Increasingly, the postal industry is under pressure for transformation to
response to changing conditions resulting from market liberalization,
emerging competition and structural changes in demand. This situation as
well as proposals to privatize the national incumbent operators, where they
are still run as a public entity, widely lead to concerns of employees,
unions and politicians that the transition could worsen the working
conditions in the industry, and that in the extreme case precarious
conditions might emerge from low-quality-cheap-prices business models, where
market entrants' cost advantages are mainly based on low wages and social
standards. Therefore, not only the evolution of economic regulation such as
pricing is under discussion, but also socioeconomic and sociopolitical
issues like the further development of social regulation, ranging from
universal service obligations to specific employment regulations.

Although other industries in which the operators were mostly
monopoly-protected public entities with the employees having civil servant
or public employee status (such as telecommunications) were liberalized
before, these aspects have not been as prominent as in the postal industry
even though also in these industries the workers often enjoyed significant
wage differentials over comparable jobs in private firms. The special
importance of the policy goal to preserve socially acceptable conditions for
the postal industry stems from the distinctive fact, that the by far largest
share of the operating expenses has to be accounted to labor costs and is
reinforced by the expected decline of demand in many markets of the industry.

One of the most controversially discussed policy instruments to achieve this
goal is the introduction of a sector-specific minimum wage for the postal
industry. While the proponents of such a legislation argue, that such
minimum wages avoid \textquotedblleft unfair competition\textquotedblright\
at the expense of the postal workers and that they are needed in order to
level the playing field between entrants and the former monopolist (since
the wages of the incumbent operator cannot be swiftly reduced to a
competitive level), the opponents argue, that such minimum wages could not
only raise prices but also hamper employment and the emergence of
competition and, moreover, inhere the danger to be strategically exploited
as an entry-deterring device.\footnote{%
For a broader overview over different areas of social regulation and their
strategic implications, see Bonini et al. (2006).}

In this article, we analyze the case of the minimum wages in the postal
industry in Germany from the public discussion mid-2007 to their
introduction in January 2008 and until their expiry end of April 2010 from
the latter competition perspective. We describe the collective bargaining
system and the case of the minimum wages in the postal industry in Germany
and discuss the case with regard to our recent paper (Heitzler and Wey
2010). Our work is related to Williamson (1968) and contributes to the
literature linking the raising rivals' cost literature (Salop and Scheffmann
1983, 1987), the literature on entry barriers (Dixit 1979, Rogerson 1984)
and the literature analyzing the interaction between monopolized labor
markets and oligopolistic product markets (\textquotedblleft unionized
oligopolies\textquotedblright , Dewatripont 1987, 1988, Horn and Wolinsky
1988a,b, Haucap et al. 2001).

\section{The German Collective Bargaining System}

In this section, we briefly describe the legal foundations of the German
system of collective bargaining and the traditional procedure of declaring
wage contracts as generally binding by means of extension regulation. We
then explain how the most recent minimum wage legislation has significantly
increased the scope for making wage contracts generally binding.

\textbf{The legal basis of collective bargaining.} In Germany, wage
bargaining occurs primarily at the sectoral level between an industry union
and an employers' association representing most of the firms in the industry.%
\footnote{%
Labor markets and labor laws differ substantially between countries (see,
e.g., Nickell 1997, OECD 1997, or Blau and Kahn 1999), where a salient
dimension that differentiates national labor markets is the degree of wage
setting centralization (Calmfors and Driffill 1988 and Wallerstein 1999).
From this angle, Germany's collective wage bargaining system is somehow
positioned in the middle between a decentralized system (with collective
bargaining at the firm level) and a fully centralized system (with
collective bargaining at the national level).} Those collective negotiations
usually result in standard wages and labor contracts which cover most of the
firms and workers in the industry. This so-called area tariff system
(\textquotedblleft Fl\"{a}chentarifsystem\textquotedblright ) still
dominates the German labor market. As has been argued by Haucap et al.
(2006, 2007) the stability of the area tariff system in Germany is mainly
externally supported by various labor market regulations which
systematically protect the collective bargaining system against deviant
behavior and outside competition.

One core institution of the German collective bargaining system is the
so-called tariff autonomy (\textquotedblleft
Tarifautonomie\textquotedblright ) which empowers unions, employers and
employer associations to form coalitions and to bargain collectively.%
\footnote{%
The legal grounds for the tariff autonomy can be found in Article 9
Paragraph 3 of the German Constitution (\textquotedblleft
Grundgesetz\textquotedblright ) and the law concerning tariff agreements
(\textquotedblleft Tarifvertragsgesetz\textquotedblright ).} The principle
of tariff autonomy protects the constitional right of the \textquotedblleft
social partners\textquotedblright\ to agree upon collective agreements on
their own and, with that, makes outright minimum wage setting through state
intervention virtually impossible.

