If you ask employees to work longer hours for the same salary, they will probably say, ‘no thanks.’  Workers might reconsider their response, however, if they realize that this approach could boost their productivity and prevent their company from having to move their jobs to another country.  That was the dilemma facing 4,000 workers in the Siemens factories in the German state of Rhineland Westphalia. At first, Siemens workers protested a management proposal to extend their workweek from 35 hours to 40 hours without additional compensation and while revoking bonuses for Christmas and vacations. However, workers accepted the same offer not long after. Since then, about 100 industrial companies in Europe have followed the Siemens example. Clearly, something is changing in Europe.


Since the end of June, Siemens workers no longer receive bonuses of about 8,000 euros a year. In return, the company has promised not to relocate its mobile phone factories to Hungary from the German towns of Kamp-Lintfort and Bochoit. The quid pro quo, valid for at least two years, reflects a major effort on the part of labor unions confronting a trend that many consider inevitable: The relocation of manufacturing out of developed, high-cost countries into developing countries that offer lower wage rates.


Close to 100 German companies have already followed the example set by Siemens. Such major names as DaimlerChrysler, Bosch and MAN are currently planning personnel cuts, longer working days, and working conditions that are more flexible. These kinds of changes are unheard of in Europe, where expenditures for healthcare, pensions and unemployment are the highest by far in the world.


When companies from Germany, France, Belgium and Spain can no longer manufacture at home, the damage to their local economies is significant. What’s clearly needed, says Sandalio Gomez, a professor at the IESE business school at the University of Navarre, is to “rethink the approach Europeans have been taking ever since the 1950s.” Gomez is referring to the Welfare State model, which has long determined Europe’s approach to labor relations as well as the contents of collective bargaining agreements. While this approach has led to major improvements in European working conditions, “for companies, this way of looking at labor relations brings rigidity, and an inability to adapt to reality. Very strong unions do not want to lose their perks,” says Gomez. Perhaps the most visible such perk is the shortened workday, which German and French unions fought so hard to establish. Yet it seems that the 35-hour workweek will soon be a thing of the past.


The Relocation Threat

Change is clearly in the air throughout Europe. The current wave of corporate relocations is forcing workers to make concessions that were unimaginable, at least until recently. European newspapers are running front-page stories about the trend, further alarming public opinion.


Jaume Valls, a professor of management and product design at the University of Gerona, calls for a calm response, arguing that the process cannot be stopped. “We should see these moves as something more natural; they have always gone on,” he says. “Everything that takes place within the context of the European Union has a more significant political impact. We [Europeans] are not supposed to take each others jobs, but there is a powerful logic to the marketplace and its costs.”


It’s also important to note that competition among different [national] labor forces is as positive a trend as competition between companies. “It may turn out that productivity per hour does not increase, but productivity per worker is clearly going to rise,” says Benito Arruñada, professor of business management at Pompeu Fabra University. “Let’s not forget that when we consume a Siemens product, we are all fundamentally participating with Siemens; it’s not just the workers and the shareholders who are selling it. This point is extremely obvious but political discussions about these topics usually overlook it.”


The important point, according to Valls, is that “companies learn how to take advantage of bargains for creating specific new relocation processes, and look for ways to optimize their subcontracting to other countries in Eastern Europe, Latin America, China, or elsewhere.”


The Debate about Blackmail

Some European leaders are less optimistic, describing the measures taken by some European multinationals as “corporate blackmail.” These leaders predict that the sort of agreement made at Siemens will not survive for long because it solves the relocation problem only in the short run. They argue that, sooner or later, companies will leave [Western Europe] because they will not be able to compete with the wages offered by Poland, China, and Hungary.


Arruñada has a different view. “Within a few years, normal wage rates in Poland and Hungary will achieve a balance with wages in Germany.”  Valls goes even further: “When wages in Eastern Europe reach the same level as in Western Europe, relocation will be something quite different. The decisions are not going to change, and they lead to blackmail. But labor unions are making a major effort, as in the case of Siemens, to agree on other sorts of working conditions.”


According to Gomez, the debate about relocation overlooks risks that companies take. We want high salaries and maximum security, Gomez says, but “what no one mentions is what we get in return for that. Companies have to be able to manufacture. They have to create wealth to the same extent that they are supporting the growth in salaries and capital. When a company has problems, it must deal with them. When you do that, you cannot know if you are going to solve your problems to the extent that you hope.”


Countries like France and Germany, Gomez adds, “have several advantages over other countries when it comes to lower costs for training personnel; the higher quality of their facilities and their advanced research capability. These advantages are real. If you do nothing more than raise the number of working hours, that may not be enough.” In his view, the question of working hours should be seen in the context of a strategic plan for making the most of your advantages and minimizing the weaknesses of your labor market.


Making Labor Markets More Flexible

Clearly the disadvantages of Europe’s labor market include its lack of flexibility and its high labor costs. In the case of Siemens, adds Arruñada, “The key point would be to find out if the salaries that workers earn at Siemens in Germany – and in other big companies in Spain – are really the salaries of their companies’ shareholders. In other words, we need to find out if their salaries are a lot higher than the salaries of other workers who are equally productive, but who do not have the good fortune of working in these companies.”


