E. Europe's low costs erode Germans' 35-hour workweek

The terms were stark: Work five more hours a week - without pay - in exchange for not moving thousands of jobs to Hungary. This was the groundbreaking deal that phone giant Siemens and Germany's manufacturing union hammered out this spring.

In a country struggling to reform its rigid labor practices to revive a moribund economy, the erosion of the 35-hour workweek - one of the crowning achievements of German trade unions - sent a strong message. Pressured by lower-wage jobs in the European Union's newest members, German companies are confronting their unions head on, using the fear of job losses to coax them into making concessions, or bypassing them altogether. Companies here are increasingly pushing for longer hours to cut labor costs.

"We're seeing a fierce global pressure to decrease costs by lowering wages or increasing the work week," says Harley Shaiken, a professor of labor relations at the University of California at Berkeley. "What underlines the global pressure is the possibility of high productivity, high quality in low-wage countries."

In Germany, unions have long been a major force in the economy. Work councils represent workers within a company. But salaries and work rules are negotiated regionally. Over the past decade, different industries have gradually implemented shorter workweeks - to 35 hours in manufacturing and 39 hours in construction. But companies now want out of the collective bargaining system.

By offering such a matter-of-fact choice - work more or lose jobs - Siemens has emboldened smaller companies to use the workweek card at the bargaining table.

Jan Teichert, chief financial officer at Einhell, a manufacturer of garden tools and outdoor equipment in eastern Bavaria near the Czech border, says the Siemens deal was a powerful symbolic victory. "It signaled to smaller companies that they too can use the threat of job losses to increase the work hours," he says.

Company leverage has grown as high unemployment has lingered and union influence diminishes, says Hilmar Schneider, a researcher at the Institute for the Study of Labor, in Bonn. Between 1990 and 2000, the number of companies covered by the union bargaining system dropped from more than 80 percent to 68 percent.

"What's new here is that a big company like Siemens went to the public and announced clearly that thousands of jobs might be lost," says Marcel Thum, head of the Ifo economic research institute's Dresden office. "There are so many cases where employees would be ready to accept longer hours to preserve their jobs, but the unions are afraid to lose their bargaining power. "

Michael Schminke, head of Panther- werke AG, Germany's best-known manufacturer of bicycles, says if German companies want to survive, they have to produce at much lower costs. "If that doesn't happen at home, they should move east."

He's done just that. Over the past 10 years, Pantherwerke has relocated most of its production facilities to Lithuania, which now has 500 employees. Only 140 remain in Germany. "The trend leads toward Eastern Europe," Schminke, who sits on the board of directors of the newly created German-Baltic Chamber of Commerce, says. "That's part of globalization."

Schminke is now negotiating a 40-hour workweek for his German employees with his company's workers' council. "I'm opposed to a discussion with the union because the union represents the interest of workers in the whole country," he says. "We are a small company and have our own needs."

But union officials say the shorter workweek has fostered more-flexible work shifts and created jobs.

Rudolf Welzmueller, a negotiator with IG Metall, Germany's second-biggest union, says it was blackmail that forced the union to accept more hours without more pay for Siemens workers.

"We were facing the prospect of losing 4,000 jobs in a region with high unemployment" he says. "The Siemens deal shouldn't been seen as a solution." The union, he insists, won't accept more work without more pay.

But the gulf between the labor costs of "old" Europe and "new" Europe may be a bridge too far for the unions. According to a study of of large and midsize companies by the consulting firm Roland Berger, German manufacturing wages are 26.34 Euros per hour; the EU's new members average 3.4 Euros per hour.

Today, 44 percent of German companies use Eastern Europe production locations as extended "workbenches" and 90 percent say they will shift further production abroad in the next five years, the study claims.

The Czech Republic and Hungary, two of 10 countries to join the EU in May, 2004, are favorite destinations.

They offer both lower wages and lower taxes. The German corporate tax burden averages 36 percent, compared with 21 percent in the new EU states. Poland recently cut its corporate tax from 27 percent to 19 percent. In Hungary, it's 12 percent.

While German companies such as Opel, Volkswagen, and Siemens started setting foot in Eastern Europe as soon as the Iron Curtain fell, EU membership is accelerating the process. "It made the nature of the market more secure," says Shaiken, the Berkeley labor specialist.

"The push toward a longer workweek is going full speed," Teichert says. "We have to work more in Germany - that's common sense."

German employees worked an average of 1,446 hours last year, compared with 1,792 hours worked in the United States.

The companies' push for more hours from workers comes at a time when Chancellor Gerhard Schröder's government, despite massive protest, is trying to reform unemployment and welfare regulations. Critics say the effort could shatter the traditional German social model. They claim the changes could pressure the unemployed to accept lower paying jobs and reduce workers' rights against layoffs.

"The Schröder reforms are going to make things ever harder for the unions," says Schneider of the Institute for the Study of Labor. "The reality is, when employees have a choice between taking a pay cut or working more," he says, "they'd rather work more."