The legal nature of the collective bargaining process is specified in the
Collective Agreements Act (\textquotedblleft
Tarifvertragsgesetz\textquotedblright , in short: TVG). According to the
TVG, only the tariff parties (unions, firms, and employer associations) can
conclude collective labor contracts. Most unions (as the united services
union - \textquotedblleft Vereinigte
Dienstleistungsgewerkschaft\textquotedblright , in short: Verdi) are
organized within the German confederation of trade unions (\textquotedblleft
Deutscher Gewerkschaftsbund\textquotedblright , in short: DGB). While there
is no doubt that all unions which are members of the DGB have the right to
conclude tariff agreement, this is typically not the case for outsider
unions.\footnote{%
The case of the Christliche Gewerkschaft Metall (CGM), which is a member of
the Christliche Gewerkschaftsbund (CGB), is instructive in this regard. Ever
since its appearance, the dominant union Industriegewerkschaft Metall (IGM)
(which is member of the DGB) has continuously tried to challenge the right
of the CGM to strike collective agreements (see Haucap et al. 2006).} In
fact, as summarized in Haucap et al. (2006, pp. 365ff.), legal practice and
the legal literature have arranged extremely restrictive conditions which
have to be fulfilled by worker associations on order to be eligible to
conclude collective agreements (see Wiedemann and Stumpf 1977, pp. 357ff.).%
\footnote{%
An exceptionally restrictive condition is the so-called mightiness
(\textquotedblleft social power\textquotedblright ) requirement which
unfolds a vicious circle that ulimately counters attempts to establish a new
rival union. According to the Federal Labor Court an indication for the
existence of social power comes from the fact whether the union already
concluded collective agreements. Obviously, the incumbent union meets this
requirement but a new union can hardly refer to collective contracting in
the past.}

The TVG states that, in general, only members of the bargaining parties are
actually bound to obey the regulations of the tariff contract. In practice,
though, a firm which is member of an employers' association pays the tariff
wage to all of its employees (for the reasons see Haucap et al. 2006, p.
363), although on June 23, 2010, the Federal Labour Court weakened the
system by allowing the application of multiple competing tariff agreements
within one firm.\footnote{%
See Federal Labor Court Erfurt (2010):\ Decisions 10 AS 2/10 and 10 AS 3/10.}

\textbf{Traditional extension rule.} While there are many stabilizers of the
area tariff system, a stabilizer of last resort is provided by the
possibility to make collective bargaining contracts compulsory for all
unorganized employers (and hence, all unorganized workers) within an
industry by an extension rule. Specifically, paragraph 5 of TVG provides the
bargaining parties with such a device, the so-called \textquotedblleft
Allgemeinverbindlicherkl\"{a}rung\textquotedblright\ (in short: AVE). The
first prerequisite to declare an employment contract to be generally binding
is the existence of a collective bargaining agreement in accordance with
TVG; i.e., a collective contract between a union and an employer association
at the industry level. Secondly, at least 50 per cent of employees in the
tariff area for which an AVE\ is initiated have to be employed in firms of
contract-bound employers and the AVE\ must be \textquotedblleft in the
public interest\textquotedblright .

The implementation of the AVE is regulated by the TVG. Initially, one of the
bargaining parties must apply for an AVE at the Ministry of Labor.
Concerning unorganized employees and employers as well as employer
associations, unions and the Ministry of Labor of the state affected by the
AVE are given the right to express their opinion. Afterwards a public
hearing of a council consisting of three representatives of umbrella
organizations of unions and employers respectively (\textquotedblleft
Tarifausschuss\textquotedblright ) is initiated. The council then decides
with the majority of votes whether or not to recommend the use of an AVE to
the Ministry of Labor. Though the Ministry of Labor is not bound by the
council's recommendation, it nevertheless has proved to affect the
ministry's final decision. Once an AVE has been put into force, it remains
effective until the collective bargaining contract expires or the Ministry
of Labor puts the AVE out of force.

\textbf{Posted Workers Act.} The Posted Workers Act (\textquotedblleft
Arbeitnehmer-Entsendegesetz\textquotedblright , in short: AEntG) came into
force in 1996 and has been revised several times later on (the latest
version dates back to April 20th, 2009). Its original objective was to
ensure binding labor standards for workers employed by businesses of foreign
origin (with a focus on construction workers). Yet, right from the beginning
it was clear that the act could also be used to force all employers
(including non-organized domestic firms) in a certain sector to adhere to
the same working standards and, in particular, minimum wages. Nowadays, the
Act's main purpose has become to enforce minimum wages in several service
sectors on domestic firms.

The Posted Workers Act reduced significantly the bar for the German Federal
Ministry of Labor to implement minimum wages when compared with the
traditional extension rule according to the TVG. First, it allows to declare
a collective wage contract as generally binding even if less than 50 per
cent of the employees of the tariff area concerned are employed by
contract-bound firms.\footnote{%
In the latest version of the Posted Workers Act a representativeness
requirement was introduced which applies to those industry where competing
collective labor contracts exist. A collective contract is more
\textquotedblleft representative\textquotedblright\ if both the number of
workers employed by contract-bound employers and the number of union members
affected by the tariff agreement are larger (see also Blanke 2007).} Second,
until 2009 the Act did not require a public hearing of a council consisting
of the involved umbrella organizations.\footnote{%
In its latest version of 2009, the Posted Workers Act was supplemented by a
paragraph which requires the Ministry of Labor to ask the involved
bargaining parties as well as the parties of competing collective agreements
(if applicable) for their statements.} Finally, the Ministry of Labor can
declare a wage contract generally binding by legal decree (\textquotedblleft
Rechtsverordnung\textquotedblright ) without having to go through a
complicated procedure as required under the TVG.\footnote{%
For example, under the TVG the Labor Ministry of a Land can block an AVE. In
this case, the Federal Ministry of Labor must ask the Federal Government for
permission.}

The Act does not apply automatically to all service sectors. Instead, the
Act explicitly states the sectors which can apply for a minimum wage ruling.
Initially, the Act only mentioned the construction industry. By the end of
2007 (shortly before full liberalization), mail delivery services and, most
recently, several other sectors have been added (as, e.g., commercial
cleaning and waste management, while nursing is currently on its way to be
included).

