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Popular Media When President Joe Biden named Lina Khan to chair the Federal Trade Commission (FTC), the conventional wisdom predicted a focus on Big Tech. In practice, however, Khan has proven hostile not just to the tech sector, but to innovators generally, including those in the gig economy.
When President Joe Biden named Lina Khan to chair the Federal Trade Commission (FTC), the conventional wisdom predicted a focus on Big Tech. In practice, however, Khan has proven hostile not just to the tech sector, but to innovators generally, including those in the gig economy. If the FTC continues down this road unchecked, there will be damaging and far-reaching repercussions that hurt consumers and imperil economic opportunities.
Read the full piece here.
Popular Media On Nov.10, new Twitter Inc. owner Elon Musk reportedly told employees that bankruptcy was a possibility unless Twitter’s cash flow improved. But that cash flow . . .
On Nov.10, new Twitter Inc. owner Elon Musk reportedly told employees that bankruptcy was a possibility unless Twitter’s cash flow improved. But that cash flow already has been reduced considerably because advertisers are pulling away from Twitter.
Popular Media America is deeply polarized, increasingly split into two, roughly equal, political camps. Each side blames the other for causing the situation. In a speech last . . .
America is deeply polarized, increasingly split into two, roughly equal, political camps. Each side blames the other for causing the situation. In a speech last week, President Biden accused Republicans of being a threat to democracy itself.
Scholarship COVID-19 vaccine mandates are in place or being debated across the world. Standard neoclassical economics argues that the marginal social benefit from vaccination exceeds the . . .
COVID-19 vaccine mandates are in place or being debated across the world. Standard neoclassical economics argues that the marginal social benefit from vaccination exceeds the marginal private benefit; everyone vaccinated against a given infectious disease protects others by not transmitting the disease. Consequently, private levels of vaccination will be lower than the socially optimal levels due to free-riding, which requires mandates to overcome the problem. We argue that universal mandates based on free-riding are less compelling for COVID-19. We argue that because the virus can be transmitted even after receiving the vaccine, most of the benefits of the COVID-19 vaccine are internalized: vaccinated individuals are protected from the worst effects of the disease. Therefore, any positive externality may be inframarginal or policy irrelevant. Even when all the benefits are not internalized by the individual, the externalities mainly are local, mostly affecting family and closely associated individuals, requiring local institutional (private and civil society) arrangements to boost vaccine rates, even in a global pandemic. Economists and politicians must justify such universal vaccine mandates on some basis other than free-riding.
Read the full paper here.
TOTM The concept of European “digital sovereignty” has been promoted in recent years both by high officials of the European Union and by EU national governments. . . .
The concept of European “digital sovereignty” has been promoted in recent years both by high officials of the European Union and by EU national governments. Indeed, France made strengthening sovereignty one of the goals of its recent presidency in the EU Council.
Presentations & Interviews ICLE Director of Law & Economics Programs Gus Hurwitz joined Steptoe & Johnson’s The Cyberlaw Podcast to discuss the Supreme Court’s decision to review whether . . .
ICLE Director of Law & Economics Programs Gus Hurwitz joined Steptoe & Johnson’s The Cyberlaw Podcast to discuss the Supreme Court’s decision to review whether Section 230 protects platforms from liability for materially assisting terror groups whose speech they distribute. The full episode is embedded below.
ICLE Issue Brief Introduction Over the past few years, several pundits and politicians have proposed introduction of German-style “sectoral bargaining” in the United States. In such a system, . . .
Over the past few years, several pundits and politicians have proposed introduction of German-style “sectoral bargaining” in the United States. In such a system, unions representing all employees in a sector bargain over the terms and conditions of employment for employees at all firms in that sector.
Several candidates in the 2020 U.S. Democratic Party presidential primaries included proposals for labor-market reforms that were based explicitly on such ideas. Meanwhile, in California, Gov. Gavin Newsom recently signed the Fast Food Accountability and Standards Recovery Act (FAST Act), which creates a “fast food council” comprising a mix of government officials, fast-food franchisors and franchisees, and representatives of fast-food workers. Among other duties, this council would be responsible for determining wages and working conditions in the fast-food industry. If implemented, such government-mandated industry-level bargaining would be unique in the United States and, as we discuss in this issue brief, borrows important features from European sectoral-bargaining models, even as such models have been falling out of favor in Europe.
The premise of such proposals is that “sectoral bargaining” is better for workers and could even protect the economy from adversarial labor-market disputes. But would Americans really be better off under sectoral bargaining?
This brief, released in conjunction with a companion piece on the German experience with sectoral bargaining, considers the evidence for and against the introduction of German-style sectoral bargaining in the United States. It begins with a brief explanation of the differences between U.S. and German collective-bargaining systems. Sections 2 and 3 outline the advantages and disadvantages of German-style sectoral bargaining. It should be stressed at the outset that Germany’s experience is very much a function of that nation’s history and constitution. But even in Germany, sectoral bargaining has been forced to adapt to the changing nature of employment over the past half-century.
Germany’s unique experience is explored further in Section 5, which contrasts it with other jurisdictions that have implemented sectoral bargaining. This is followed, in Section 6, with a discussion of the prospects for implementing sectoral bargaining in the United States. The discussion focuses on both legal and practical issues that would affect the potential for successful implementation. Finally, Section 7 discusses the likely outcome of implementing U.S. sectoral bargaining.
In the United States, the vast majority of employees in most areas of economic activity are employed under at-will contracts negotiated directly between the employer and the employee. Only about 16 million Americans, 11.6% of employees, currently have their employment contracts negotiated by a labor union. Union membership as a proportion of U.S. employees peaked in 1954 at about 35%.
By contrast, in Germany, the employment contracts of about 52% of the nation’s employees are governed through agreements negotiated by labor unions. Meanwhile, about 40% of German employees have representation in works councils. (These groups likely overlap considerably.)
In the United States, negotiations between labor unions and employers typically occur either at the single-unit level (e.g., a manufacturing plant, warehouse, or other location-specific entity) or sometimes at the firm level. In practice, this means that workers at a particular jobsite or firm delegate responsibility to negotiate the terms and conditions of their employment to a representative or group of representatives, who then undertake such negotiations with the management of that jobsite or firm.
While there are state and national-level organizations representing unionized workers in various U.S. economic sectors (e.g., utilities, transportation, warehousing, movie production), unlike their German counterparts, such groups do not participate in negotiations with state or national employer groups over the terms and conditions of employment. In this context, their role is primarily political. For example, unions persuaded Congress to pass the National Labor Relations Act in 1935, which established certain statutory protections for employees, including the “right to strike,” which amounts to a prohibition on employers from firing employees who refuse to work under certain circumstances. For many years, state legislatures also empowered unions to require employers to garnish the wages of both unionized and non-unionized employees to cover union dues. In 2018, this was ruled unconstitutional by the U.S. Supreme Court.
By contrast, negotiations between German labor unions and employers often occur at the sectoral level. As a result, in many cases, both labor unions and firms have organized themselves into sector-based coalitions, at least for the purposes of negotiating the terms and conditions of employment. In other words, workers effectively delegate responsibility to negotiate the terms and conditions of employment to an organization that represents workers in various fields from various companies. Firms likewise delegate negotiating responsibility to industry groups that may include firms offering a range of products and services that use various technologies.
In addition to sectoral bargaining via unions, German employees have established local (plant) and/or firm-level representation through “works councils.” These councils are independent of the unions and negotiate with individual firms to establish variations from national sectoral arrangements. Furthermore, German companies with more than 500 employees, are in, general required to have employee representation on their supervisory boards (equivalent to boards of directors) as part of a process known as “co-determination.”
Advocates of sectoral bargaining argue that it has numerous advantages over plant or firm-level bargaining. As noted in the companion piece to this brief by Matthias Jacobs and Matthias Münder, the primary reasons for this are:
Figure 1: Comparing German, US, and OECD Labor Markets
Advocates argue that these advantages of sectoral bargaining have generated substantial economic benefits. In particular, they point to the following facts about the German economy:
While sectoral bargaining and other features of Germany’s system of employee representation may have certain advantages and related economic benefits, it also has disadvantages and associated economic costs. The main disadvantages, as noted in the companion piece, are:
These disadvantages of sectoral bargaining have contributed to Germany experiencing several economic costs relative to the United States. Most notably:
Not all the benefits and costs described in Sections II and III can necessarily be ascribed to Germany’s system of sectoral bargaining. Co-determination through works councils and employee membership of company boards likely also played significant roles, as have features of German culture. Unfortunately, it is difficult to parse the roles each of these mechanisms play at a macro level without looking at the micro-level detail, either through cross-sectional comparisons (see Section 5) or by looking at the effects of changes over time.
