Together we rule, divided we stand: public employers as semisovereign state actors and the political economy of public sector wage restraint in Germany Inauguraldissertation zur Erlangung des Doktorgrades der Wirtschafts- und Sozialwissenschaftlichen Fakultät der Universität zu Köln 2019 presented by MSc, Donato Di Carlo from Teramo, Italy First reviewer: apl. Prof. Dr. Martin Höpner Second reviewer: Prof. Dr. Christine Trampusch Date of oral defense: 26/06/2019 Table of Contents List of Figures .................................................................................................................................................... iv List of Tables ....................................................................................................................................................... v List of Abbreviations .......................................................................................................................................... vi Acknowledgements .......................................................................................................................................... viii Setting the Scene .................................................................................................................................... 3 Introduction........................................................................................................................................ 3 The argument of the dissertation ........................................................................................................ 6 Plan of the dissertation .................................................................................................................... 12 Part I. Public employers as semisovereign state actors. Toward a state-centred institutionalist framework for the study of public sector wage setting ........................................... 14 Chapter 1. Wage policies in EMU’s public sectors ....................................................................................... 15 1.1 Defining wage policy options in the context of the EMU macroeconomic regime .............. 15 1.2 The importance of wage policy in the EMU ......................................................................... 17 1.3 The puzzle of Germany’s public sector wage restraint ........................................................ 25 1.4 Brief excursus on defining the public sector ....................................................................... 29 Chapter 2. Methodological strategy of the dissertation ................................................................................ 31 2.1 Logic of case selection: Germany as both an extreme and crucial case .................................... 31 2.2 Methodology: a two-step process tracing approach .................................................................. 34 i 2.3 Nature, origin and storage of the utilised sources ..................................................................... 38 Chapter 3. Casting the net widely: Germany’s public sector wage restraint and the study of wage determination in the social sciences ...................................................................................................... 42 3.1 Economics .................................................................................................................................. 42 3.2 Interests-based Comparative Political Economy ....................................................................... 47 3.3 Industrial Relations .................................................................................................................... 51 3.4 Institutionalist Comparative Political Economy ........................................................................ 55 3.5 Testing the rival hypothesis: does export-led pattern bargaining explain wage restraint in the German public sector? ..................................................................................................................... 59 Chapter 4. Toward a state-centred institutionalist framework for the study of public sector wage setting ................................................................................................................................................................ 65 4.1 Foundations of theory-guided process tracing: state-centred institutionalism as an alternative theoretical approach ........................................................................................................................ 65 4.2 Together we rule, divided we stand: public employers as semisovereign state actors............... 71 4.3 Public employees and the political deterrence power ................................................................ 79 4.4 The state as an institutional contextualisation: a four-tier analytical framework for the study of public sector wage setting ................................................................................................................ 85 4.5 Wage policy requires fiscal politics ........................................................................................... 92 Part 2. From reunification to a new institutional equilibrium: the trajectory of wage restraint in the German public sector ................................................................................................ 96 Chapter 5. The German institutional setting in the early 1990s .................................................................. 97 5.1 The politico-administrative structure of the state ...................................................................... 97 5.2 Public Sector employment relations and the system of interest representation ....................... 100 5.3 The fiscal constitution of the state ............................................................................................ 106 5.4 Legal and fiscal watchdogs ...................................................................................................... 109 ii Chapter 6. The 1990s. Die Blühenden Landschaften hit the vincolo esterno ........................................... 110 6.1 Reunification and the loss of fiscal and wage discipline (1990-1993) ..................................... 110 6.2 Public sector wage restraint in the face of budget deficits (1994-1997) .................................. 118 6.3 Analysis of the 1990s ................................................................................................................ 127 Chapter 7. The 2000s. The double Länder offensive: institutional and constitutional reforms of public sector wage setting ............................................................................................................................. 133 7.1 Wage restraint in the context of institutional reforms of the wage bargaining structure ......... 133 7.2 Competitive federalism and civil service’s wage differentiation in the context of constitutional reforms ........................................................................................................................................... 153 7.3 Analysis of the 2000s ................................................................................................................ 160 Chapter 8. “Die öffentlichen Kassen sind immer leer“, even in the age of prosperity ............................ 168 8.1 A new institutional equilibrium in the German public sector .................................................. 171 Conclusions ......................................................................................................................................... 179 Public employers as semisovereign state actors and the political economy of public sector wage restraint in Germany ...................................................................................................................... 181 The fiscal mechanism of public sector wage restraint: wider implications for CPE theory and policy making in the EMU.............................................................................................................. 186 Appendix A: list of interviewees ....................................................................................................... 213 Appendix B: dates of the signature of selected sectoral collective bargaining agreements......... 214 iii LIST OF FIGURES Figure 1: Inflation levels and real exchange rates (REER) across the EMU. Country clusters (1999- 2015) ......................................................................................................................................................... 21 Figure 2: Compensation of public employees as percentage of GDP, average of EMU countries (1995- 2016) ......................................................................................................................................................... 25 Figure 3: Trajectory of hourly compensation in the public sectors of EMU members (1999-2015) ........ 26 Figure 4: Indexes of hourly wages in different sectors of the German economy (1991-2010) ................. 28 Figure 5: Germany’s public sector wage restraint vis-à-vis EMU peers (1999-2015) ............................ 32 Figure 6: Correlation between wage increases (% change) in manufacturing and public services in Germany (1971-2007) ............................................................................................................................... 61 Figure 7: Indexes (1991=100) of nominal hourly wages in Germany in the