Occasionally, salaries in big companies are artificially high because of circumstances that have nothing to do with labor laws. In sectors where there are high long-term capital equipment costs, workers in Europe – and in Spain, above all – are tempted to pressure their companies for salaries that are higher than their productivity warrants. Hemmed in by high equipment costs, their companies agree to these demands. However, when it comes time to modernize their plants later on, these same companies may decide not to do that if wages remain at artificially high levels – or if they fear that the cycle can repeat itself, notes Arruñada.


If the wages of some workers are higher than their productivity warrants, what can we do as a nation? According to Arruñada, we have a choice: “We can continue to commit ourselves to these high labor costs, and the companies can continue to leave us. Alternatively, we can agree that the companies remain here, but pay lower salaries. Otherwise, companies can act as intermediates for those who get paid here and those who are paid in Poland and India.”


When a company decides to relocate because of high labor costs, we have to ask a key question, says Arruñada: Are there any other workers in our country available to do the same work at the same level of productivity – but at lower salaries? “If the answer is ‘yes,’ then the company has no reason to leave Spain. It makes sense for the company to create more flexible conditions in its labor market so it can stay here.” Moreover, “measures have to be taken so that current workers do not prevent this process from taking place. Workers who now have jobs know that if the company closes down, they will be paid through a special form of compensation – either when the company closes down, or when they retire as anticipated. However, newer employees lose out. Often, they are younger, and they have to be satisfied with jobs where conditions are much worse.”


The End of the 35-Hour Workweek?

Germany is now involved in the radical reform of its labor market.   Unemployment insurance payments have been cut from 32 months to a maximum of 12 months. Germans are also making very significant institutional reforms through collective bargaining agreements, as the Siemens case demonstrates. In many other German companies, the workweek is being extended, although no one is saying that the 40-hour workweek is an established fact.


Arruñada says bluntly, “I don’t think that we want to work 35 hours, either in Spain or Germany or Poland. Not when we realize that a 35-hour workweek is only possible if we consume merely what we have produced in those 35 hours. It is not possible to work 35 hours a week and consume as if we were producing for 40 hours. When it comes to this topic, people are sometimes hypocritical. Some people support policies such as the 35-hour workweek, hoping that we can continue to consume as if we were working 40 hours – at the cost of other people [in other countries] working 50 hours, and being paid [as if they worked only] for 30 hours. That’s what we’re really talking about.”


The expanding tide of this revolution is also being felt in France, where there are plans to abandon the 35-hour workweek. In that country, small companies already revoked the 35-hour workweek at the beginning of this year. The previous government, led by socialist Lionel Jospin, put into effect the Aubry Law – the 35-hour law. The Jospin government presented this legislation as a major social advance and a formula for cutting France’s unemployment rate. The idea was to use the hours that millions of employees were not working to create new jobs for those who were unemployed. In reality, things turned out to be very different. The unemployment rate has remained at about 10%, and the public sector deficit has grown because of tax cuts offered to companies in compensation for the new working hours.


Despite the apparent failure of the 35-hour workweek, negotiations with labor unions are expected to be much tougher in France than in Germany. “The various labor unions all have different cultures and different views of the negotiation process. Ultimately, it amounts to realizing that either working conditions change along with the relationship between workers and employees, or the company moves out and the jobs are lost,” notes Valls.


Spain is another country where changes are taking place, explains Arruñada. “Our labor market is one of the most regulated in the world, and we are paying a high price for that. Spain is growing, but if we had a normal European labor market, Spain could be growing much faster. We could be taking much greater advantage of our potential. More of our young people could be working, and in better jobs.”


Spain’s automobile industry has not become as extreme a case as Siemens, but its labor rules are becoming more flexible in return for moderate salary increases. The most notable case is the Nissan Motor Ibérica plant, where workers have agreed to work an average of 37 minutes more each day, by shortening their break periods.


Longer working hours are a major blow to organized labor because the 35-hour workweek has long been viewed as one its most visible victories. According to Gomez, “This is only one of the red lights that switch on, starting next year.” In his view, some other hallmarks of the Welfare State could also be affected, including the pension system, which could be revised or changed. Other measures could be in store, because it is not possible to meet commitments made in the 1960s when conditions were very different.”


This does not necessarily mean that progress achieved over the course of so many years will be entirely lost, says Gomez. From labor’s point of view, “there are other ways to move forward, such as in the content of your work, and your ability to develop professional skills. In the old days, you focused more on routine, monotonous tasks. There was not much content, and work was not much of a challenge. This more flexible approach now allows you to find jobs that are more fulfilling, and get you involved.”


What Weapons Can We Count On?

Arruñada sees no reason to take an alarmist view of corporate relocation. “Companies aren’t entirely disappearing; they are merely relocating their activities from some sites to others. In the case of Spain, a greater number of companies have come in, and many of them are in high-technology.”


For his part, Valls warns that “we can’t avoid the flight of manufacturing but we must prevent Research and Development from leaving. The problem is, in the medium term, it is not obvious that R&D isn’t going to flee, and that would be much a more serious problem.” To prevent that, people will have to be more flexible about labor markets and review their approach to organizing labor and their policies for training and attracting qualified professionals “who have a very high quality environment in Spain.”


According to Gomez, Western Europe should “rely on the skills of its professionals, who are much better than in China and the Eastern [European] countries. It must emphasize R&D in technology and investment.” On the other hand, we have “low productivity and rigidity in our labor market, which means that people don’t have enough functional and geographical mobility, and their compensation does not reflect their productivity.”


Ultimately, every country in Europe will undergo change, says Gomez. “Those countries that adapt more quickly to this reality will get the best results.”