\section{The German Postal Minimum Wage Case}

In Germany, the transition period towards market liberalization started on
January 1st, 1998\ with the implementation of the first EU\ Directive on
postal service markets.\footnote{%
In the EU, the stepwise liberalization process of the market for postal
services is governed by three EU Directives; namely, Directive 97/67/EC,
Directive 2002/39/EC, and Directive 2008/06/EC, where the latter one
requires the member states to abolish any remaining reserved areas by the
end of 2010, with some exceptions until the end of 2012.} Initially, the
date for full liberalization and the abolition of the remaining legal
monopoly was planned to be January 1st, 2003 but the German federal
government decided prior to that date to postpone the date for five years.
During winter 2006/2007 it became clear, that the Federal Government was
committed to the January 1st, 2008 as the date for the full market opening.

\textbf{The road towards minimum wages.} In the forefront of the full
liberalization of the postal market, labor unions (especially Verdi) and
several political parties called for the introduction of a generally binding
minimum wage for the industry. Their main argument was that wage dumping at
the expense of established postal workers should be prevented this way\ and
the debate was intensified by the release of a study on the allegedly
precarious employment conditions at the postal service competitors (Input
Consulting 2006).\footnote{%
Therefore, these developments represent a textbook example of the expected
developments described by Bailly and Meidinger (2010).}

During the years of the liberalization process Deutsche Post had already
significantly restructured operations; e.g., through outsourcing of its post
offices and transport services, but the mail delivery network has been kept
inhouse. Until full liberalization in 2008, the reserved area included
letters up to 50 grams (with some exceptions for large senders). At that
time, virtually all operators who had entered the non-reserved segments of
the market provided end-to-end services, many of them at a local or regional
level, competing with Deutsche Post through alliances. Thereby, the
competition that emerged was primarily in the area of value-added services
as little requirements had to be fulfilled to operate outside the reserved
area (Dieke and Wojtek 2008).

Deutsche Post claimed that its disadvantage of having relatively high wages
due to the former legal status of its employees as civil servants requires
the implementation of minimum wage legislation in order to ensure a level
playing field when the market was fully accessible to competitors. On the
one hand, Deutsche Post claimed that they would not be able to compete in
public procurement tenders anymore, while on the other hand, low wages at
the competing firms led to social security transfer payments to the workers
employed at these firms, thus leading to a subsidization of the competitors.
Therefore, the minimum wages should also serve as a flanking measure to
liberalization in order to avoid such transfers.

During the summer of 2007, the momentum on this issue further increased and
the lawmakers stepped in and formalized the social expectations. In August
2007, the grand coalition of the federal government agreed upon the
introduction of minimum wages in the postal sector via amendment of the
Posted Workers Act, leaving the exact details open until the end of 2007.%
\footnote{%
See \textquotedblleft Bundesregierung beschlie\ss t Mindestlohn f\"{u}r
Brief-Branche\textquotedblright ,\ August 22nd, 2007
(www.post-und-telekommunikation.de).} Shortly after this decision, a swift
series of strategic moves by the involved parties followed.

On August 28th, 2007, the Postal Employer Association (Arbeitgeberverband
(AGV)\ Postdienste) dominated by the Deutsche Post and its subsidiaries was
established. Subsequently the competitors proclaimed that this establishment
was a strategic move to implement excessive minimum wages in order to
squeeze them out of the market after the full market opening.\footnote{%
At court hearings in 2009, the most important competitors claimed that they
did not have the opportunity to join the association or to take part in the
negotiations. See German Parliament, Commission for Labor and Social
Affairs, meeting protocol 16/65, statement of F. Gerster, p. 875.}

On September 4th, 2007, the newly founded AGV\ Postdienste and Verdi reached
a collective wage agreement which was intended to serve as the reference
contract for minimum wages in the postal service sector.\footnote{%
The contract is posted on the website of AGV Postdienste
(www.agv-postdienste.de).} Accordingly, the contract was submitted to the
Federal Ministry of Labor and Social Affairs to be declared as generally
binding. The agreements stipulated a general minimum wage per hour of \euro\
8.00 in East Germany and \euro\ 8.40 in West Germany. Additionally, the
minimum wage for mail delivery was set even higher at \euro\ 9.00 and \euro\
9.80, respectively. Thereby, the minimum wages should have become effective
on December 1st, 2007.\footnote{%
See \textquotedblleft Mindestlohn im Postbereich
vereinbart,\textquotedblright\ Handelsblatt online (www.handelsblatt.com).
The tariff contract was signed on 29 November, 2007 (www.verdi.de).}
Interestingly, the contract provided an extraordinary termination clause
which became effective if and only if the contract would not have been
declared as generally binding as an industry-wide minimum wage.\footnote{%
Precisely, article 6, paragraph 3 of the tariff contract stipulates:
\textquotedblleft Both parties have an extraordinary termination right if
the contract is not declared generally binding according to the Collective
Agreements Act and the Posted Workers Act. In that case [...] the contract
can be terminated within a period of one week by the end of the calendar
month.\textquotedblright}

To investigate the actual working conditions in the postal industry, the
Federal Network Agency (\textquotedblleft
Bundesnetzagentur\textquotedblright ) conducted a survey about working
conditions and wages at licensed postal service operators from summer to
autumn 2007 (BNetzA 2008). Table \ref{tab:WagesBefore} provides an overview.

