conjunction with a

(then) shorterthanagrecd working week and long weekends off. The question flared up again in the autumn

of 1995 with the move to the 35hour week. The engineering employers nationally called for the right of

management to schedule Saturday working without a need for weekend supplements. In most cases, this was

successfully resisted by IG Metall, although as the MercedesBenz cases illustrates it was used a

negotiating lever at companylevel on a widespread basis.

7 A schema for this will developed with the local Fraunhofer Institute, and put to works council and

management.

8 'Massiven Prolest bei Volum gegen Raslall angekündigt ', Handelsblatt, 1011 December 1993.

9 'Der Mini-Mercedes wird ab 1997 in Raslall gebaut ', Handelsblatt, 16 December 1993.

10 It was felt that, because the Swatch car will be highly price competitive, it could not be built in Germany at

current cost levels. According to Helmut Werner (head of MercedesBenz AG) 43% of the valueadded in the

project will be in Gennany: however, the 'outcome of the [1995] bargaining round in the metalworking industry

confirmed the correctness of the decision for Lorraine' (Stuttgarter Zeitung, 11 March 1996). The Moselle

Department is already home to a large number of German companies, including several leading automotive

suppliers from BadenWürttemberg: LApp (cables). Behr (air conditioning) and SEW (electric motors).

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Appendix II: Liberalisation in Air Transport and Telecommunications

Appendix II

The Impact of Liberalisation in Air Transport and Telecommunications Case Studies: Aer Lingus and Telefonica

Air transport and telecommunications are two sectors which have figured prominently in the Single Market liberalisation process. However, both sectors have yet to be opened up to full competition. The real impact of the IMP will, only emerge from 1997 in air transport, and from 1998 in the telecommunications sector. Both sectors are also going through a period of upheaval because of wider, global changes in competition and technology. Thus while the IMP has clearly played a part in promoting and enabling change it is impossible to be categorical about any specific overall IMP effect on pay and bargaining.

However, there are similar processes taking place in both sectors in which the IMP has played a part, although mainly in speeding-up the pace of change rather than prompting reform. An obvious factor is the case of airline subsidies, where the increasing pressure brought to bear on national authorities has in turn led companies such as Iberia and Air France to bear down more heavily on pay and employment costs than would otherwise have been the case. The impact of fair competition policy is particularly clear in the case of Aer Lingus, which we examine in more detail below.

Less directly, the IMP has also played a part in encouraging widespread moves towards a two-tier pattern of employment. This process has already begun in the airlines, with the creation of new, lower-cost subsidiaries and franchises. In telecommunications, the process has is much less advanced. Here the change essentially involves both a reduction in numbers and a change in recruitment. The pattern being established is early retirement on generous terms, with new employees will be recruited on less favourable conditions. This is a central to the plan recently agreed for France Télécom and is likely to be followed elsewhere, although there are legal obstacles to this approach in both Spain and Italy.

Another development is increasing international co-ordination of both management and unions. Both industries have naturally had an international outlook from their inception; the difference now is the degree of international and European integration, with cross-border takeovers and joint ventures and transfers of personnel on an unprecedented scale. This is part of a global process, but the IMP has encouraged it.

A general point to note about both industries is that the tradition of state ownership means that there are no sectoral agreements which other employers would otherwise (usually) be obliged to apply. Thus both the new companies and the new subsidiaries of existing firms which have emerged over the past few years have enjoyed an unusual freedom to develop their own pay and personnel policies. In Italy, for example, the cellular phone business owned by Stet has applied the sectoral agreement for the engineering industry, supplemented by unusually large individualised payments. In Germany, airline staff employed by the low-cost Lufthansa Express are not covered by the parent company's collective agreement.