Figure II: Comparing German, US, and OECD Output per Capita
SOURCE: World Bank. Figures are GDP per capita based on purchasing power parity (PPP) in constant 2017 international dollars.
Germany’s system of sectoral bargaining has undergone some substantial changes over the course of the past quarter-century. Since 1996, the proportion of German employees working under a sectoral-bargaining agreement has fallen by more than 35%. The main drivers of this reduction have been the changing nature of work and increasing exposure of German markets to international competition. Employers have responded in four primary ways:
First, there has been a shift away from formal participation in collective-bargaining agreements and toward more informal “orientation” to such agreements. As noted above, about 20% of establishments report adopting this approach, which provides employers with considerably more flexibility, because the formal rules do not apply.
Second, employers are increasingly choosing to include specific flexibilities in their sectoral-bargaining agreements that allow them to reduce the wages they offer below the formally agreed-upon levels. There are two main types of such flexibility:
Third, many larger firms now outsource work that previously was done by low-paid in-house workers. For example, a 2017 study found that the proportion of retailers employing in-house janitorial staff fell from 82% in 1975 to 20% in 2009.
Fourth, there is a strong correlation between firm size and adoption of collective-bargaining agreements. Fewer than 20% of firms with less than 100 employees are covered by such agreements, while more than 50% of firms with more than 500 employees are covered. This suggests that smaller, more dynamic firms in Germany’s innovative Mittelstand (SME) sector, which accounts for more than 99% of companies in the country, are increasingly avoiding collective-bargaining agreements.
With the decline in sectoral bargaining, the inclusion of hardship and opening clauses in new agreements, and the outsourcing of low-wage jobs, many of the putative advantages of the German system have been eroded. For example:
At the same time, the decline in rigidly enforced sectoral bargaining likely has helped Germany to avoid the problems experienced in jurisdictions with more rigid approaches, such as France and Italy, as Germany has experienced more robust economic growth over the past two decades (see Figure 3). It is also notable, however, that France (since 2008) and Italy (since 2011) likewise have begun to shift away from sectoral bargaining and toward firm-level bargaining.
Figure III: Output per Capita in Germany, France, and Italy
Source: World Bank. Figures are GDP per capita based on purchasing power parity (PPP) in constant 2017 international dollars.
Nonetheless, some attempts to make the German system more flexible have been thwarted. For example, a recent proposal by the Confederation of German Employers Associations to break down complex agreements into modular elements—which would have enabled employers to adopt only those elements that are most relevant to their firms, plants, and employees—was rejected by IG Metall, Germany’s largest labor union.
As noted in the introduction, there has been a recent push to introduce sectoral bargaining in the United States. This section examines whether German-style sectoral bargaining could be introduced here, with particular attention to the legal constraints.
German sectoral bargaining relies, in part, on the existence of national-level bodies to represent employees, on one side, and employers, on the other. Without such national-level representation, there would be incentives for regional organizations to agree to terms and conditions of employment that favored firms and employees in that region. Competition among regional groups would be expected to drive down wage levels and other employment benefits, as each regional group would seek terms and conditions that are likely to attract business locally. With national representation, labor unions and employer groups can negotiate region-specific terms and conditions that limit such competition.
The functioning of such national-level bodies and associated agreements are facilitated by German federal law; specifically the Collective Agreements Act, which is explained in the companion piece to this brief. In the United States, some federal protections—including the First Amendment—guarantee the rights of individuals to associate, and hence to join unions. The National Labor Relations Act (NLRA) established a federal right to strike and reasserts the right of individuals “to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” As such, employees could delegate their rights to bargain over terms and conditions of employment to sectoral unions at state, regional, or national levels.
Notwithstanding these rights to associate, however, there is a strong possibility that agreements made by sectoral unions with groups of firms that otherwise compete on the market would run afoul of U.S. antitrust law.
U.S. antitrust law, broadly speaking, prohibits competitors from coordinating their behaviors in ways that set prices or that otherwise manipulate the competitive landscape in ways that cause anticompetitive harm to consumers. The early history of the U.S. labor movement illustrates the basic problem. For decades, U.S. labor activists ran up against “antitrust law and its common law precursors, which established a baseline presumption in favor of competition within labor markets.”
The result was a consistent onslaught of criminal and civil charges, usually resulting in injunctions that prevented workers from organizing in order to “restrain trade or competition within the labor market” through collective bargaining. The U.S. Supreme Court even held that the terms of the Sherman Antitrust Act—nominally focused on business trusts—covered any combination in restraint of trade, including labor-union activities. With passage of the Clayton Act, Congress created an explicit exception to the antitrust laws for the organizing activities of labor unions. This protection was expanded with passage of the Norris-LaGuardia Act and the National Labor Relations Act, both of which clarified and expanded the statutory antitrust exemptions that applied to labor unions.
Agreements between competitors—that is, the employer side of the sectoral-bargaining analysis—do not have any such explicit exemptions in U.S. law. Indeed, the current position of both the Federal Trade Commission (FTC) and the U.S. Justice Department (DOJ) is that such agreements likely violate the law. Indeed, both federal antitrust agencies have brought cases on the basis of impermissible collusion among employers to set wages and other employment conditions.
The U.S. Supreme Court has recognized some non-statutory antitrust exceptions that could be extended to employers. Two examples of non-statutory exemptions are particularly relevant here. In Brown v. Pro Football Inc, the Supreme Court recognized an exception for employers that collectively bargain with a labor union. Brown arose when the owners of National Football League teams were unable to reach an agreement with the football players’ union over the creation of “development squads” that could provide substitute players to the teams. The union wanted players on those squads to be able to negotiate their salaries, but the club owners wanted to set the weekly rate at $1,000. When talks stalled, the club owners went ahead with the proposed plan. The players’ union sued, alleging that the agreement among employers to set the wage rate was a restraint of trade that violated the Sherman Act. The Supreme Court disagreed with the union because the agreement:
…took place during and immediately after a collective-bargaining negotiation. It grew out of, and was directly related to, the lawful operation of the bargaining process. It involved a matter that the parties were required to negotiate collectively. And it concerned only the parties to that collective-bargaining relationship.
The facts of Brown counsel caution when trying to construe this precedent more broadly beyond professional sports, let alone at the level of an entire sector of the economy. First, as noted above, the Supreme Court construed the labor non-statutory exemption as extending to the group of employers that were already involved in the collective bargaining in question. That is, the nature of professional football is that there are member teams that are bound by the collective bargaining of the football players. Thus, the employers are already compelled to partake in the collective activity. Further, although not explicitly an aspect of that case, it is nonetheless true that the small collection of employers involved were all identical and similarly situated, and all generate the same output of “professional football.”
Although it’s possible to imagine stretching this exemption to cover an entire sector—where all unions in that sector simultaneously engage in a collective-bargaining negotiation and all firms in that sector have sufficiently similar interests that they also can collectively bargain—it appears very hard to square with U.S. antitrust law. Decades of antitrust precedent push against the notion that firms that are otherwise competitors can jointly negotiate on wage and related restrictions, rejecting even “special case” exemptions such as those for the “learned professions.” Particularly since a “sector” can encompass a wide variety of firms with differing working conditions, safety concerns, cost drivers, and customers. To easily fit into a similar exemption, a legally relevant “sector” would have to be highly constrained. There would also be a host of fraught questions that attend determining how to decide what a relevant “sector” is, what entity gets to make that decision, and what to do about firms that uncomfortably straddle different sectoral classifications.
The “state action” doctrine in U.S. antitrust law also provides a potential means to develop a sectoral-bargain scheme—though here, too, the path is not easy (to put it mildly). In Parker v. Brown, the Supreme Court held that a California state agriculture program that set certain agricultural prices:
…was never intended to operate by force of individual agreement or combination. It derived its authority and its efficacy from the legislative command of the state and was not intended to operate or become effective without that command. We find nothing in the language of the Sherman Act or in its history which suggests that its purpose was to restrain a state or its officers or agents from activities directed by its legislature.