\begin{table}[tbph]
\caption{Industry wages before the introduction of the minimum wage (BNetzA
2008)}
\label{tab:WagesBefore}\vspace{2mm} \centering
\begin{tabular}{lcccc}
& Deutsche & \multicolumn{3}{c}{Competitors} \\ 
& Post AG & West & East & Average \\ \hline
Sorters & 11.34 & 8.10 & 6.11 & 7.68 \\ 
Drivers & 11.99 & 8.08 & 6.23 & 7.73 \\ 
Delivery postmen & 12.13 & 7.71 & 6.18 & 7.28 \\ 
Administrative staff & 16.01 & 11.24 & 9.23 & 10.97 \\ 
Average & 13.04 & 8.23 & 6.38 & 7.79 \\ \hline
\end{tabular}%
\end{table}

Focusing on wages per hour for postmen, Table 1 clearly shows that the
tariff agreement between AGV Postdienste and Verdi set minimum wages which
exceeded the average wage rates paid by competitors by 20 to 30 per cent,
although the average wage rate of \euro\ 12.13 calculated for the Deutsche
Post should be treated with caution. This relatively high wage rate
reflects, to a certain part, Deutsche Post's burden of having senior postmen
who still enjoy the benefits of civil servant status or similar working
contracts. However, the wage rate that Deutsche Post's partner firms have
been paying for new employees (including postmen) were substantially lower
and have been even lower than the minimum wage set in the tariff contract
between AGV\ Postdienste and Verdi.\footnote{%
For details, see BNetzA (2008) and Dieke and Zauner (2007). Considering
other industries where minimum wages existed in Germany, the wages per hour
were not as high as, e.g., for constuction workers, but higher than for
other industries with comparable qualification requirements, e.g., facility
security or cleaning services.}

Immediately, the competitors complained heavily about the level of the wages
and the procedure how the tariffs have been agreed upon.\footnote{%
The coverage of the tariff agreement was another issue of importance.
Initially, it was planned that the tariff agreement should hold for all
firms delivering letters no matter of the firms' core business (as, e.g.,
publishing and newspaper delivery). By November 29th, 2007 the draft of the
wage contract was revised such that it only \ applied to firms with letter
delivery being their core business. See \textquotedblleft Koalition einigt
sich auf Post-Mindestlohn,\textquotedblright\ Spiegel online, November 29th,
2007 (www.spiegel.de).} The main competitors responded on September 18th,
2007, with the establishment of another employers' association
\textquotedblleft Arbeitgeberverband Neue Brief- und
Zustelldienste\textquotedblright\ (AGV Neue BuZ) which stated that a minimum
wage would be reasonable and acceptable if it was between \euro\ 6.00 and
\euro\ 7.50.\footnote{%
See Press Release of the AGV Neue BuZ, 27 September, 2007 (www.agv-nbz.de).
In June 2010, wages of \euro\ 7.50 (East)\ and \euro\ 8.50 (West) seem to
evolve as a compromise in the discussion about the introduction of minimum
wages for nursing (see, e.g.,
http://www.mindestlohn.de/meldung/bruederle-lenkt-in/).}

Furthermore, a new union for letter and delivery services\ (Gewerkschaft
Neue Brief- und Zustelldienste, in short: GNBZ) was founded which agreed
upon a wage contract with the new employer association AGV Neue BuZ,
stipulating a general minimum wage per hour of 6.50 \euro\ and 7.50 \euro\
for East Germany and West Germany, respectively. That contract was also
submitted to the Federal Ministry of Labour as an alternative proposal for a
mandatory minimum wage.\footnote{%
See BdKEP Press Release, 12 December, 2007 (www.bdkep.de).}

The minimum wage critically depended on a revision of the Posted Workers Act
by adding letter delivery services to the sectors eligible for a minimum
wage regulation.\footnote{%
Market surveys conducted by the Federal Network Agency revealed that the
introduction of a minimum wage by means of the extension rule of the TVG
would be problematic, as the wage contract between AGV Postdienste and Verdi
hardly represented at least 50 per cent of the employees in postal delivery
services that had to be employed in firms of contract-bound employers
according to the TVG. See BNetzA (2008).} On December 20th, 2007, the
amended Act (BMAS 2007) which now included letter services, was passed by
the Upper House (\textquotedblleft Bundesrat\textquotedblright ). On
December 28th, 2007, a decree was issued by the Federal Labor Ministry,
declaring the wage contract between Verdi and AGV\ Postdienste generally
binding for all mail service providers. The decree became effective on
January 1st, 2008, and was set to expire by April 31st, 2010.

\textbf{The impact on competition.} The extension of the wage contract
between Verdi and AGV\ Postdienste by means of the Posted Workers Act had a
significant impact on the competitors' businesses. According to a statement
of the German Federal Government, 153 postal service companies shut down
operations in 2008-2009 and about 19,000 jobs had been cut.\footnote{%
See the reply of the Federal Government to the inquiry of the parliamentary
group of the liberal party (FDP) (available at
http://dip21.bundestag.de/dip21/btd/16/091/1609192.pdf) and Press Release of
the Federal Network Agency (available at
http://www.bundesnetzagentur.de/media/archive/15280.pdf).} Nevertheless,
although the minimum wages are considered frequently as the main source of
these market developments, additional factors like the overall difficult
situation and managerial errors might have contributed significantly to the
observable developments.

In the first quarter of 2008, the PIN\ group filed insolvency after its main
shareholder, the Axel Springer group, had ended support for its postal
operations already in December 2007. Since then, the PIN group has been run
by an insolvency administrator. During this period, the group paid the
minimum wages while being subsidized out of public social security funds
(Ecorys 2008). In the first quarter of 2008, about 50 per cent of formerly
about 11,400 jobs have been slashed, so that the delivery network has been
cut down substantially (already in February 2008, 37 of approximately 91
companies of the PIN\ group filed bankruptcy). While the insolvency
administrator tried to preserve the PIN\ group as a whole, it turned out,
that the selling of the different regional companies separately was a more
viable solution. The publishing house Holtzbrinck acquired twelve PIN firms
in metropolitan areas. In mid-sized cities regional publishers took over
several other PIN firms. Subsidiaries of PIN\ in smaller towns and rural
areas often could neither be preserved nor sold to other firms and had to
shut down operations.