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1. Bargaining Developments in the Airlines

The last few years have seen growing conflict between management and unions in the major airlines, as most companies have sought "to slash costs by reducing employment, increasing labour flexibility and, on occasion, direct cuts in pay. It was widely expected that the early 1990s would be a crunch time for industrial relations, particularly in companies with large payrolls and a heavy burden of debt, and events have borne this out. There were a number of serious disputes, particularly in 1993/94, some of which have continued intermittently in the subsequent two years.

Air France The most prominent of these disputes was over restructuring proposals at Air France in October 1993, which eventually led to the resignation of the company's chairman, after a violent two-week confrontation. The more conciliatory approach of the new chairman led to a revised plan involving voluntary redundancies; a freeze on pay increases (and the halving of the number of promotions) over three years; and various measures to improve efficiency, including extended hours. The objective was to increase productivity by 30% in the three years to end of 1996, but the company once again found itself in dispute in November 1995 over proposals to introduce a two-tier pay structure for flight crew.

Subsequently Air France has been involved in a prolonged dispute with unions representing former Air-Inter (domestic) staff. This time the conflict has been over proposals to harmonise pay and conditions of flight crew, who have hitherto enjoyed better terms. The outcome of the Air France reforms is still in the balance.

While Air France is the most prominent example, there has been a wave of disputes over the same period at other companies, notably Alitalia, Iberia, TAP and Olympic Airways. The common element in all these disputes has been job cuts. But there have also been pay freezes and reductions. At Iberia, pay cuts averaging some 15% were accepted after a dispute at the end of 1994.

Alitalia The most recent, and potentially most far-reaching, agreement is at Alitalia, where a prolonged dispute ended with unions agreeing a major restructuring in June 1996, in return for a substantial employee stake in the airline - an agreement modelled on agreements reached over the past few years at a number of US companies, such as United Airlines.

The exact terms of the new arrangements are still under negotiation, but essentially the agreement involves the creation of a new low-cost company - the so-called Highly Competitive Carrier - which will operate a number of European and Intercontinental routes. The aim is to close the labour cost gap between Alitalia and Lufthansa. The German airline is felt to be a realistic target compared to British Airways, which has the benefit of the UK's low social charges. The main target of cost reductions is cabin crew, where the company estimates that its costs are some 70% higher than those of its major competitors

Cabin crew in the new company will almost all be new recruits, paid at lower rates than existing Alitalia staff. Pilots will, however, transfer to the new company, although the terms of

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this move have yet to be agreed. The 'old' company will continue to employ ground staff and

some pilots. The two companies will have separate agreements, although the same unions will

continue to represent staff.

There are two innovative aspects of this agreement. The first is that future recruits will be paid

at lower rates (the approach also being adopted in télécoms). The second is the move to the

US-style employee shareholding, together with employee representation at Board level. Under

the new arrangements it is proposed that there should be three employee-directors. Employee

shareholding will be limited to a maximum 30% of ordinary shares.

While industrial conflict has been most in evidence in southern European, other airlines have

also been involved in significant cost-cutting exercises. Lufthansa introduced a temporary

wage freeze and lowered entry-level pay rates in 1993, as well as extending working hours for

flight crew. SAS has reduced its workforce by nearly 15%. Both Sabena and Aer Lingus (see

below) have had a series of disputes with different groups of employees over pay and

flexibility.

Much of this restructuring and consequent increase in industrial unrest has coincided with the

opening up of European routes to greater competition, and in particular the liberalisation

measures agreed in July 1992 and implemented from January 1993 - the so-called Third

Package. However, this is only one of the factors involved. The general increase in

competition world-wide, the excess capacity in the industry, the recession of the early 1990s

(and the impact of the Gulf War), the need to update fleets and the huge debt burdens faced by

some companies have all been important factors. There are very few cases where change can

be identified with specific EU liberalisation measures, even though these measures have

undoubtedly played a part in changing the competitive environment.

Expansion of lower-cost services

The response to increased competitive pressure has increasingly been the take-over of smaller

airlines, in conjunction with the development of'hub-and-spoke' networks, on the US model,

with the lower-cost airlines flying passengers into the main international hubs from outlying

airports. Such operations often have a low level of traffic and use aircraft of different types. So

the impact of these lower-cost operations on the terms and conditions of employment of the

main groups of employees has been limited.