The state action doctrine has been extended in some ways over the years since Parker v. Brown. Relevant here, under certain circumstances, is that it may permit not only anticompetitive conduct by the sovereign state itself—paradigmatically, acts of the legislature—but by lesser state authorities and state-authorized commissions and boards dominated by market participants, but acting under the color of delegated state authority. Otherwise anticompetitive conduct of state-authorized boards can qualify for the state action exemption only if both prongs of the test articulated in California Retail Liquor Dealers Ass’n v. Midcal Aluminum Inc are satisfied. They are, respectively, that the challenged anticompetitive conduct must be “one clearly articulated and affirmatively expressed as state policy” and that the policy is “actively supervised” by the state itself. The Court’s unanimous opinion in Phoebe Putney further strengthened Midcal’s clear articulation prong, which applies to both lesser state agencies and independent boards dominated by active market participants.
More recently, however, the Supreme Court has suggested that the active supervision prong must be more than merely pro forma. In N. Carolina State Bd. of Dental Examiners v. F.T.C., the Court held that “[i]mmunity for state agencies… requires more than a mere facade of state involvement, for it is necessary in light of Parker’s rationale to ensure the States accept political accountability for anticompetitive conduct they permit and control.” Notably, the Court in N.C. Dental focused on the fact that a controlling number of decisionmakers on the board in question were active market participants. It also described the problem before the Court as considering when “a State empowers a group of active market participants to decide who can participate in its market, and on what terms.” This suggests that the active oversight requirement may apply more broadly.
Thus, any attempt to bring sectoral bargaining to the United States would need either 1) an explicit statutory exemption from Congress or 2) to qualify for one of the existing non-statutory exemptions. Assuming that Congress is not going to enact such an exemption any time soon, the latter option would be required. California’s recently enacted FAST Recovery Act, mentioned above, is one such attempt to thread this needle by qualifying for the state action exemption, and hence to immunize a council against federal antitrust scrutiny.
Section 1471(a)(1) of the California law establishes a “Fast Food Council” consisting of four individuals that own restaurants or franchises, four individuals that represent employees, one representative of the Governor’s Office of Business and Economic Development, and one representative from the state Department of Industrial Relations. The council would have the power to “promulgate minimum fast food restaurant employment standards, including, as appropriate, standards on wages, working conditions” as well as other worker-welfare goals. The FAST Recovery Act requires the council to submit reports to relevant committees of the California Legislature regarding any standards or rules it proposes, in order to give lawmakers the opportunity to enact legislation that would put the proposed change into effect.
But, as noted above, merely putting formal requirements into law will likely be insufficient to satisfy the “active supervision” requirement. For example, it will matter whether the council is regarded as closely affiliated with the state government or if it is more like an independent organization populated largely by industry participants and only superficially overseen by the state. Almost certainly, this law will draw legal attention, very possibly from the FTC or DOJ, and resolution of litigation will turn on very specific factual inquiries into the program’s implementation and operation.
In the decades after World War II, the combination of sectoral bargaining and co-determination appear to have created a more commodious relationship between German employers and employees than was the case in the United States, resulting in fewer industrial disputes and fewer days lost to strikes. As international competition intensified, however, the German system was forced to adapt, with the addition of clauses permitting both temporary and permanent exceptions. Nonetheless, sectoral bargaining has been on the decline in Germany and is now limited primarily to a relatively small number of large firms. While 50-60% of firms with more than 500 employees participate in sectoral-bargaining agreements, less than 20% of firms with fewer than 100 employees do.
Given the waning fortunes of sectoral-bargaining agreements in Germany—and, indeed, throughout Europe—it is ironic that U.S. politicians would now contemplate such a model for American workers. Yet, with California’s passage of the FAST Act, the issue is very much on the table.
The FAST Act applies to establishments that are members of a “fast food chain,” which is defined in the statute as “a set of restaurants consisting of 100 or more establishments nationally that share a common brand, or that are characterized by standardized options for decor, marketing, packaging, products, and services.” By setting minimum wages and working conditions at such establishments, the act is intended to improve the prospects for workers. Unfortunately, it is likely—in many, if not all, cases—to have the opposite effect.
If the council setting wages and working conditions for fast-food chains follows the typical German sectoral-bargaining arrangement, wages and conditions will be set according to the standards of the least productive third of establishments. This would limit the negative impact of the act on franchisees and might even lead to an overall reduction in wages in the sector, especially if such a statutory arrangement is deemed to be a permissible exception to minimum-wage laws.
On the other hand, if the council setting wages and conditions decides to set wages significantly above current market rates, the consequences for franchisees and their employees could be disastrous. Faced with unsustainable wage outlays, franchisees would face a difficult choice: sell off, switch to become a franchise of a smaller chain, or automate.
It is notable that the first attempt to implement sectoral bargaining in the United States is proposed in a sector that is not subject directly to international—or even interstate—competition. But it is subject to technological competition. Already, some fast-food restaurants have begun to automate. In part, this is happening to increase the speed, quality, and consistency of service. But it is also being driven by costs: as labor costs rise, the incentive to switch to more capital-intensive modes of production will increase.
It is, of course, possible that the council will prohibit such automation in an effort to maintain jobs. But doing so would merely make it more difficult for covered fast-food restaurants to compete with smaller chains that are not covered by the FAST Act. Beyond that competitive distortion, such action by the council would entail a covert tradeoff that further diminishes consumer welfare. Faced with other inflationary pressures, competitive threats from smaller chains not subject to the FAST Act, and ordinary cost increases, larger chains will be forced to raise prices. In the short term, this might shift surplus toward workers. Over the medium to long term, however, it would suppress demand, harming consumers by providing them with fewer goods and services than they would otherwise demand, and harming workers by shrinking the industry overall.
If the FAST Act is, indeed, a harbinger of the future of employer-employee bargaining in the United States, then the prospects for the U.S. economy look even bleaker than many portend. To see why, one need only refer back to Figure 3. Does the United States really want to shift toward a low-growth trajectory like those of France or Italy? Moreover, it bears repeating that, in an environment of international competition, Germany’s model required all manner of tweaks in order to make it “work.” Even then, Germany’s rate of economic growth has been considerably lower than that of the United States, as can be seen in Figure 2.
To address the other main argument made for a switch to sectoral bargaining: reduced numbers of days lost to industrial action. As demonstrated in Figure 4, the United States has already achieved that.
Figure IV: Annual U.S. Worker-Days Lost to Strikes, 1947-2021
Source: Work Stoppages, U.S Bureau of Labor Statistics, https://www.bls.gov/web/wkstp/annual-listing.htm (last visited Aug. 23, 2022)
In short, if the United States were to import the German model of sectoral bargaining at this stage, it is unlikely to benefit from any of the advantages that the model offered to Germany early in its adoption. It would instead suffer the disadvantages and associated costs that Germany now seeks to avoid by unwinding this model at the margins. As the United States heads further into unstable economic times, it would be unwise to adopt a bargaining model that would make its labor market less flexible and more subject to the disruptive effects of competition from overseas and from new technology.
No system is perfect, but U.S. labor markets have consistently outperformed those in Germany in terms of output per worker. The wider consequence of shifting to a German sectoral-bargaining model would be to push the United States behind much nimbler competitors, ultimately hurting both consumers and the workers that such otherwise well-intentioned reforms are intended to help.
 Alexia Fernández Campbell, The Boldest and Weakest Labor Platforms of the 2020 Democratic Primary, Vox (Oct. 29, 2019), https://www.vox.com/2019/9/5/20847614/democratic-debate-candidatelabor-platforms.
 Assem. Bill 257, Food facilities and employment, ch. 246 (2021-2022), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202120220AB257.
 Id. at 1471(d)(1)(A). Notably, this is not a pure sectoral-bargaining scheme, where there would be true negotiations between industry representatives on one side and labor representatives on another. Instead, it represents a hybrid approach that, at least theoretically, allows the bargaining to happen within the auspices of this council.
 Matthias Jacobs and Matthias Münder, A Worthy Import? Examining the Advantages and Disadvantages of Sectoral Collective Bargaining in Germany, International Center for Law & Economics (Sep. 25, 2022), https://laweconcenter.org/resource/a-worthy-import-examining-the-advantages-and-disadvantages-of-sectoral-collective-bargaining-in-germany.
 At-Will Employment, Betterteam, https://www.betterteam.com/at-will-employment#:~:text=At%2Dwill%20employment%20means%20that,are%20considered%20at%2Dwill%20employees (last visited Sep. 23, 2022).
