A Cartel Analysis of the German Labor Institutions and its Implications for Labor Market Reforms

This paper offers a cartel explanation for the stability of German collective bargaining institutions. We show that a dense net of legal safeguards has been woven around the wage-setting cartel. These measures make deviation by cartel insiders less attractive and simultaneously erect entry barriers for alternative unions. As we argue, many recent labor policy measures, which make wages more flexible, serve to further stabilize the labor cartel, while truly procompetitive proposals have not been implemented, exactly because of their destabilizing effects. We propose policy measures that remove entry barriers and facilitate outside competition by alternative collective bargaining organizations. (JEL: J 52, K 31, L 12)