The possible expansion of these lower-cost services has been a source of considerable concern

to trade unions. An example is the British Airways shorthaul services from Gatwick,

employing former Dan Air staff. These crews were employed on the lower rates of pay

inherited from the former company, a position accepted by unions because of the fragility of

the operation. Subsequently, as jobs have become more secure, the unions have pressed for

pay increases to bring these employees in line with other staff, culminating in 1996 with a

ballot for a strike. A dispute was averted when the company agreed to additional increases.

Most of the airlines' major costs are fixed, so there is an obvious incentive in trying to reduce

the only large element which is variable: the cost of labour. However, there are limits to this -

at least as far as the main airlines are concerned - because so much of their competitive edge

depends on perceived service quality. Low-cost services, such as Β A's various franchise

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companies, typically have lower standards of customer service and greater flexibility, with a smaller number of staff performing a range of tasks. In general, the new low-cost operations have been insulated from the mainstream - for both technical/operational reasons and to avoid confrontation with trade unions, which are powerfully entrenched in all the major companies.

Case Study: Aer Lingus Developments in Ireland over the past eight years provide an important example of the way in which the IMP has had an impact on pay and bargaining in a small, established airline. The competition on Ireland-UK routes between Aer Lingus and the new low-cost competitor, Ryanair, led the airline to introduce lower starting rates for new employees to reduce the pay bill. Subsequently the recession of the early 1990s led to a severe financial crisis and a cash injection from the Irish government, conditional on Aer Lingus restructuring its operations, in line with EC rules. Around 1,000 jobs were lost, pay was frozen and hours and working practices changed. Subsequently, working practices at TEAM Aer Lingus (the company's engineering and maintenance subsidiary) were radically reformed, after a lengthy dispute.

Ryanair was founded in 1985 but began to compete seriously with Aer Lingus following the first package of liberalisation measures, effective from January 1988, which allowed the company to undercut fares and operate on the London-Dublin route. Aer Lingus also expanded operations at this time, taking advantage of the establishment of so-called 'fifth freedom' routes to fly to mainland Europe via Manchester.

However, Ryanair's pared down, low-cost service meant that the established airline had to reduce costs to compete effectively. Ryanair initially employed non-EU flight crew on low rates, but its crucial labour cost advantage was low staffing levels. For example, Ryanair cabin crew are responsible for cleaning aircraft and preparing them for the next flight. By contrast Aer Lingus has dedicated cleaning crews, although these staff are also expected to help with loading and unloading. Ryanair's resolutely non-union stance has undoubtedly helped in securing more flexible working. Neither pay levels nor increases are negotiated, although a staff forum deals with working arrangements. The company does, however, try to maintain broadly in line with Aer Lingus pay rates, especially for overtime.

Aer Lingus's expansion on routes via Manchester required the recruitment of new staff, but the company decided it could no longer afford to recruit at existing entry rates. So in 1989 the company introduced new, extended pay scales with lower starting rates. Employees rejected the proposal but did not vote for any action against the company and the new pay arrangements were imposed. The new rates were subsequently raised slightly after the union appealed to the Labour Court in 1990, but the outcome was a substantial reduction of starting rates, some 10-15% for clerical grades. This represented a major saving for the airline. Around 300 clerical staff and general operatives were taken on under the new terms. There were also some 500 voluntary redundancies at the time and these people were largely replaced by staff on the lower rates. The new staff were christened 'yellow packs' by existing employees, a reference to the cheap 'own-brand' products sold by the Irish supermarket chain Quinnsworth.