Turning to the other main competitor TNT, the picture is somewhat different.
Right after the introduction of minimum wages, TNT\ announced that it is
\textquotedblleft considering withdrawal from the German
market\textquotedblright\ as a consequence of the minimum wage, but this
point seemed to loose prominence over time, especially against the
background of the insolvency of the other main competitor PIN.\
Interestingly, TNT decided not to pay the minimum wages but kept its own
lower wage rates effective. This decision, though, put an additional
financial burden on the company as it had to build up reserves for the wage
differential and associated social security contributions.

Finally, as competing postal operators relied on building alliances with
partner firms to reach nearly full geographic coverage, market exit of small
regional players has resulted in reductions of the main competitors
coverage. For example, it is documented in Ecorys (2008) that as a
consequence of partner insolvency, the coverage of the TNT network including
allied partners went down from 93 to 87 per cent in Germany. However,
shortly after the Federal Administrative Court's judgement that declared the
minimum wages void,\ TNT\ announced new plans to extend its area coverage
and delivery frequency.\footnote{%
Meanwhile, by January 2010, TNT, Holtzbrinck, Madsack, Citipost and some
other companies in the mailing industry founded the Mail Alliance which
started operations on January 25th, 2010. Their offerings are limited to
firms and institutions, but include hybrid mail. Coverage is claimed to be
nation-wide with a conveyance speed of E+2. The wages paid by the companies
of the alliance are mainly in the range of \euro\ 6.50 to \euro\ 7.50 (see
the Mail Alliance' website: www.mailalliance.net).}

\textbf{Legal disputes.} With the implementation of minimum wages, a series
of legal disputes has been triggered which took two years to settle, while
the period of the law was set to two years and three months anyhow. On
January 9th, 2008, TNT and other competitors (organized in the new employer
association AGB\ Neue BuZ) filed a lawsuit against the German Federal
Government. They insisted on their constitutional right to conclude a
collective wage agreement on their own (namely, the tariff contract
concluded in 2007 between the AGV Neue BuZ and GNBZ). On March 7th, 2008,
the Berlin Administrative Court (\textquotedblleft Verwaltungsgericht
Berlin\textquotedblright ) declared the minimum wage void. The court argued
that the Federal Government was not empowered by the Posted Workers Act to
overturn a competing collective contract by declaring another collective
tariff contract as generally binding. By that, the court clarified that a
minimum wage can only be imposed on employers and workers not bound to any
tariff agreement.\footnote{%
See Berlin Administrative Court (2008):\ Decision VG\ 4 A 439.07.} The
Federal Ministry of Labor and Social Affairs appealed the decision, but the
preceding decision was confirmed after the Federal Labor Ministry appealed
by the Higher Administrative Court Berlin (\textquotedblleft
Oberverwaltungsgericht Berlin\textquotedblright ) on December 18th, 2008.%
\footnote{%
See Higher Administrative Court Berlin (2008):\ Decision OVG\ 1 B 13.08.}

After the Federal Labor Ministry appealed for a second time, on January
28th, 2010, the Federal Administrative Court (\textquotedblleft
Bundesverwaltungsgericht\textquotedblright ) finally judged the declaration
of the minimum wage void due to another formal defect. In its decision, the
court argued that the Federal Labor Ministry had failed to give other
affected parties the opportunity to comment prior to issuing the ordinance.
As a consequence, the minimum wage was not binding for the plaintiffs from
its beginning on, while it remained in force for unorganized competitors who
did not go to court.

Furthermore, already on February 13th, 2009, a new amendment of the Posted
Workers Act was put into force which should cure the Act's shortcomings when
more than one collective contract has been concluded in the same sector.
First, the amendment specifies a new \textquotedblleft
representativeness\textquotedblright\ criterion which should guide the
Federal Labor Ministry's decision concerning the choice of the tariff
contract as the basis for an extension rule when more than one collective
contract exist. Second, the amendment incorporates a procedure of hearings
of the affected parties into the Act which was missing in the former
version. Those amendments have been acknowledged by legal experts as
sufficient to guarantee that a minimum wage based on the collective contract
between Verdi and AGV Postdienste could stand the test of a labor court but
would have required to repeat the extension procedure from beginning on (see
Blanke 2007).

The new amendment is closely related to Verdi's accusation that the new
union GNBZ was not empowered to conclude collective labor contracts. Verdi
argued that the GNBZ does not meet the minimum standards a \textquotedblleft
tariff-enabled\textquotedblright\ union must fulfill according to the TVG.%
\footnote{%
See Blanke (2007) for an expert's report which argues that the new union
should not be regarded as tariff-enabled according to the TVG. That study
also argues that the \textquotedblleft representativeness\textquotedblright\
criterion of the revised Posted Workers Act requires to neglect the
competing collective agreement.} On October 30th, 2008 the Cologne Labor
Court (\textquotedblleft Arbeitsgericht K\"{o}ln\textquotedblright ) shared
this view and denied that the GNBZ\ is a tariff-enabled union in the sense
of the TVG. Accordingly, the wage contract between AGV Neue BuZ and GNBZ was
declared void by the court. This court ruling together with the Federal
Government's political commitment to find ways to implement minimum wages
has been inflicting considerable uncertainty on the viability of the
competitors' future businesses. Both, GNBZ and AGV Neue BuZ, appealed
against the court ruling, but both parties withdrawed their appeals.

