Germany’s protracted crisis may manifest largely at the level of parliamentary politics, but the deeper context for these political ruptures is the transformation of the country’s economy beginning with reunification in the 1990s and accelerating in the mid-2000s with the creation of the eurozone and deregulation of the German labor market. Though the size of Germany’s economic pie grew over the last two decades, it did so at the cost of reordering the class structure, relegating millions of workers to insecure, temporary, and low-paid employment as their only long-term prospect. This has created a new working poor, the existence of which is highly lucrative for capital while also exerting moral pressure on other workers to stay productive and not rock the boat, lest economic turbulence cause the low-wage sector to expand even more.

The institutionalized class struggle eroded particularly in the sphere of collective bargaining, as many companies left the employers’ associations and generally became more aggressive in negotiations and labor disputes. Trade unions for their part refrained from forcing employers back into collective bargaining through strikes. Instead, the unions attempted to shore up their losses and prevent further erosion by clearing the way for company-level deviations from sectoral standards in the mid-1990s. The resulting contracts, which retained corporatist institutions in exchange for significant wage and working conditions concessions by organized labor, allowed business owners to implement further wage reductions particularly in sectors already plagued by low pay. Unions adopted this strategy in order to protect their strongholds in the face of a seemingly unstoppable onslaught. One could even argue that this strategic retreat is part of the reason why German unions in select industries remain so strong to this day despite significant overall losses. Ultimately, however, the decentralization of collective bargaining created large pools of low-wage labor complementing and reinforcing the country’s core productive industries, while lowering overall wage costs. The dynamic also causes friction between workers across industries and sectors and weakens organized labor’s hand over the long term, as capital successfully carves out zones of heightened exploitation largely outside of the unions’ organizational reach that in turn ensure the stability of the core economy.

[...] precarity gives German companies a means with which to reconfigure their cost structure. Many now operate a dualized employment structure consisting of a core of permanent employees reinforced by a periphery of precarious workers. This structure gives companies two significant advantages.19 Firstly, they can react more flexibly to the demands of a volatile world economy, since the “dismissal costs” of precarious workers are fairly marginal compared to permanent staff. Secondly, they produce conflicting interests within the workforce and therefore in the trade union movement. Precarious workers’ top priority is to enter the permanent workforce. In order to do so, they are often willing to accept relative wage restraint. Permanent workers, however, are interested in improving their working conditions and wages, and sometimes even accept bosses’ arguments justifying precarious employment to protect their more secure jobs. Finally, precarious work is deliberately used as a means of internal social discipline. Precarity constitutes a new form of the “reserve army” described by Marx in the first volume of Capital.20 In the past the unemployed filled the ranks of the capitalist reserve army, exerting an external structural pressure on wages and labor relations. Today, precarious employment internalizes this function within the firm. Though they may work inside the company, temporary workers always have one foot in unemployment. Their mere presence serves as a continual reminder to permanent staff that their futures may very well also become less secure should the company fail to meet its earnings targets.

By contrast, VoC’s overarching message is institutional diversity and resilience. Rather than accepting the Thatcherite teleology, Hall and Soskice suggested that contemporary capitalism had stabilized around distinct institutional models — Liberal Market Economies (LMES) such as the United States and the United Kingdom on the one hand, and Coordinated Market Economies (CMES) such as Germany and Sweden on the other. In each VoC, national-level institutions shape firm-level strategy, promoting market coordination in LMES and nonmarket coordination in CMES. While each of these models shared certain structural features, they were nonetheless appreciably different in their institutional features, and in how they faced market pressures. In addition, coordinated market economies were able to sustain the redistributive and egalitarian thrust of the welfare states. Finally, the VoC framework implied that each model had an obduracy, a staying power, because each one generated stable political coalitions around it. So while CMES and LMES generate comparable levels of economic performance, the kinder, gentler, more egalitarian versions of capitalism were capable of resisting the drift toward the neoliberal American model.

Different countries have different “Trajectories of Neoliberal Transformation.” Liberalization takes place as institutional deregulation, institutional derogation, and institutional conversion, and in each country, we find a different mix of these mechanisms. Yet in all countries, liberalization involves an expansion of employer discretion. Employer discretion has three interrelated dimensions: discretion in wage determination, discretion in personnel management and work organization, and discretion in hiring and firing. In each of these areas across a wide variety of different countries, owners and managers have much more freedom to run their businesses and “manage” their employees as they please than they had a few decades ago. VoC’s focus on institutional form draws our attention away from these developments.

Baccaro and Howell place class actors and class power at the center of their argument. Since the end of the 1970s, we have witnessed “a marked shift in the balance of class power,” as “weakened and divided trade unions face resurgent and radicalized employers.”13 In making this case, Baccaro and Howell draw on the power-resources approach, which stresses the importance of the strategic context within which actors operate. Employers are fundamentally unruly, and they will seek an expansion of their discretion at the firm level and a liberalization of industrial relations institutions “unless they are constrained by the power of trade unions or the state. The pace, scale, and scope of liberalization will reflect the relative balance of power between labor and capital.” To recall, VoC scholars portray employers as both rational and strategic as well as cooperative and prosocial in their support of traditional institutions. For Baccaro and Howell, this is misleading: more often, employers play hardball with traditional institutions, transforming them from within. The state, they stress, is far from neutral in this process. On the contrary, it is “the most important agent of liberalization.” They stress that neoliberalism is “not about limiting state intervention …. It is instead about using state power to bring about (and institutionalize) a market order.”15 As Polanyi argued, interventionist states are indispensable for this project.