 Union Members Summary, USDL-22-0079, US Dep’t of Labor (Jan. 20, 2022), https://www.bls.gov/news.release/union2.nr0.htm.
 Drew Desilver, American Unions Membership Declines as Public Support Fluctuates, Pew Rsch. Ctr. (Feb. 20, 2014), https://www.pewresearch.org/fact-tank/2014/02/20/for-american-unions-membership-trails-far-behind-public-support.
 Simon Jäger, Shakked Noy & Benjamin Schoefer, The German Model of Industrial Relations: Balancing Flexibility and Collective Action 10, NBER Working Paper No. 30377 (2022).
 Id. at 23.
 29 U.S.C. § 151–169; see also: The Right to Strike, National Labor Relations Board, https://www.nlrb.gov/strikes (last visited Sep. 23, 2022).
 Janus v. American Federation of State, County, and Municipal Employees, Council 31, 138 US 2448, (2018).
 See, generally, Jacobs & Münder, supra note 4 and Jäger, et al., supra note 8.
 Jäger et al. supra note 8, at 22.
 Id. at 20.
 Jacobs & Münder, supra note 12 .
 Id. at 7.
 Jäger et al. supra note 8 at 11 and 12.
 Id. at 12
 Jacobs and Münder, supra note 4 at 8.
 Id. at 9.
 Jäger et al. supra note 8 at 11.
 Id. at 1.
 See, Hagen Lesch, Changes in Industrial Action: A Comparison Between Germany and Other OECD Countries, CESifo Forum 4, 68 (Dec. 2015) (From 1995-2014, an average of four days per 1,000 were lost to strikes in Germany; in the United States, the figure was 24 per 1,000 days).
 See Figure 1 above.
 Robot Density Nearly Doubled Globally, International Federation of Robotics (Dec. 14, 2021), https://ifr.org/ifr-press-releases/news/robot-density-nearly-doubled-globally; Wolfgang Dauth, Sebastian Findeisen, Jens Suedekum & Nicole Woessner, The Adjustment of Labor Markets to Robots, 19 J. Eur. Econ. Ass’n 3104 (2021).
 Daron Acemoglu & Pascual Restrepo, Robots and Jobs: Evidence from US Labor Markets, 128 J. Pol. Econ. 2188 (2020).
 Figure 1, above.
 Jäger et al. supra note 8, at 1.
 Jäger et al. supra note 8, at 11.
 See Figure 2 below.
 Jacobs & Münder, supra note 4, at 1.
 Deborah Goldscmidt & Johannes F. Schmieder, The Rise of Domestic Outsourcing and the Evolution of the German Wage Structure, NBER Working Paper No. 21366 (2015), https://www.nber.org/papers/w21366.
 Jäger et al. supra note 8 at 12.
 Morad Elhafed, Stuck in the Middle No More: How German Mittelstand Companies Can Break Out and Go Global, Forbes (Feb. 24, 2022), https://www.forbes.com/sites/forbesbusinesscouncil/2022/02/24/stuck-in-the-middle-no-more-how-german-mittelstand-companies-can-break-out-and-go-global.
 Markus Grabka, Income Inequality in Germany Stagnating Over the Long Term, but Decreasing Slightly During the Coronavirus Pandemic, DIW (2021), https://d-nb.info/1238598374/34; Karl Brenke, Real Wages in Germany: Numerous Years of Decline, 5 German Inst. Econ. Rsch. 1 (2009).
 Collective Bargaining, worker-participation.eu, https://www.worker-participation.eu/National-Industrial-Relations/Countries/France/Collective-Bargaining (last visited Aug. 23, 2022); Collective Bargaining, worker-participation.eu, https://www.worker-participation.eu/National-Industrial-Relations/Countries/Italy/Collective-Bargaining (last visited Aug. 23, 2022).
 Jacobs & Münder supra note 4, at 15.
 29 U.S.C. §§ 151-169, Section 7.
 See, e.g., 15 USC § 1 (“prohibiting any combination… in restraint of trade or commerce”). This language notwithstanding, the Sherman Act doesn’t prohibit “any… restraint.” Simple coordination may or may not be unlawful, for example, while horizontal agreements among competitors to fix prices or allocate markets is per se unlawful. See, e.g., United States v. Socony-Vacuum Oil Co. Inc., 310 U.S. 150, (1940). See also, Arizona v. Maricopa County Medical Society, 457 U.S. 332, (1982); Kiefer-Stewart Co. v. Joseph E. Seagram & Sons Inc., 340 U. S. 211, (1951).
 Cynthia L. Estlund & Wilma Liebman, Collective Bargaining Beyond Employment in the United States, 42 Comp. Lab. L. & Pol’y J. 371, 373 (2021).
 Id. at 373–74.
 In re Debs, 158 U.S. 564 (1895); Loewe v. Lawlor, 208 U.S. 274 (1908)
 15 U.S.C. § 17.
 29 U.S.C. § 151–169; 29 U.S.C. § 104; see also, United States v. Hutcheson, 312 U.S. 219 (1941) (Reaffirming that legislation had created a strong antitrust exception for labor unions).
 Antitrust Guidance for Human Resource Professionals, DOJ Antitrust Division (October 2016), https://www.justice.gov/atr/file/903511/download (“An agreement among competing employers to limit or fix the terms of employment for potential hires may violate the antitrust laws if the agreement constrains individual firm decision- making with regard to wages, salaries, or benefits; terms of employment; or even job opportunities.”)
 See, e.g., United States and Arizona v. Arizona Hospital and Healthcare Association and AxHHA Service Corp., Case No. CV07-1030-PHX, (2007) (DOJ sued the Arizona hospital association for attempting to bargain collectively for most hospitals in the state in order to set rate schedules for per-diem nurses.); In the Matter of the Good Guys Inc., 115 F.T.C. 670 (1992) (FTC sued a group of nursing homes that had collectively agreed to not use the services of a particular nursing registry that had raised the prices it was charging for its per-diem nurse placement); Council of Fashion Designers of America, Federal Trade Commission (Jun. 9, 1995), https://www.ftc.gov/news-events/news/press-releases/1995/06/council-fashion-designers-america (FTC sued the council of fashion designers for colluding to reduce the prices of fashion models).
 Brown v. Pro Football, 518 U.S. 231, (1996).
 Id. at 234.
 Id. at 235.
 518 U.S. at 250.
 See, e.g., Maricopa, Goldfarb, Professional Engineers, FTC v. AMA.
 Parker v. Brown, 317 U.S. 341, 350–51, (1943).
 N. Carolina State Bd. Of Dental Examiners v. FTC, 574 U.S. 494, (2015); California Retail Liquor Dealers Ass’n v. Midcal Aluminum Inc., 445 U.S. 97, (1980).
 California Retail Liquor Dealers Ass’n, 445 U.S. at 105, (1980).
 FTC v. Phoebe Putney Health System Inc., 568 U.S. 216, (2013).
 N. Carolina State Bd. of Dental Examiners, 574 U.S. at 505.
 Id. at 511—12.
 Assem. Bill 257, Food facilities and employment, ch. 246 § 1471(a)(1)(A)-(F) (2021-2022), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202120220AB257.
 Id. at (d)(1)(A)
 Id. at (d)(1)(B).
 This is particularly relevant considering NC Dental’s holding that focused on “the constant requirements of active supervision.” (574 U.S. at 515). See also, Brief for the United States as Amici Curiae, No. 19-12227 (2019), https://www.ftc.gov/system/files/documents/amicus_briefs/smiledirectclub-llc-v-battle-et-al/smiledirectclub-v-battle_ca11_usa_ftc_amicus_brief_9-25-19.pdf (FTC citing NC Dental as requiring a state to undertake the “constant requirement of active supervision”).
 California AB 257, at 5.
 See Id. at 10, s. (k)(1): “The minimum wages, maximum hours of work, and other working conditions fixed by the council in standards promulgated pursuant to subdivision (d) shall be the minimum wage, maximum hours of work, and the standard conditions of labor for fast food restaurant employees or a relevant subgroup of fast food restaurant employees for purposes of state law.”
 Felix Behr, The Big Ways Robots Are Quietly Taking Over Fast Food, mashed (Feb. 14, 2022), https://www.mashed.com/433837/the-big-ways-robots-are-quietly-taking-over-fast-food.