Meanwhile, Ryanair's success encouraged rapid expansion until 1991, even seeking to compete on flights between the UK and continental destinations. The cost base rose significantly, with different types of aircraft and 26 routes. The company recorded losses of

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IR£20 million in 1991 and was forced to restructure under new management. Routes were pruned and the company moved to a single aircraft type. Around 30 employees (mainly management) were made redundant. Staff rosters were revised to operate more efficiently and aircraft were scheduled to fly several times day with the same crew each time. Today the company employs some 650 people, with flights from Ireland to eight UK destinations. Most of the company's business is in the so-called VFR (Visiting Friends and Relatives) market.

The crisis hit Aer Lingus much more severely in 1992/93, partly because of its exposure to the transatlantic market, and losses of IR£60 million were recorded. As a semi-state organisation much of the expansion had been financed by borrowing. Money to cover bank debts was needed if the company was to compete at all under the new terms set by the third package of EU liberalisation measures.

How far Aer Lingus's problems were the result of increased competition on intra-EU routes is debatable. However, the rules on fair competition had a significant impact on the terms of the government's aid: the IR£175 million of aid was made conditional on a variety of cost-cutting measures (the Cahill Plan, named after the Aer Lingus chairman). The plan sought reductions in labour costs totalling IR£34 million over two years. Measures eventually agreed included the restriction of overtime, reduction of roster duty allowances, changes in working patterns and an increase in temporary and part-time staff. Proposed cuts in overtime rates and the privatisation of catering were both dropped. An agreed pay increase of 5.25% was not awarded and pay was frozen for two years. However, the major economies were achieved via job loss: there were more than 1,000 redundancies, the last in March 1995. Currently Aer Lingus employs around 4,000 people in Ireland in passenger, freight and related activities.

In return for these sacrifices, the remaining workers were offered a stake in the company worth 10% - half in shares and half in cash. Employees were also offered the opportunity of buying and selling shares in an internal company market, with tax incentives for those retaining shares for five years or more. These shares have only recently acquired a real value: the company made a profit in 1995/96 for the first time in many years.

A separate restructuring occurred at the company's TEAM subsidiary, which had been turned into a separate company in 1990, employing some 2,000 people. The intention had been to privatise this engineering and maintenance operation, but the impact of recession and the increased competition for maintenance work (in part a Single Market effect, in part a global trend) damaged the company, which was faced with a lack of work and a mounting cash-flow crisis. The rescue proposed under the Cahill Plan included extended hours, cuts in pay and the removal of all shop floor demarcations. Eventually, after a long dispute, a Labour Court recommendation resulted in modified reforms being accepted. These included extended hours for up to 30 weeks a year and the end of demarcations between skilled workers. Pay was frozen until July 1996.

2. Bargaining Developments in Telecommunications Services

By comparison with the airlines, the impact of liberalisation on pay and bargaining in the télécoms sector has been limited, essentially because of the overwhelming importance of technological innovation as a force for change. Even in the UK, where there has been

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liberalisation and steadily increasing competition since British Telecommunications was privatised in 1984, the impact on industrial relations has been muted. This partly reflects the market place. Despite the huge increase in competition (with around 150 licensed organisations, there is now more competition in the UK and than in the US) BT has a very high market share. Elsewhere, it is only now, with the 1998 deadline fast approaching, that significant changes are taking place.

In the three largest countries - Germany, France and Italy - the impact of impending liberalisation and/or privatisation on pay and bargaining is almost certain to be the creation of a two-tier system of employment. The 'model' here is France.

Case Study: France Télécom At the end of May 1996, the French Government agreed a new legal framework for the partial privatisation of France Télécom, to take effect from 1 January 1997. So far as employment is concerned, the main change is that there will no longer be any limitation on the recruitment of 'contractual' employees. At present, around 96% of employees have civil service (fonctionnaire) status, with corresponding job and pension guarantees. All recruitment on civil service terms will cease after five years. Although some traditional recruitment is planned, essentially the new rules mean that the balance of employment will be fundamentally changed. Over a ten-year period, the company expects that some 20-25,000 staff will take early retirement, in addition to around 35,000 normal retirements. Altogether around a third of the current workforce will leave, while the vast majority of new staff will be recruited on new conditions.