At the European level, the claimants also filed complaints about the law,
but since the regulation of the labor markets is outside of the competence
of the European Union and fully under the authority of the member states,
the European Commission did not open any procedures.\footnote{%
At the EU level, the Federal Association of International Express and
Courier Companies (\textquotedblleft Bundesverband Internationaler Express-
und Kurierdienste\textquotedblright ) filed a complaint addressed to the
European Commission. It was argued that the minimum wage agreement's only
objective was to block competition. In additon, TNT\ filed a complaint
against the German government based on Art. 82 of the European Treaty. It
was claimed that the minimum wage decree leads to an unfair infringement on
competition and violates the freedom to establish business throughout the
European Union by raising rivals' costs. The European Commission examined
the issue but decided to abstain from opening a procedure.}

\section{Social Regulation, Minimum Wages, and Raising Rivals' Costs}

Throughout Europe, 1.6 million people are employed directly in the postal
sector with an average age above 40 years and mainly low to medium
qualification levels. Especially in this industry, the need to adapt to
large mail volume decreases and tailoring the networks to demand and
profitability as well as increased competition leads to the necessity of
business model revisions, workforce optimization with a decrease in
employment volume and the evolution of jobs' nature and status.\footnote{%
Also since especially in industries where wage cost are the major cost,
efficiency goals likely involve downward pressure on wages, see also Wachter
et al. (2001).} Although there are some counter-strategies as, e.g.,
diversification, there is generally a trend toward modernization of the
postal networks involving automatization and delivery optimization which in
turn lead to decreasing employment and other social consequences such as the
simplification of tasks and the flexibilization of the workforce through
part-timers and external workers (SDCPS\ 2010).

New social standards and social regulation aim to address these undesired
consequences of the liberalization and the related introduction of
competition, such as \textquotedblleft unfair competition\textquotedblright\
at the expense of the postal workers or to level the playing field between
the starting position of former monopolists and entrants into the respective
industry.\footnote{%
This growing importance of social regulation is also reflected in the third
European Framework Directive addressing the concern and aiming to prevent
social and wage dumping in the context of the full market opening.} Thereby,
the main goal of social regulation is to achieve \textquotedblleft fair
competition at socially acceptable conditions despite the needs for
operational and social optimization of their activities, [...] although it
is sometimes challenged as being hampering the sector evolution through the
creation of entry barriers\textquotedblright\ (Bailly and Meidinger 2010).

One of the most controversely debated issues are especially
industry-specific minimum wages, since such minimum wages not only are means
to stabilize the social conditions during the introduction of competition,
but in turn also might lead to drawbacks. The potential adverse effects
include rising prices and the introduction of new limits to competition,
especially in industries where an oligopolistic rather than a fully
competitive industry structure can be expected due to network effects and/or
economies of scale.

If the minimum wages are not set nationwide but for a certain industry, they
could in particular represent powerful tools to raise rivals' costs and
inhere the danger to be strategically exploited as an entry-deterring
dervice. This strategy might not only be profitable for the incumbent firm
but also the unions might be interested in pursuing such a deterrence
strategy, since the incumbent may profit from reduced competition and the
union from higher wages of their members. Such a situation may especially
arise in cases, where the workers of the entrant firms are organized less
and thus the unions are representing primarily the employees of the
incumbent.

In our recent paper (Heitzler and Wey 2010), we provide a model of the case
of the minimum wages in the postal industry in Germany, where we
theoretically analyze the research questions, \textit{i)} what the
conditions are such that both a union and the incumbent agree on an entry
deterring wage, \textit{ii)}\ whether there are instances such that a even
more efficient competitor can be deterred from entry through minimum wages
and \textit{iii)} whether there are instances where overall productive
efficiency decreases through minimum wages.

In the basic setting, we model two (postal)\ operators providing their
services with full (geographic) coverage\ at positive non-labor marginal
costs plus fixed labor costs to run their delivery network, facing a linear
demand. Thereby, we allow their non-labor marginal costs to differ in order
to reflect their relative cost efficiency what might be in favor of the
incumbent as well as the entrant. Concerning the workers, we assume for
simplicity, that all workers of the incumbent firm are represented by a
union (with identical and sufficiently low reservation wages), while the
workers at the entrant firm are not organized at all. The union is assumed
to maximize the wage bill of their members (since unions often receive
simply a share of their members' wages as membership fees). The game follows
a two-stage timing where in the first stage the union and the incumbent firm
Nash-bargain about the wage rate and in the second stage the two firms
compete \`{a} la Cournot.\footnote{%
We interpret Cournot competition in the sense of Kreps and Scheinkman (1983)
such that the postal operators are assumed to set first their mail
capacities and then compete in prices. As shown by the authors, that game
yields the Cournot outcome if products are homogeneous. In addition, we
suppose that both firms' mail delivery networks are sufficiently large to
guarantee a certain delivery quality for their supplied mail volumes.}

For the analysis, we consider two alternative regimes concerning the
existence of an extension rule which makes the wage agreed upon by the
incumbent and the union generally binding for all firms in the industry.
Without the extension rule, the entrant pays its employees their reservation
wage, while the wage rate negotiated between the union and the incumbent
firm applies only to the employees of the incumbent firm. In contrast, if an
extension rule is in place, then the entrant firm must pay the (minimum)
wage which is determined jointly by the union and the incumbent firm.