ICLE Issue Brief There is currently no formal legal mechanism by which to form sectoral collective-bargaining agreements in the United States. However, a political debate is now underway about whether this should change, with a specific focus on the hospitality industry and the so-called “gig” economy.
There is currently no formal legal mechanism by which to form sectoral collective-bargaining agreements in the United States. However, a political debate is now underway about whether this should change, with a specific focus on the hospitality industry and the so-called “gig” economy. By contrast, Germany has a long tradition of sectoral collective bargaining. For a better idea of the consequences a legislative initiative to enact such a mechanism might have in the United States, this report looks with due brevity at the legal and practical situation in Germany. From the employer’s point of view, what are the advantages and disadvantages of sectoral collective bargaining in Germany? What are the incentives and disincentives for an employer to opt into collective bargaining? Quantitative data shows that sectoral collective bargaining is steadily becoming less prevalent in Germany. One reason for this decline could be that, for some employers, the disadvantages outweigh the advantages.
There is a long tradition of sectoral collective bargaining in Germany. The total number of German employees working under a sectoral collective-bargaining regime, however, has been in continuous decline. As of 1996, 70% of employees in western Germany and 56% of employees in eastern Germany were employed under a sectoral collective-bargaining agreement. By 2020, those numbers had fallen to 45% and 32%, respectively. Still, there is new interest in the United States in German-style sectoral-bargaining arrangements. In legislative debates in the U.S. Congress, as well as in New York State, sectoral collective bargaining has been referenced as a model to emulate.
This issue brief discusses the advantages and disadvantages of sectoral collective-bargaining agreements in Germany. While we found no studies that offered a comprehensive assessment of the impact of each factor, it is plausible that the advantages and disadvantages described here are part of the calculus for a German business considering whether to opt into sectoral collective bargaining. One reason why fewer employers are opting into this mechanism could be that they collectively see the disadvantages of sectoral collective-bargaining agreements as preponderate over the advantages. There are other factors not addressed in this brief that have contributed to such agreements becoming less prevalent overall. These include changing industrial structures, less organization on the part of labor, and a trend toward more individualistic behavior in society at large. Weighing the advantages against the disadvantages, this brief concludes that the complexities and complications arising under a sectoral-bargaining system may, for some employers, outweigh the benefits that such schemes provide.
First, we present the various sources of German labor law (Part I), which should help readers to understand the advantages and disadvantages of sectoral collective bargaining as they are laid out here. Namely, when an employer opts out of sectoral collective bargaining, the decision is tantamount to choosing a different approach to setting the terms and conditions of employment. Basic knowledge of the various ways to set terms of employment in Germany is a prerequisite to understanding the advantages and disadvantages of sectoral collective bargaining from the employer’s point of view (Part II).
Labor and employment relations in Germany are marked by a multilayered regulatory system.
The basis of every employment relationship is a contract of employment agreed upon by an employer and an employee. As a matter of constitutionally guaranteed private autonomy, it is true that the parties to an employment contract are fundamentally at liberty to include whatever terms they like in their agreement. But there are some limits, drawn mainly by law. The courts, as well as lawmakers, operate under the assumption that employees are the weaker of the two parties, structurally speaking. In order to prevent employers from exploiting their economic strength against employees who come before them as individuals, employment contracts must not disadvantage employees in inappropriate ways (e.g., under section 307, para. 1 and section 310, para. 3, no. 1 of the German Civil Code). This principle is known as “review of standard terms and conditions” or “review of form contracts” (ABG-Kontrolle).
In addition to employment contracts negotiated individually between an employer and an employee, an employer can bind itself contractually to provide an agreement to some or all its employees through a mechanism called a “grant to the entirety” (Gesamtzusage). A grant to the entirety is an offer directed at all employees to modify the employment contract; and as a rule, employees tacitly accept it. However, an employer proceeding with this course of action can only bind itself unilaterally and cannot extract any performance from the opposite side; a grant to the entirety is therefore a one-way street.
In the labor-and-employment-law hierarchy of authority, “works agreements” sit above employment contracts. They can be entered into at various levels: at the plant or facility level, at the company or enterprise level, and at the concern or conglomerate level.
Under the Works Constitution Act (Betriebsverfassungsgesetz, the “BetrVG”), employees can elect a body called the “works council” (Betriebsrat) to represent them at their facility. The works council represents all employees at the facility regardless of whether they participated in its election. Roughly speaking, the Bundesarbeitsgericht [Federal Labor Court] takes a “plant” or “facility” (Betrieb)—as the term is used in section 1, para. 1, sentence 1 of the BetrVG—to be an organizational unit that operates under unitary leadership and within which an employer, having employees and facilities, seeks to carry out a purpose. A plant or facility is thus a local unit, and there can be several of them within a single company. If a company comprises several plants or facilities, a “general works council” is formed at the company or enterprise level (see section 47, para. 1 BetrVG). If the company is part of a concern or conglomerate, the workforce may constitute a “concern works council” (see section 54, para. 1 BetrVG).
Pursuant to section 77, para. 4, sentence 1 of the BetrVG, works agreements apply directly to and are compulsory for all employees. “Directly” here refers to the fact that the parties to the employment contract need not stipulate to the validity of the works agreement: independently of the will of the parties, the employment relationship is subject to the works agreement as if it were law. “Compulsory” means that the employment contract’s provisions generally may not deviate from works agreements unless the difference redounds to the employee’s advantage.
At the same time, the parties are not free to negotiate on the full range of issues. Pursuant to section 77, para. 3, sentence 1 of the BetrVG, a works agreement cannot cover compensation and other terms and conditions of employment that are (or typically would be) covered under a collective-bargaining agreement. The employer need not be subject to a collective-bargaining agreement, nor does a corresponding valid collective-bargaining agreement even need to exist; rather, so long as the contemplated provision is “typical” of collective bargaining, it cannot be covered by a works agreement. The purpose of this rule is to ensure robust autonomy of the parties to collective bargaining. Works councils, which are unlike labor unions in that employees are not obligated to pay dues, are not to come into competition with them.
Collective-bargaining agreements are contracts collectively negotiated between an employer and its employees (by and through the representative body, if any, that each side opts to have represent it). Collective-bargaining agreements provide for the content, formation, and termination of employment relationships; see section 1, para. 1 of the Collective Agreements Act (Tarifvertragsgesetz, the “TVG”). Only a union can enter into a collective-bargaining agreement on the employees’ side. The employer’s side might be an individual company or enterprise, or an association of employers. A collective-bargaining agreement entered into by a company or enterprise is known as a “firm-specific collective-bargaining agreement” (Firmentarifvertrag).
While collective-bargaining agreements, generally, are an important and relevant topic of discussion, this brief deals specifically with sectoral collective-bargaining agreements, a special kind in which the contracting party on the employer’s side is an association or federation of employers. If a collective-bargaining agreement applies to a maximum number of employers in a particular sector of the economy, it is referred to as a “sectoral collective-bargaining agreement” (Flächentarifvertrag).
Whereas individual employees are presumed, as a structural matter, to be the weaker party relative to employers, employees in a union have collectivized their power and thus are supposed to have achieved parity with the employer’s side. For this reason, a presumption of reasonableness is ascribed to collective-bargaining agreements. This is because the parties to collective-bargaining agreements treat one another as near-equals and, as a result, such agreements presumably provide reasonable terms and conditions of employment. The legal requirements for collectively bargained rules and norms are therefore also not as strict; for example, they are not subject to the same kind of oversight as employment contracts, which must pass muster under “review of form contracts” principles (see section 310, para. 4, sentence 1 of the German Civil Code).
Similar to works agreements, collectively bargained rules apply directly and are compulsory pursuant to section 4, para. 1, sentence 1 of the TVG. In fact, they are said to possess “normative force” (normative Wirkung). Collectively bargained rules apply when both sides of the employment relationship are bound to the collective-bargaining agreement; the parties to an employment contract need not stipulate to it. Unless the collective-bargaining parties have expressly agreed to sanction deviations from an agreement’s terms, the parties to an employment contract are only permitted to deviate from collectively bargained rules and norms if the deviation benefits employees; see section 4, para. 3, alternative 2 TVG. Accordingly, collective-bargaining agreements set the floor for terms and conditions of employment.