The plan reflects the company's urgent need to recruit younger, more adaptable employees. The current workforce has an average age of 43.. Although there has recently been some limited recruitment of younger people on contractual terms this has not been at anything like the rate needed to offset the continued ageing of the workforce: the average age has been increasing by 6 to 8 months each year. By comparison the new firms in the industry employ a workforce which on average is 10 to 15 years younger.

A similar procedure is likely to be adopted in.Germany, where Deutsche Telekom employees enjoy the same protected status as their French counterparts. In Italy there are additional factors involved, with Stet seeking to reduce the status and pay of certain categories of staff to bring them in line with competitors, both in Italy and abroad.

Stet's main subsidiary, Telecom Italia, has already made some moves to introduce reforms in a 1995 agreement on flexible working and job loss. This agreement provided enhanced redundancy payments aimed at encouraging voluntary retirement among long-service employees. The agreement also saw the introduction of remote working, designed to cope with regional imbalances in employment, and incentives to encourage geographical mobility.

The changes certainly reflect the impact of the IMP, in the sense that this is one of the major driving forces behind privatisation. Developments in the UK, by contrast, have little to do with the IMP - but they do provide some relevant pointers.

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Pointers from the UK experience Although liberalisation and competition has changed the company culture considerably, it has taken a long time - perhaps ten years - for this to feed through to BT's personnel strategy. As far as the bulk of employees are concerned, there has been gradual change. While middle and senior managers have moved to individualised pay, and are no longer covered by collective bargaining, pay arrangements for the mass of employees have continued to be centralised. Collective bargaining continues for a large number of junior managers and professional staff. In a sense it is the absence of fundamental change which is striking, especially given the general decentralisation of UK collective bargaining over the past decade.

By contrast, none of the new competitors which have emerged since privatisation are covered by collective bargaining at any level (although the main trade union does have a significant membership in the main competitor company, Mercury). Individual performance pay is the norm for all employees, and Mercury has also adopted a policy of'flexible benefits' - a system where employees are allocated benefits to a certain value and then exercise a (limited) choice on how their package of benefits is made up.

In future, BT hopes to achieve much greater flexibility, moving to a limited number of pay bands (perhaps as few as 4 or 5) in place of 80 grades, with pay related to skills and performance. Flexible benefits are also seen as a way of reinforcing a 'single status' culture. But this market-driven strategy still seems some way off.

The main change has been in employment levels and patterns. BT employment levels have fallen from 235,000 in March 1985 to 126,000 in March 1996, accounting for the vast bulk of the fall in EU employment in the sector. These job losses have been unevenly spread. Exact comparisons are difficult to make because of changes in BT's definitions. According to the unions, however, the greatest job loss was among operators - from around 32,000 to fewer than 4,000 employees. The number of engineers also fell from around 110,000 to around 62,000. By contrast, the number of managerial jobs fell from some 34,000 to a little under 30,000 over the same period.

The most dramatic changes occurred in 1992/93, as a result of generous incentives for employees to take redundancy. On one day (31 July 1992) nearly 19,500 left the company. However, these figures do overstate the extent of overall job loss in the industry. While exact figures do not exist, industry sources estimate that there are some 30,000 people employed in providing télécoms services outside BT. These figures include those providing sub-contract services, and therefore fluctuate. There is also a very high turnover of staff in some of the new cable companies (partly reflecting the large number of sales staff employed). Thus while employment at BT has fallen to only 53% of its level ten years ago, the overall figures suggest a fall to around 66% for the sector as a whole.

As for the impact of internationalisation, through alliances and joint ventures, this seems to have been limited so far. The company believes that an increased presence in other European countries is unlikely to lead to any downward pressures on pay and conditions. If anything, the reverse is the case, with companies competing for scarce skills. For their part, the unions feel that management has adopted a somewhat more aggressive approach in its international operations, with some shift towards individualised pay and 'non-contractual' bonus schemes.