The results from our model confirm the existence of the incentives to raise
fixed costs in the industry in order to deter entry. More precisely, \textit{%
i)}\ the incentives to raise the fixed costs of all firms in the industry
increase with decreasing cost efficiency of the competitor and \textit{ii)}\
entry is deterred for sure in some cases with strictly positive probability
(corollary 2). Furthermore, \textit{iii)} the expected wage rate, the
union's (expected) wage bill and the incumbent's (expected) profit are all
strictly larger under an extension rule (corollary 3).

In an extension of the model, we abstract from efficiency differences and
relax the assumption that the entrant provides full network coverage, since
the entrant may choose its network size freely while the incumbent is
assumed to be obliged to provide full coverage by universal service
obligations. In this extension, we add an investment stage at the beginning
of the game, where the entrant incurs sunk costs to build up its delivery
network in this initial stage, while the fixed labor costs of operating the
network in the subsequent game (as in the base model) increase linearly in
network coverage.

In the extended model we show, that in the regime with a generally binding
wage, entry is also deterred completely in some situations (depending on
reservation wages and demand conditions), while under all conditions the
investments and the network coverage are strictly smaller under an extension
rule than without it (proposition 3).

Our analysis is also related to the literature on entry barriers (Dixit
1979, Rogerson 1984). Most importantly, Rogerson (1984) shows that under
symmetric cost conditions a dominant firm has incentives to raise fixed
entry costs. In Rogerson (1984) the level of fixed entry costs is
exogenously given (since no vertical structure is taken into consideration),
while in our analysis the fixed labor costs of operating a mail delivery
network are the outcome of negotiations between the union and the incumbent
operator, which in turn leads to the strategic role of the union and the
incentives (depending on the share of organzied workers at the entrant firm)
to raise industry wages in favor of the incumbent firm. In consequence,
both, the union and the employers' association may have both incentives to
agree on a minimum wage to deter entry. Even small labor productivity
advantages of the incumbent firm cause an incentive for raising
rivals'(variable labor) costs. While typically minimum wages increase
productive effciency, this may not hold any longer in our setting, since
even more efficient rivals can be deterred effectively.

The case where employers and a union increased (variable)\ labor costs has
been analyzed in the related paper of Williamson (1968). He showed that an
incumbent firm may pursue the strategic goal to accept high wage rates if
this also raises rivals' costs (see also Haucap et al. 2001). Precisely,
Williamson analyzed the so-called Pennington case and he argued that an
industry-wide wage contract which increases the cost of relative
labor-intense firms to a larger extent than the costs of relative
capital-intensive firms can be used to force labor intensive firms to
withdraw from the market. Quite generally, the raising rivals' cost
literature assumes that the strategic variable (as, e.g., a generally
binding minimum wage rate) impacts directly on firms' variable costs (see
Salop and Scheffman 1983, 1987).\footnote{%
\textquotedblleft The Raising Rivals' Costs paradigm requires \textit{i)}
that the conduct of the challenged firm \textquotedblleft unavaidably and
significantly\textquotedblright\ increase the costs of its competitors and 
\textit{ii)} that the raising of rivals' costs enables the excluding firm to
raise prices above the competitive level\textquotedblright\ (Krattenmaker
and Salop, 1986).} In those settings a necessary condition for making a
raising rivals' cost strategy profitable is that the rival firms' labor
productivity (in the case of wage being the strategic variable) is smaller
than the firm's labor productivity which executes the anticompetitive
practice. As a consequence, in papers considering variable labor costs,
overall productive efficiency is likely to increase as the more productive
firm gains market shares while less productive firms loose market shares.

Overall, through the combination of these approaches, our model delivers new
insights on the nature of union-firm bargaining when labor costs are fixed
instead of variable costs and the effects of labor laws which make wage
contracts generally binding. It thus also extends the literature analyzing
the interaction between monopolized labor markets and oligopolistic product
markets (\textquotedblleft unionized oligopolies\textquotedblright ,
Dewatripont 1987, 1988, Horn and Wolinsky 1988a,b, Haucap et al. 2001).

The interim conclusion of the case not only highlights the strategic
importance of the establishment of an employer association and the agreement
on a wage rate with Verdi as a prerequisite for the introduction of the
minimum wages, but also the strategy of the establishment of a competing
employer association and of a competing union as well as the agreement on a
competing tariff contract.

Furthermore, the model predicted the effects of the introduction of a high
minimum wage for the postal industry in Germany, that the cost increase was
disastrous for the competitors, where not a marginal reduction in output was
the consequence, but also firms were squeezed out of the market entirely,
for example when PIN\ had to file insolvency, although the subsequent legal
dispute of minimum wage declaration was successful in the sense that it has
been declared void.

Additionally, investments and market entry that did not happen, are not
observable. Therefore, the actual effects of the strategy might be partly
hidden, since \textquotedblleft quite often, the theory of the case is not
that the defendant has \textit{gained }power over price by raising its
rivals'\ costs, but that it has \textit{defended} its power over prices
against the threat of new entry\textquotedblright\ (Tom and Wells 2003, p.
393).

\section{Conclusion}

In this paper we discussed how minimum wage legislation in the form of
extension rulings can be used by collective bargaining partners to deter
entry or to drive existing competitors out of the market. Our main
application is the postal service industry where the labor costs of running
a mail delivery network are mainly fixed operating costs.