For collective-bargaining agreements to possess “normative force,” both parties to an employment contract must have opted into collective bargaining. Collective bargaining becomes binding for employees when they join a union; see section 3, para. 1, alternative 1 TVG. If an employer enters into a firm-specific collective-bargaining agreement, that employer is bound to abide by it under section 3, para. 1, alternative 2 TVG. The terms of an association’s collective-bargaining agreement become binding upon an employer when that employer joins the association that is party to it; see section 3, para. 1, alternative 1 TVG. Employer associations or federations are societies of employers organized by economic sector (and often by region). The validity of a sectoral collective-bargaining agreement thus requires that the employer in question be a member of an organization of this kind.
The Collective Agreements Act (the “TVG”) does not call for any particular arbitration or dispute-resolution mechanism to resolve conflicts between the parties to collective-bargaining agreements. Because the employers’ side regularly resists the demands of a union (for example, for higher salaries), there needs to be a mechanism to force both collective-bargaining parties to the table, as well as a source of pressure for them to reach an agreement. This mechanism is the “job action” (Arbeitskampf), which on the employees’ side consists mainly in going on strike. The right to strike is constitutionally guaranteed under Article 9, para. 3 of the Basic Law (Grundgesetz, the “GG”), and if a union goes on strike, any employee is entitled to participate.
German law, as well as European Union labor law, contains numerous additional rules and provisions that are relevant for employment relationships. The Basic Law (as Germany’s constitution), on the other hand, provides hardly any rules that come to bear on employer–employee relationships.
Based on the sources of German labor law laid out in Part I, the advantages and disadvantages of sectoral collective-bargaining agreements from the employer’s perspective will be easier to see. What incentives lead an employer to opt into sectoral collective bargaining (Section A)? Why do employers go down this path in arranging their employee relationships, rather than managing those relationships by means of a firm-specific collective-bargaining agreement, a works agreement, or employment contracts? What has led more employers to opt out of sectoral collective-bargaining agreements or to never opt in to begin with (Section B)?
Employers benefit from sectoral collective-bargaining agreements in multiple ways. The advantages are sufficiently alluring to motivate an employer to opt in if, in its estimation, they outweigh the accompanying disadvantages of such agreements (on the disadvantages, see Section B).
Collective-bargaining agreements are generally viewed as being attended by what is known as a “relative duty to keep the peace” (relative Friedenspflicht). This duty to keep the peace is the reason a union is prohibited from striking to achieve terms already settled under a collective-bargaining agreement to which it is a party. The duty applies for the entire term of the agreement, during which the union must conduct itself “peacefully.”
Once the validity of that agreement has expired, however, a union is allowed to strike to try to force its way into a renewed collective-bargaining agreement on more favorable terms. If the expired collective-bargaining agreement was firm-specific, then the target of this kind of strike will necessarily be the employer party to that agreement. Thus, being bound to the terms of a firm-specific collective-bargaining agreement comes with a risk of periodic job action.
An employer can reduce this risk by opting into sectoral collective bargaining by joining an association or federation of employers that enters into such agreements on its behalf. Namely, in the event of a strike over a sectoral collective-bargaining agreement, a union in most cases will strike not against all but only select firms within the association or federation. This lowers the risk that any one employer will have to suffer production or revenue losses because of a strike it cannot do anything about.
Sectoral collective bargaining enables plants and facilities, as well as companies or enterprises, to insulate themselves from disputes over terms and conditions of employment. Such disputes are shifted up to the association level, lowering the risk that such a dispute will affect the atmosphere at the plant.
Alternatively, an employer might provide for terms and conditions of employment collectively, seeking a firm-specific collective-bargaining agreement or a works agreement. But firm-specific collective-bargaining places the locus of discussions about the terms and conditions of employment inside the company or enterprise. Dissatisfaction with the outcome of negotiations is, therefore, felt directly within the company. Relatedly, there is more of a tendency for it to be directed at the employer itself than would be the case if negotiations were conducted at further remove—i.e., at the level of the association or federation as the negotiating partner. If an employer decides, on the other hand, to set terms and conditions of employment collectively through works agreements (to the extent that this option is legally viable in the first place), it can have a negative impact on its working relationship with the works council. Namely, negotiations about terms and conditions of employment are much more contentious than the day-to-day matters, such as hiring decisions, which require the works council’s involvement.
Sectoral collective-bargaining agreements are legally sanctioned contracts that create a trust or syndicate. While valid, these agreements foreclose the possibility of (among other things) competition among the participating companies with respect to terms and conditions of employment. As coordinated via the collective-bargaining agreement, all the association or federation’s members will pay at least the same salaries for comparable job specifications and qualifications. An employer can thus be confident that a German competitor who is bound to the same collective-bargaining agreement will not be able to outbid it by betting on worse terms and conditions of employment. Because they do not apply across companies and enterprises, firm-specific collective bargaining and works agreements cannot accomplish what sectoral collective bargaining can in terms of shutting down competition within an industrial sector.
This means that two conditions are needed to achieve the “trust effect”: (i) the competition must be in Germany and (ii) it must be bound under the same sectoral collective-bargaining agreement. That, in turn explains why, over the course of decades, the trust effect has steadily waned as an advantage of sectoral collective bargaining. Where there is markedly less attachment to sectoral collective bargaining and vigorous competition from companies outside Germany in a given economic sector, the trust effect of sectoral collective bargaining is diluted.
Namely, most foreign competitors of German companies overwhelmingly are not tied to German sectoral collective-bargaining agreements. In fact, they are only obligated to follow German collective-bargaining agreements if they both generate labor output in Germany and the Bundesministerium für Arbeit und Soziales [Federal Ministry of Labor and Social Affairs] extends their scope to cover foreign employers who carry on activities in Germany, either by declaring the agreements generally compulsory under section 5 TVG or by issuing a regulation pursuant to sections 7 and 7a of the Act on Mandatory Working Conditions for Workers Posted Across Borders and for Workers Regularly Employed in Germany (Arbeitnehmer-Entsendegesetz – AEntG) (see sections 3 and 8 AEntG). The minute a foreign company or enterprise produces goods or delivers services abroad, German sectoral collective bargaining will cease to affect competition from it. To this extent, the sectoral collective-bargaining agreement serves no purpose in terms of eliminating it.
Since more employers are not tied to sectoral collective bargaining and German companies compete with foreign companies all the time in this age of globalization, the trust effect is regularly not decisive in the calculus of whether to opt into sectoral collective bargaining.
An association or federation of employers normally will be an organization comprising multiple companies. A broader membership structure makes it more probable that the members, in terms of their finances and profitability, will differ. If salary and wages under a sectoral collective-bargaining agreement were oriented toward the most profitable company, it would not be feasible for all members. Thus, payroll levels are traditionally geared instead toward the productivity of the weakest one-third of member companies. This is why it can make sense for a business that is thriving relative to its economics sector to join an association or federation of employers: it is a way to prevent one’s own financial strength from becoming the yardstick in salary negotiations, the way it would be in a firm-specific collective-bargaining environment.
It is costly and difficult to prepare for and conduct collective-bargaining negotiations. The union’s demands must be reviewed by counsel, and their feasibility and ramifications must be analyzed from a practical standpoint. The employer’s side must develop its own position on what it would like to have in the collective-bargaining agreement. It must seek advice on whether (and how) those goals can be achieved with legal certainty and how the agreement would affect the company. It also needs to develop a strategy and narrative for both the interval leading up to the negotiations and the negotiations themselves.
As these activities crop up, a company or enterprise that manages its labor relations by means of firm-specific collective bargaining is required to employ specialists or resort to a significant volume of external support. Companies pursuing firm-specific collective-bargaining agreements, therefore, incur expenses and could require additional hiring.
Consequently, one advantage of sectoral collective bargaining, from the employer’s perspective, is that such negotiations need not be conducted in-house. Instead, these tasks are unloaded onto an association or federation of employers that bundles collective bargaining on behalf of all members so that the association or federation’s central collective-bargaining division will adequately represent the employers’ interests, while simultaneously managing the administrative tasks associated with bargaining. Even if the employers pay dues to the organization, this approach creates cost savings, because the costs are distributed across the entire membership. The more centralized the conduct of negotiations and the broader the scope of a collective-bargaining agreement, the lower the transaction costs for the employers.
In addition to the suggested advantages of sectoral collective-bargaining agreements highlighted in Section A, there are also serious structural disadvantages.
As a rule, sectoral collective-bargaining agreements apply to all member companies and enterprises in each region—e.g., to the metals and electronics-industry firms in the state of Bavaria. This means they apply both to companies and enterprises in densely populated areas with a lot of industry and high costs of living, as well as to those in rural areas. Additionally, sectoral collective-bargaining agreements apply to large organizations with several thousand employees, as well as to a smaller mid-sized company with only 50 employees.