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Case Study: Telefonica The accelerating pace of change in the European telecommunications market and its impact on collective bargaining are demonstrated by recent developments at Telefonica. Like other companies in the industry, Telefonica is making moves to achieve greater flexibility and become more responsive to rising customer expectations, both in the business and the domestic market. The company is also seeking to develop new, high value-added services. However, the Telefonica case also illustrates how companies in the industry are effectively buying change with very generous packages of incentives.

In February 1996 Spain's state-owned telephone company concluded an important new agreement with trade unions which opens the way for a new five-year (1996-2000) strategic plan. This latest agreement marks an important new stage in a process which has been under way since 1989, when Telefonica and the unions established a joint committee to modernise the company's grading structure. This is a continuing process of refonn, but the latest agreement confinns the establishment of nine basic job groups, incorporating the previous multiplicity of grades. New, streamlined descriptions of functions were approved in January 1996, creating the basis for much greater flexibility.

However, the key changes in the latest agreement mainly involve moves to slim down the workforce and make the company more responsive to customer demands.

In December 1994 the company restructured itself, decentralising and forming new affiliates for previously consolidated operations. The main company was focused on basic telephone services and international communications. The new affiliates were: mobile services; public telecommunications; data transmission; advertising and infonnation; multimedia; and international business. Although some of these businesses already existed in embryonic form, the new structure redefined them and gave them a distinct identity within an overall corporate structure.

Then, in 1995, Telefonica - together with its Dutch, Swiss and Swedish counterparts - established a European consortium, Unisource. The new grouping, primarily aimed at international business customers, forms part of a globalisation strategy, which takes in companies such as ATT and the Japanese KDD, as well as Telefonica's own international operations in Latin Anerica.

Both these strategic initiatives have been undertaken in response to increasing European competition and the liberalisation of the industry. The December 1994 restructuring was put in place to make management more responsive and responsible, and specifically:

'To meet the challenges posed by liberalisation of telecommunications which should conclude by 1998 (and) to become more agile and efficient in ever more demanding markets, to take advantage of the new opportunities which will emerge.'

Telefonica's new strategic plan demands an acceleration of the process of change and points to three principal factors driving the need for changed working practices:

1. The increase in the number of competitors in all services and products (including BT, France Télécom, cable TV, 'call-back' services such as Viatel and Esprit).

106


2. Technological progress providing lower entry costs for new competitors.

3. New services with télécoms capability, specifically cable TV.

The strategic plan spells out two responses necessary 'to win the battle of competition'. The first is a permanent improvement in internal procedures to reduce costs so as to be able to lower prices. The second is an increase in both the quality and range of services. The emphasis is strongly on the need to satisfy customers: 'to work better and more cheaply, which requires a profound change of mentality in us'. The immediate objective is defined as 'passing from a monopoly to leadership in a newly liberalised sector'.

The company aims to have 310 lines per employee in operation by the year 2000. In terms of jobs this means a considerable reduction. The number of jobs in the parent company has already fallen by some 5,000 in the last four years. The plan envisages a reduction from the 1996 level of 69,500 jobs to around 55,000 over the next five. However, outside the main company, Telefonica estimates that the other businesses will create some 3,800 new jobs.

This job loss is intended to be entirely on the basis of voluntary redundancy, with generous terms offered to those who leave. Early retirement, effectively on full pay, is being offered to those aged 57 (previously 58) with new incentives to younger staff. Under the new agreement, those who leave aged below 57 will receive 45 days' pay per year of service, with a minimum of one year's pay and a maximum of 3'/2 years'.

These incentives are backed up with job guarantees to those who remain. It is guaranteed that there will be no redundancies caused by 'technological changes involved in the Strategic Plan'. The agreement also states that 'excess personnel' will be redeployed and that new activities will be developed to absorb them.

