Are unions the reason for Germany’s success?

The sixth part of Timothy Noah’s piece on Slate entitled “United States of Inequality: The Great Divergence and the Death of Organized Labor” gives a historical account for the decline of union membership in the United States. The decline of labor in the United States was a function of the lack of political support at a time when the U.S. was facing an economic crisis of falling wages and rising prices. Reagan deregulation was the proposed fix which included diminished support for labor in America. The political climate at the time expected that in order to compete in world markets, high wages demanded by union members placed high cost burdens on U.S. companies, therefore shifting demand towards cheaper, foreign goods.

The American auto-industry became the symbolic example of union labor’s disastrous effect on the U.S. economy: high priced domestic goods of low quality could not compete with low priced foreign goods from Japan that were of higher quality. In effect, the American auto-industry is now desperately trying to survive, begging for help from the U.S. government. Whatever the reason of the U.S. auto industries demise was; that’s not of concern. The union, mismanagement, lack of early political support, deregulation, etc…, these could all have been factors and could be weighted appropriately as the downfall.

Germany approached this situation differently.  At the same time Reagan decided to withdraw its support for labor in the U.S., Germany did the opposite and now, not only stands as one of the chief auto exporters in the world, but also has union membership and all the alleged devastating associations with it like high wages, expensive benefits, etc… Now Germany’s export led growth is helping it stay out of it’s recession. A healthy fiscal balance sheet and mild stimulus helped too, but why is German exports booming while all others are importing? Take a look at the top German exports for 2009:

1. # Passenger cars … US$11.2 billion (15.7% of exports, down 39% from 2008)
2. # Pharmaceutical preparations … $8.7 billion (12.2%, down 6%)
3. # Other scientific, medical and hospital equipment … $3.7 billion (5.2%, down 13.3%)
4. # Other industrial machinery … $3.4 billion (4.8%, down 26.7%)
5. # Other automotive parts and accessories … $3 billion (4.2%, down 23.8%)
6. # Industrial engines … $1.8 billion (2.6%, down 32.5%)
7. # Automotive engines and engine parts … $1.75 billion (2.5%, down 40.7%)
8. # Electric apparatus … $1.7 billion (2.3%, down 27.5%)
9. # Measuring, testing and control instruments … $1.48 billion (2.1%, down 26.7%)
10. # Industrial organic chemicals … $1.47 billion (2.1%, down 25.5%).

Focus on the makeup, rather than the direction. (German exports are moving back up in 2010) The top exports are all high value-added goods that are high in demand.  Moreover, these goods demand high prices. These high prices translate into a large markup that give enough cushion within the margins to allow union labor.

Is union labor the cause or the benefactor of this success? The perfect comparison between American and German automobiles can help illustrate the answer. Both were union labor, demanded high wages and benefits, and usually sold near the same price given relatively similar models. The difference? German automobiles had the quality to demand higher prices, American automobiles did not.  German car manufacturers had strong brand positing such as BMW, Mercedes and Porche that was associated with the quality.  Germany even had nationalistic branding for quality centering around the concept of “German engineering.”    Marketing is the success here and the reasons for why nations demand German luxury automobile products is more indicative of the products themselves, not how labor is organized.

Germany was successful in becoming a high export nation because it greatly benefited from manufacturing high value added products of high quality.  What this story tells is that, Germany’s success story is mostly in part to the products themselves.  While there are many contributing factors to the quality of those products, you can’t assume that because Germany has unions and that it is a success, that one should assume that unions will lead to success.  One also can’t assume that because of the rise of foreign competition, unions must be abolished, in order to create a cost structure that can compete.  The real lesson here is that the burden of competition will always be placed on the companies who bear it, whether or not a government plan’s on helping those who participate in it.