It is, therefore, practically impossible for a one-size-fits-all sectoral collective-bargaining agreement to promulgate employment terms that would be appropriate for all kinds of businesses. Differently sized employers that make different products in different locations do not necessarily expect the same outcomes when they commit their terms and conditions of employment to collective bargaining. In addition, the businesses within a broadly defined sector will vary in terms of profitability, depending on which subsector of the economy they are deemed a part of. This can make it challenging for a less-profitable business to fund payroll increases geared toward companies in the same sector that enjoy greater financial success. Belonging to an association or federation of employers can, therefore, exacerbate a less-profitable company’s financial situation.
The sectoral collective-bargaining parties have been criticized for putting overly rigid agreements in place and have reacted at times by writing savings clauses into their agreements. The clauses “save” certain subject matter of the agreements for eventual plant- or facility-level regulation. To the extent provided under a savings clause, employers and works councils can enter into works agreements that deviate from the collectively bargained rules—even to the disadvantage of employees. Section 77, para. 3, sentence 2 of the BetrVG removes the legal impediment to works agreements addressing issues otherwise reserved for collective bargaining. Depending on how they are executed, such savings clauses serve as a basis for the works parties to stipulate to, e.g., temporary reductions in hours (and, correspondingly, pay) or to temporary suspensions of rights under a collective-bargaining agreement.
Opting into sectoral collective bargaining has far-reaching consequences. Once an employer has opted into sectoral collective bargaining, it will have a tough time later if it seeks to extricate itself from the terms and conditions of employment under the agreement. This can become especially problematic if the company’s finances take a turn for the worse. A company or enterprise also may find itself in an internationally competitive environment that makes it imperative to react with maximum flexibility, and in a decentralized way, to challenges created by innovative products and technologies.
In principle, an employer is constrained by a sectoral collective-bargaining agreement if it is a member of the employers’ association, and the agreement is effective. If an employer decides to leave the association or federation of employers before the agreed-upon expiry of the collective-bargaining agreement, section 3, para. 3 of the TVG binds the employer to the terms of the agreement through the end of the agreement’s term. This principle is known as the “continuing commitment” (Nachbindung). Thus, until the collective-bargaining agreement has expired, an employer cannot deviate from the agreement to the employees’ disadvantage, despite no longer belonging to the association or federation and even if its own workforce agrees to the change. In the short term, it can be unpleasant to be tied to collectively bargained salary and wage schedules, which usually run for a few years at a time.
From an employer’s perspective, however, it can be significantly more uncomfortable to be bound to collective-bargaining agreements with open-ended or unlimited timeframes. For example, employers will often enter into open-ended collective-bargaining agreements that lock in basic elements of the employment framework, such as paid vacation or long notice periods for terminations or layoffs, for decades at a time. Such agreements are risky for employers because they never “end,” and the “continuing commitment” only ends upon the agreement’s expiration date. There is a debate in the labor and employment-law literature over when this potentially “perpetual constraint” ought to terminate. As a matter of current law, however, the Bundesarbeitsgericht [Federal Labor Court] has rejected these considerations.
The termination of the “continuing commitment” is at once also the beginning of what is known as the “continuing effect” or “aftereffect” (Nachwirkung); see section 4, para. 5 of the TVG. Once a collective-bargaining agreement has expired, its provisions remain in force until another agreement replaces it. Going forward, an employer who has left the association or federation can thus adjust terms and conditions of employment so that the workforce bears the burden, as well. But for this to happen, the employees must give their consent, which they have little incentive to do. Another option at this stage would be to modify the terms and conditions of employment by way of a works agreement. But terms and conditions that were included in collective-bargaining agreements will, in many cases, be barred as subject matter for works agreements under section 77, para. 3, sentence 1 of the BetrVG, a provision which has already come up in this brief.
For an employer constrained by a sectoral collective-bargaining agreement that does not contain savings clauses, the only realistic way to modify terms and conditions of employment to cut costs is to enter into a firm-specific collective-bargaining agreement with the union. If an employer-employee relationship is governed by a sectoral as well as a firm-specific collective-bargaining agreement with the same union, the dominant view is that the firm-specific agreement, being more specific, controls—even if its terms are less favorable. As long as a sectoral collective-bargaining agreement remains in force, however, the employer will have no means to exert pressure on the union to enter into a firm-specific agreement if worse terms and conditions are at stake for labor. It will instead have to consign itself to the good will of the union. The company will have to convince the union, based on its financial situation, that it and the jobs it provides can only be saved if the parties agree to less favorable terms and conditions of employment in a firm-specific collective-bargaining agreement.
Even this procedure can often be made more difficult by an employer’s past lack of rigor in setting up its employment contracts. The employment contracts of employers who are under collective-bargaining agreements regularly contain clauses that incorporate by reference terms from the collective-bargaining agreement. The result is that the employer-employee relationship becomes subject to those terms even if the employee is not a member of the union, which results in the collective-bargaining agreement not having normative force. Depending on how the incorporation by reference clause is drafted, there is a risk from the employer’s perspective that the “better” terms and conditions in the sectoral collective-bargaining agreement will continue to apply, alongside the worse ones in the firm-specific agreement. In such a situation, the terms more favorable to the employee would prevail under section 4, para. 3, alternative 2 of the TVG, leaving the employer constrained by sectoral collective bargaining—simply by force of its incorporation by reference in an employment contract.
Thus, from the perspective of an employer, it is difficult, in practical terms, to opt out again once one has opted into sectoral collective bargaining. This can provide an especially serious disadvantage in times of rapid economic transformation, or for a business in crisis.
Sectoral collective bargaining, or rather its sum total—the aggregation of various sectoral collective-bargaining agreements—keeps growing in complexity. One can only speculate as to why. One factor will be the desire, on the part of both employer and employee, for more flexibility in the employment relationship. The complexity of the arrangements is a major challenge for small and mid-sized companies and enterprises. Locally and in a decentralized manner, with small human-resources departments, they must implement sectoral collective-bargaining agreements that were negotiated by large, dedicated commissions.
And often for a business, it may not elect to abide only by select parts of the aggregation of agreements. Employers instead face an all-or-nothing situation: either they implement the entire, complex body of agreements as an association or federation member, or they do not participate as members constrained by collective bargaining. The leading federation for labor and social policy for the entire German economy—the Bundesvereinigung der Deutschen Arbeitgeberverbände [Confederation of German Employers’ Associations]—has acknowledged the problem of the complexity of these bodies of agreements. One solution it has proposed is to permit companies and enterprises to select individual modules from the group of agreements, like building blocks. For that to happen, an employer’s association must strike a corresponding arrangement in a collective-bargaining agreement with the union. Jörg Hofmann—head of the large and powerful union IG Metall—however, recently rejected such a proposal.
Another reason an employer may not opt into sectoral collective bargaining is that collective-bargaining agreements almost always provide for annual pay increases. In sectoral collective-bargaining agreements, the annual increases are not geared toward individual business performance. To that extent, employers who are not so constrained can proceed with greater self-determination and avoid this almost automatic annual rise in labor costs.
Even if collective-bargaining agreements help companies and enterprises save on transaction costs, this advantage comes with a loss of payroll flexibility. Uniform terms and conditions of employment means employees are on compensation schedules geared toward their job descriptions and qualifications, rather than their productivity; after all, a collective-bargaining agreement needs to contain some kind of abstract or generalized compensation scheme. While it is true that employers can still reward good job performance by paying bonuses beyond what the pay scale requires, for many employers, it is also a major challenge to set up a legally sound bonus system.
Sectoral collective bargaining has played, and will continue to play, a significant role in the employment world, even if the prevalence of sectoral collective-bargaining agreements is steadily waning. Whether an employer opts into sectoral collective bargaining is a matter of weighing the pros and cons of such a scheme, as discussed here. Every employer must decide for itself whether the advantages of these agreements outweigh the disadvantages. From the perspective of a forward-looking company that values flexibility and wants to offer employment terms that are specific and tailored to its business, there is much to recommend not subjecting one’s terms and conditions of employment to sectoral collective bargaining, unless the agreements in question provide enough in the way of savings clauses that permit more flexible (temporary or long-term) management of certain parts of the agreement that govern terms and conditions of employment
In sum, the challenges associated with sectoral bargaining in Germany are noteworthy. Policymakers in the United States who seek to import such a model would do well to understand these challenges arising in Germany.