The Plan envisages the creation of 700 specialised new jobs and an increased rate of transfer of people to the subsidiary businesses created in December 1994. The company openly admits that the process of transferring people has been 'costly and complex'. Partly this is because neither the necessity for the transfers, nor the professional opportunities involved, were adequately communicated. But management also points to a business culture which is still excessively rigid: 'too rigid for a competitive market in which flexibility is the key'. Only 472 employees transferred in the initial phases.

As a result the new agreement offers a substantial incentive to move. Employees volunteering for transfer to any grade in the new affiliates will receive a bonus of 35 days' pay per year of service, with a minimum of one year's pay and a maximum of two.

The reductions in employment and the transfers will, the company says, 'make flexibility and the 're-engineering of procedures the key words in the coming months'.

The management clearly feels the overriding need to take employees with them. The emphasis throughout is very much on a voluntary and participative approach to change - as indeed it has been in other major companies, including BT. Pay issues have been largely irrelevant to this process.

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Management emphasises the relative importance of both employment guarantees and training issues in enabling change to take place.

However, new working practices are being introduced. The new agreement focuses on the flexible use of working time and shifts to improve customer service. New four-week shift patterns are being introduced to cater for round-the-clock telemarketing. Weekend and holiday working is also envisaged, according to demand. Similar four-week shift cycles have also been agreed for administration and retail outlets. The aim is to minimise loss of market share by maintaining the previous customer base as far as possible, recognising that 'customers see liberalisation as an opportunity to obtain improved services, with more attractive prices and with a higher quality of customer care'.

Towards Europeanisation? One development noted by management and unions in several countries is the increasing exchange of information between different countries and, to some extent, the co-ordination of policies on both sides of industry. This affects both télécoms services and the major manufacturing companies which supply them. In general, both sides expect that European Works Councils will have an impact. But they do not expect international pay comparisons to become a major issue. One reason is that even within a single country it is becoming harder to make valid pay comparisons, because of job diversity - and because the sector itself is becoming harder to define.

On the union side, there have been an increasing number of meetings as the 1998 deadline has approached. One interesting development is that the international union organisation, the PTTI, is beginning to seek some co-ordination of the collective bargaining agenda between unions in different countries, for example on hours and holidays.

On the employers' side, there have been regular short-term exchange programmes for some time now, including middle managers from all the major companies. At senior level, personnel managers from the main companies and suppliers have been organising informal forums for the past three years. These essentially involve exchanges of information and discussion of the strategic outlook.

This increase in networking within the industry is in part the result of globalisation. But there is no doubt that the Single Market has been a catalyst, especially on the union side. One symbol of this is the agreements between unions (for example the STE in the UK and the DPG in Germany) on the representation of employees who are temporarily posted abroad.

108

References and additional sources:

This bibliography contains both sources referred to in this report and additional literature which has been consulted in the course of the research.

Anderton and Barreli (1995): The ERM and Structural Change in European Labour Markets: A study of 10 countries (Weltwirtschaftliches Archiv, Band 131, 1995, Heft 1)

Acs and Audretsch (1991): Innovation and Small Firms (MIT Press)

Acs and Audretsch (1993): Small Finns and Entrepreneurship (Cambridge University Press)

Barreli (1990): Has the EMS changed wage and price behaviour in Europe? (NDESR Review, November 1990)

Barreli et al (1995): The Employment Effects of the Maastricht Fiscal Criteria (NTESR Discussion Paper 81)

Boyer (1993): D'une serie de "National labour standards" à un "European monetary standard"? (Recherches économiques de Louvain 59/1-2)

Brewster and Hegewisch (1994): Policy and practice in European human resource management. The Price Waterhouse Cranfield survey (Routledge)

Brown et al (1990): Employers Large and Small (Harvard University Press)

Buigues et al (1990): The Impact of the Internal Market by Industrial Sector (European Economy special edition)

Buigues et al (1993): Market Services and European Integration (European Economy 3/1993)

CES (various years): Memoria sobre la situación socioeconomica y laboral (Consejo Economico y Social)

Crouch (1991): The decentralisation of bargaining in Europe (ASAP: 1991 Rapporto sui Salari. Franco Angeli).

