The System of Wage-Setting Japan, Germany and the US: Towards Convergence?

Presentation (Elaboration), 2002

25 Pages, Grade: 2.4 (B)











1 Introduction

How and to what extend do labour systems in general, and wage-setting mechanisms in particular, differ amongst the three biggest economies of the world, namely Japan, Germany, and the United States? Does the trend towards increasing trade liberation lead to pressure to harmonise different wage-setting systems? If so, what is the evidence for convergence?[1] What impact could this have on the future of the labour systems of the so-called less flexible countries?

These are the questions that this paper will attempt to address on the following pages. While limited in scope, it will attempt to shine a light, however brief, on the above issues, and offer a conclusion that will take into account both the facts presented and a possible future scenario.

Specifically, chapter two to four will briefly highlight the main characterises that influence wage-setting in Japan, Germany, and the United States respectively. Chapter five will consider issues of convergence and divergence, in general terms and also more countryspecific. Finally, chapter six will sum up the main findings of this report, and offer a view on the possible future of the convergence debate.

2 The Japanese System of Wage-setting

Traditionally, Japanese HR model and its policies have been, and still are today, characterised by a Life-long Employment System (LES), and - more importantly in the context of this paper - a Seniority-based Wage System (SWS). Both of these policies, it will be shown, are often viewed as mechanism in the promotion of industrial peace in Japan (Sumiya 1976).

The LES involves the recruitment of graduates straight from university, which is followed, after in-house training, by a non-lay-off rule (Watanabe 2000) until the worker’s retirement age. Sumiya (1971) explains this against a historical background, where workers would often switch between companies and take valuable expertise with them from one company to the next. The LES tries to counter this by attempting to keep graduates and their skills in the company throughout their working life.

The SWS was introduced in Japan in the 1920s as an incentive for managerial staff to stay with one company, partly to support the LES. It not only consisted of an increase in wage in line with seniority in the company, but also of a retirement bonus based on years of service in that one company. One important concept of the SWS was termed ‘living wage’, which determined wage not only by market conditions, but also by the actual incurred living costs of the worker’s family. During and after World War II, the SWS was extended from white-collar employees to all workers, in order to provide these workers with guaranteed minimum living conditions by raising wages every year. This government-supported policy was based primarily on age, and institutions had been set up to oversee this system (Watanabe 1999).

The Densan model, established in 1947, was the first formal wage-system in Japan.[2] It consisted of a standard wage (based on living expenses, qualifications, level of service, and regional price differences), on a non-standard wage (based on allowances for special job content and working conditions), and on biannual bonuses (Watanabe 1999).

Another important aspect of the Japanese wage-setting system is the use of Roshi Kyogi Kai, or Joint Consultation Committees (JCC), which in 1988 existed in more than 70% of all private firms with 100 or more employees (MOL 1990). One of the main functions of these committees is the facilitation of union-management joint decision-making ‘on issues that affect the welfare of the employees and the firm’ (Park 1984). As such, they are intended as dispute-avoiding mechanism from the management perspective, but also give the employees the chance to voice their opinion and concerns in areas such as wage-setting and living conditions.[3] While these JCC are also used as information-sharing devices between management and the unions, in the light of wage-setting they play an important part in the annual Shunto round of wage bargaining (‘Spring Offensive’),[4] which is seen as setting the de-facto standard for annual wage-increases across companies and even industries (Morishima 1992).

3 The German System of Wage-setting

By far the largest and most powerful industrial trade union in Germany is IG Metall (the Industriegewerkschaft Metall für die Bundesrepublik Deutschland), representing 2.8m workers in March 2002 (Barber 2002), down from 3.4m members in February 2000 (Barber 2000).[5]

This fact hints at one of the main features of the German system of wage-setting: Strong and large unions with considerable power and influence. The German system of wage-setting and collective bargaining is, essentially, one of strong union-participation. Appelbaum and Batt (1994) term this the Industrial Relations HR model, in which unions have a legitimate role and exist to mediate between management and workers on the workers’ behalf.

To extend this view further, it is noted that IG Metall (which covers a substantial part of Germany’s export industries) is united with other German unions under the Deutsche Gewerkschaft Bund (DGB), the German trade union federation, which centralises general negotiations, for example with the German government. This was illustrated in the case of a proposal to ease rules protecting employees of small companies against dismissal in 1996, a plan heavily opposed by the DGB: ‘The plans would herald the end of Germany's consensus-based industrial relations and mean its entry into the U.S. system of hire and fire’ (Young 1996).