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 IAB, Tarifbindung und betriebliche Interessenvertretung 2020 – Ergebnisse aus dem IAB-Betriebspanel, table 5.
 Cf. BVerfG, Case No. 1 BvR 1571/15 and passim, NZA 2017, 915, para. 146 (Jul 11, 2017); BAG, Case No. 7 AZR 716/09, NZA 2011, 905, para. 35 (Apr 6, 2011); BAG, Case No. 1 AZR 189/17, NZA 2019, 402, para. 32 (Nov 20, 2018); BT-Drs. 18/4062, p. 8, which cites language employed by the Bundesverfassungsgericht [Federal Constitutional Court] verbatim.
 See, e.g., BAG, Case No. 5 AZR 424/16, NZA 2017, 1073, para. 13 (Mar 22, 2017) and ErfK-U. Preis, BGB § 611a, para. 218.
 For the more extensive and precise definition, see BAG, Case No. 7 ABR 38/04, juris, para. 18 (May 25, 2005).
 Richardi-R. Richardi/C. Picker, BetrVG § 77, para. 148.
 NK-GA-R. Schwarze, BetrVG § 77, para. 56.
 On the primacy of mandatory codetermination pursuant to § 87, para. 1 BetrVG over § 77, para. 3 BetrVG, see BAG (GS), Case No. GS 2/90, NZA 1992, 749, at 752-755 (Dec 3, 1991) and ErfK-T. Kania, BetrVG § 77, paras. 53-56.
 Cf. ErfK-T. Kania, BetrVG § 77, paras. 45-49.
 BAG, Case No. 5 AZR 36/19, NZA 2020, 868, para. 20 (Mar 18, 2020).
 ErfK-T. Kania, BetrVG § 77, para. 43.
 Certain plant- or facility-level policies that apply to all employees regardless of union membership, as well as the fact that the establishment and organization of works councils can be negotiable in collective bargaining, see § 1, para. 1 TVG, have no bearing on this memorandum.
 See R. Rebhahn, NZA-Beilage 2011, 64 on the specific features of a sectoral collective-bargaining agreement.
 Cf. BVerfG, Case No. 1 BvR 1571/15 and passim, NZA 2017, 915, para. 146 (Jul 11, 2017).
 On the presumption of reasonableness, see for example BAG, Case No. 4 AZR 50/13, NZA 2015, 115, para. 29 (May 21, 2014) and Wiedemann-M. Jacobs, Einleitung, paras. 100-118; see BVerfG, Case No. 1 BvR 1571/15 and passim, NZA 2017, 915, para. 146 (Jul 11, 2017): “Richtigkeitsvermutung”; for an overview of the differences in terminology see Wiedemann-M. Jacobs, Einleitung, para. 103 m.w.N.
 ErfK-M. Franzen, TVG § 4, para. 1.
 ErfK-M. Franzen, TVG § 4, para. 2.
 See ErfK-M. Franzen, TVG § 1, para. 2.
 E.g., BVerfG, Case No. 1 BvR 1571/15 and passim, NZA 2017, 915, para. 131 (Jul 11, 2017).
 On the right to strike for nonunion workers or for workers organized elsewhere, see BAG, Case No. 1 AZR 142/02, NZA 2003, 866, at 867-868 (Feb 18, 2003).
 On which see, e.g., BAG, Case No. 1 AZR 160/14, NZA 2016, 1543, para. 27 (Jul 26, 2016) and more thoroughly FJK ArbeitskampfR-Hdb-C. Mehrens, § 4, paras. 122-157.
 J. Lessner, RdA 2005, 285, at 286; C. Schnabel, NZA-Beilage 2011, 56, at 58; cf. K. Hering, NZA-Beilage 2011, 61, at 63; cf. W. Boecken, in: Arbeitslosigkeit, 113, at 123.
 See above at I.2.
 M. Löwisch and V. Rieble, Tarifvertragsgesetz, Grundlagen, paras. 44-45; on authorization under antitrust law Wiedemann-M. Jacobs, Einleitung, paras. 95-99; see also the thorough treatment in Däubler-D. Schiek/D. Ulber, Einleitung, paras. 556-589.
 Cf. A. Junker, ZfA 1996, 383, at 390 and C. Höpfner, Die Tarifgeltung im Arbeitsverhältnis, at 232.
 R. Rebhahn, NZA-Beilage 2011, 64, at 66; M. Gentz, in: FS Schaub, 205, at 208-209.
 M. Löwisch and V. Rieble, Tarifvertragsgesetz, TVG § 4, para. 473.
 J. Lessner, RdA 2005, 285, at 286.
 On this as a reason for opting into collective bargaining, see G. Schaub, NZA 1998, 617, at 618.
 See C. Schnabel, NZA-Beilage 2011, 56, at 58.
 This is also noted by C. Schnabel, NZA-Beilage 2011, 56, at 58, who thus concludes that the more centralized the sectoral-level negotiation process, the more leeway ought to be provided for plant-level solutions.
 Cf. H. Konzen, NZA 1995, 913, at 917.
 For an overview, see R. Bispinck, Mitbestimmung 2003, 16, at 17; on the instruments that create flexibility in sectoral collective-bargaining agreements in the chemicals industry, see W. Goos, in: GS Heinze, 259, at 265-268; Däubler-W. Däubler, Einleitung, para. 59; M. Löwisch and V. Rieble, Tarifvertragsgesetz, TVG § 4, para. 466; C. Schnabel, NZA-Beilage 2011, 56, at 61; T. Dieterich, NZA-Beilage 2011, 84, at 85-86; for in-depth discussion of savings clauses in collective-bargaining agreements, see Wiedemann-G. Thüsing, TVG § 1, paras. 252-302.
 Däubler-W. Däubler, Einleitung, para. 59; M. Löwisch and V. Rieble, Tarifvertragsgesetz, TVG § 4, para. 470.
 Cf. M. Franzen, RdA 2001, 1, at 4-5; M. Henssler, ZfA 1994, 487, at 507-508; P. Hanau, RdA 1998, 65, at 68-69.
 C. Schnabel, NZA-Beilage 2011, 56, at 59.
 Cf. G. Schaub, NZA 1998, 617, at 619.
 C. Höpfner, Die Tarifgeltung im Arbeitsverhältnis, at 399-406; Wiedemann-H. Oetker, TVG § 3, paras. 100-102; M. Löwisch and V. Rieble, Tarifvertragsgesetz, TVG § 3, paras. 272-279; BeckOK ArbR-R. Giesen, TVG § 3, para. 24.
 BAG, Case No. 4 AZR 261/08, NZA 2010, 53, paras. 34-49 (Jul 1, 2009), according to which a continuing commitment that extended for more than a year beyond the earliest possible opportunity to terminate the collective-bargaining agreement was constitutional; C. Höpfner, Die Tarifgeltung im Arbeitsverhältnis, at 391-394 views a commitment continuing in perpetuity as unconstitutional.
 See above at I.2.
 BAG, Case No. 4 AZR 655/99, NZA 2001, 788, at 789-790 (Jan 24, 2001); BeckOK ArbR-R. Giesen, TVG § 4, para. 15; for a critical take on the principle that more specific provisions prevail, see Wiedemann-M. Jacobs, TVG § 4a, paras. 481-491.
 BDA, Arbeitsrecht und Tarifpolitik – Tarifvertrag.
 ZEIT Online, Arbeitgeber wollen Tarifverträge öffnen.
Scholarship Abstract Economists well understand that the work of Friedrich Hayek contains important theoretical insights. It is less often acknowledged that his work contains testable predictions . . .
Economists well understand that the work of Friedrich Hayek contains important theoretical insights. It is less often acknowledged that his work contains testable predictions about the nature of market processes. Vernon Smith termed the most important one the ‘Hayek hypothesis’: that gains from trade can be realized in the presence of diffuse, decentralized information, and in the absence of price-taking behavior and centralized market direction. Vernon Smith tested this prediction by surveying data on laboratory experimental markets and found strong support. We extend Smith’s work first by showing how subsequent theoretical advances provide a theoretical foundation for the Hayek Hypothesis. We then test the hypothesis using recent field experimental market data. Using field experiments allows us to test several other predictions from Hayek, such as that market experience increases the realized gains from trade. Generally speaking, we find support for Hayek’s theories.