CSERC (1996): Les inégalités d'emploi et de revenu (La Découverte)

DARES (1996): L'évolution du rapport salarial (Les Dossiers de la DARES, 1/1996. Ministère du Travail).

Dieppedalle and Puel (1992): Les négoications salariales de branches (Document Travail et Emploi, Ministère du Travail)

Economistas (1995): Diez anos con Europa (Economistas 66-67, Colegio de Economistas de Madrid)

109

European Observatory for SMEs (1995): Third Annual Report (The European Network for SME Research)

European Economy (1996): The economic and financial situation in Ireland in the transition to EMU (European Economy 1996/1)

European Economy (1994): The economic and financial situation in Spain (European Economy 1994/7).

Giaoutzi at al (1989): Small and Medium Size Enterprises and Regional Development (Routledge)

Giavazzi et al (eds): The European Montary System (Cambridge University Press).

Gorgeu et Mathieu (1995): Recrutement et production au plus juste - les nouvelles usines d'équipement automobile en France (Centre d'Etudes de l'Emploi)

Gospel ed (1992): The single European market and industrial relations (British Journal of Industrial Relations)

Gunnigle (1995): Collectivism and the management of industrial relations in greenfield sites (Human Resource Management Journal 5/3)

IDS (1988): Personnel management and the single European market (Incomes Data Services/Institute of Personnel Management)

IDS (1995): Pay benchmarking (IDS Focus 76, October 1995)

IDS(1996): Profit-related pay (IDS Study 603, June 1996)

II Sole (1996): Il lavoro nei distretti (Il Sole, issues of 11,12,23,26,27 April and 7, 9, 14 May 1996)

Inland Revenue (1994): Profit-Related Pay - an employer survey (A report by IFF Research Ltd. Inland Revenue Economics Papers: No 2. HMSO)

Lester (1994): Managing people in Europe (Economist Intelligence Unit)

Marsden et al (1992a): The Transition to the Single Market and the pressures on the European industrial relations systems (EC-DG V)

Marsden et al (1994): European integration and the European labour market (Social Europe, Supplement 1/94)

Marsden et al (1992): Pay and Employment in the New Europe (Edward Elgar)

Morgan (1996): Structural change in European Labour Markets (NIESR Review, February 1996)

110

Najman and Reynaud (1992): Les règles salariales au concret (Document Travail et Emploi, Ministère du Travail)

OECD Jobs Study (1994): Evidence and explanations. Part 1: Labour market trends and underlying forces of change. Part 2: The adjustment potential of the labour market.

Pepper (1991): The Pepper Report - promotion of employee participation in profits and enterprise results (Social Europe, Supplement 3/91)

Prosperetti (1996): La retribuzione flessibile (Intersind. FrancoAngeli).

Pyke et al (1991): Industrial Districts and Inter-Firm Co-operation in Italy (International Institute for Labour Studies)

Rainnie (1988): Industrial Relations in Small Finns(Routledge)

Rolfe and Byre (1995): Labour mobility in the European market (Policy Studies Institute)

Scheuer (1996): Faelles aftale eller egen kontrakt i arbejdslivet (Copenhagen: Nyt fra Samfundsvidenskaberne)

Sengenberger et al (1990) The Re-emergence of Small Enterprises: Industrial Restructuring in Industrialised Countries (ILO)

Shonfield (1992): Trends in pay systems in the European Community (Paper for EC/UNICE/ETUC seminar on Adaptation of Remuneration Systems, Brussels June 1992).

Silvestre ed (1992): La regulation des salaires dans le secteur public (ILO)

Vaughan-Whitehead (1990): Wage bargaining in Europe (Social Europe Supplement 2/90)

Weitzman (1984) The share economy (Harvard University Press)

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