While the 2.8m members of the IG Metall alone might not seem to have a great influence on other sectors, wage negotiations between the IG Metall and Gesamtmetall, (the employers’ association leading the negotiations on behalf of the employer), typically set the standard for other sectors of the German economy (Barber 2002).[6] In effect, other wage negotiators in other sectors use this agreement as a guideline for their own wage-talks (EIU 2002).

Barber (2002) comments that IG Metall's record shows ‘that it usually cuts a deal before launching extended strikes and settles for about half of its initial pay demand’, thus hinting at the union’s ability to actually prevent industrial action (in the form of strikes or walkouts), rather than abusing its power to obtain unrealistic concessions from employers.[7] However, there is still the danger that IG Metall and Gesamtmetall will agree upon too-high a wagesettlement, which has the potential to affect Germany’s overall competitiveness, as wages are widely seen as being high already (EIU 2002).

Linked to these high wages is the following argument - which will be taken up again in the discussion about convergence in chapter five - in which Freeman and Schettkat (2001) claim that the compression hypothesis[8] of the German wage system contributed significantly to Germany’s high level of unemployment in the 1980s and 1990s. The underlying notion here appears to be that as a result of this theory the level of wage differences is comparatively low in Germany as opposed to other developed countries. While reducing earnings inequality, this implies that firms with low-wage strategies ‘are not able to pay conditional wages as low as they would prefer in the absence of institutional restrictions’ (Stephan 2002), thus affecting their competitiveness (see Appendix I for the level of employment protection in Japan, Germany and the US).

In sum, the German system of labour relations can be seen as a centrally coordinated ‘sectoral collective bargaining system’ (Tüselmann 2001), with bargaining taking place between strong unions and employers’ associations, which is then extended to other sectors, resulting in a strong degree of wage standardisation with little wage inequality, but potentially higher levels of unemployment.


[1] Convergence, for the purpose of this paper, will be defined as institutionalised convergence, with specific importance given to trade unions.

[2] Densan, the Electric Power Industry Workers' Union in Japan, achieved acceptance for its model of a ‘living wage with the support of the Central Labour Relations Commission. Based on a survey on union members' actual living costs and aimed at securing certain minimum living standards - notably daily intake of 2,400 calories for each adult - this ‘Densan Model’ is regarded as the first scientifically established wage system in the country’. It fixed wages based on ‘concrete, objective factors; the model was considered to be fair, eliminating the room for arbitrariness. It was also egalitarian as it was applied equally to office and factory workers, nullifying the traditional class boundary’ (Ono, 1989). Gaining support in many other industries, it is often regarded as the prototype of seniority-based wage systems in Japan (Watanabe 2000).

[3] It should be noted that authors such as Tokunaga (1983) take a more critical stance towards JCC, and argue that they are effectively management-led devices for union-cooptation, and to ‘pre-empt employee militancy’ (Sugero and Koshiro 1987).

[4] Shunto is considered by authors such as Shimada (1983) as an institutional framework, in which individual enterprise unions and industrial union federations coordinate their wage negotiations with the employers’ associations. In 1992, these negotiations covered roughly 60% of all Japanese unionised workers, and typically set the role for smaller unions. In essence, Shunto sets the standard for Japan’s annual wage increases (Shirai 1983).

[5] IG Metall is actually an engineering union, despite its title, which suggests it is limited to metalworkers.

[6] These wage deals in Germany are eyed with suspicion from the European Central Bank in Frankfurt, as deals in Germany involving high wages across industries and sectors might lead to a rise in inflation in the Euro-zone (Barber 2002).

[7] The typical act of reaching a compromise in wage-negotiations is very nicely described by the Economist Intelligence Unit (EIU 2002): The wage negotiations tend to follow a conventional pattern. In time-honoured tradition, act one begins with IG Metall making an over-the-top demand that is way out of line with any reasonable view of what the economy could absorb. Following this, Gesamtmetall usually counters with a meagre offer of its own, and after much haggling, often accompanied by warning strikes, or at least by the threat of strikes, the curtain finally falls when an agreement is reached which is considered more or less reasonable by both sides.

[8] The compression hypothesis states that due to the intense institutionalised wage-setting in Germany, the wage structure is compressed, as compared to, for example, the more market-determined wage structure in the USA. Low skill jobs at the bottom end of the scale are destroyed as a result of overly high wages in this market-segment (Siebert 1997).

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University of Manchester  (Manchester School of Management)
2.4 (B)
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System, Wage-Setting, Japan, Germany, Towards, Convergence
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Ben Beiske (Author), 2002, The System of Wage-Setting Japan, Germany and the US: Towards Convergence?, Munich, GRIN Verlag,


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