Even in more standard raising rivals' costs models, where wages affect a
firm's marginal labor costs directly, wage increases can be used to
monopolize the final product market. However, there are several differences
between raising rivals' marginal and raising rivals' fixed labor costs. Most
importantly, when labor constitutes fixed costs, then the profitability of a
raising rivals' costs strategy does not depend on a sufficient efficiency
advantage of the incumbent firm (which engages in the anticompetitive
practice) vis-\`{a}-vis potential competitors. This observation has several
implications. First, the alleged conflict of interest between the firm and
its union becomes less pronounced than in the case of variable labor costs.
When wages are variable costs a wage increase not only distributes rents to
the union but also tends to reduce the overall joint surplus available
because of the well-known double mark-up problem. Second, when wages are
fixed costs then an incumbent is able to deter entry through strategic wage
increases even if the entrant firm is more efficient. As a consequence,
overall productive efficiency can be reduced under a raising rivals' fixed
labor cost strategy.

The postal minimum wage case in Germany reveals the strong incentives of the
incumbent firm and the established union (which cares only about its
organized members employed by the incumbent) to settle (strategically) on a
relative high wage rate so as to harm competitors.

The implementation of these minimum wages by the Federal Ministry of Labor
and Social Affairs based on the Posted Workers Act allowed to declare the
tariff contract between the employer association AGV\ Postdienste and the
union Verdi as generally binding. Quite obviously, the procedure widely
neglected new and entrant firms' (and their employees') interests. And even
worse, the procedure of declaring collective wage contracts generally
binding has been used strategically by the incumbent players to directly
harm entrant firms. Additionally, it can be safely assumed, that investments
and the extension of the networks of the new competitors have been reduced
or delayed, respectively. The strategic intention becomes intelligible, when
one considers the fact that the tariff contract specifying the proposed
minimum wages was made contingent on being declared as generally binding by
the Federal Government.

We also described the legal disputes which resulted from the Federal
Government's minimum wage ruling. The most problematic issue has become the
fact that the incumbent unions (namely, the unions organized in the DGB)
lost their monopoly position in the \textquotedblleft market for collective
contracts.\textquotedblright\ This is a rather new development in the German
labor market, and the labor institutions (which were designed for bilateral
wage negotiations between a monopoly union and a monopolistic employer
association at the industry-level) are still struggling to come to terms
with a competitive labor market.

Therefore, especially minimum wages proposed by established industry players
in industries where wage costs are mainly fixed costs should be treated with
special care, since \textit{i)} unduly high minimum wages are a particularly
effective deterrence instrument when labor constitutes fixed costs, \textit{%
ii)} drastic effects on competitors rather than \textquotedblleft
marginal\textquotedblright effects might result, \textit{iii)} the conflict
of interest between a union and a firm vanishes when the limit wage is
relatively low, \textit{iv)} even more efficient rivals can be deterred and 
\textit{v)} overall productive efficiency may decline. Hence, before the
introduction of such social regulations, not only competitors but also
competition authorities should have the right to be heared in order to
balance the interests of the existing players in the market and actual and
potential entrants to the industry.

\newpage

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Appendix.

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\begin{center}
\begin{longtable}{p{2cm}p{8.3cm}}
	\caption{Postal minimum wage in Germany: Timeline\label{tab:timeline}} \\
\endfirsthead
\endhead
%\hline 
\multicolumn{2}{r}{{(Continued on next page)}} \\ %\hline
\endfoot
%\hline \hline
\endlastfoot
%\begin{tabular}{ll}
01.01.1998 & Introduction of gradual liberalization of postal markets in Germany \\ 
15.07.2007 & Chancellor Angela Merkel rejects the introduction of a postal minimum wage for 2007 \\ 
21.08.2007 & Establishment of Postal Employers Association (AGV Postdienste), member of BDA \\
04.09.2007 & Verdi and AGV Postdienste agree on minimum wage for postal services from 1st December 2007 on \\ 
05.09.2007 & Complaints of competitors concerning the negative impact on competition \\ 
06.09.2007 & BNetzA supports the competitors claim \\ 
08.09.2007 & Federal Ministry of Economics and Technology (BMWi) shares the concerns \\ 
10.09.2007 & Federal Employers Association (BDA) and CDU express same concerns \\ 
12.09.2007 & Establishment of competing employers association Arbeitgeberverband neue Brief- und Zustelldienste (AGV\ neue BuZ) \\ 
18.09.2007 & BDA, Bundesverband der Zeitungsverleger, Bundesverband der Kurier-, Express- und Paketdienste (BdKEP), Bundesverband der Neuen Brief- und Zustelldienste \\ 
19.09.2007 & Government coalition: only letter servies instead of postal services \\ 
23.09.2007 & Coalition disagrees on topic \\ 
09.10.2007 & VAT exemption proposed - competitors defeat \\ 
10.10.2007 & Competitors-employed announce to establish an \emph{anti-union} \\ 
12.10.2007 & SPD fails with general minimum wage plan and extension of AEntG \\ 
29.10.2007 & Federal Network Agency for Electricity, Gas, Telecommunications and Railways issues recent figures on employment in the postal sector: only 33/44\% of all workers covered \\ 
01.11.2007 & BMWi supports that position and opposes again \\ 
02.11.2007 & BMAS and SPD consider the quota as fulfilled \\ 
02.11.2007 & CDU wing refuses to adopt the extension of the AEntG \\ 
06.11.2007 & Springer tries to sell PIN to TNT (bought end of June) \\ 
14.12.2007 & Bundestag accepts minimum wage draft bill \\ 
21.12.2007 & TNT threatens with operations withdrawal \\ 
21.12.2007 & 7 out of 91 PIN companies register for insolvency \\ 
28.12.2007 & Minimum wage legislation (Bundesrat) and minister decree: Gross minimum wages for sorting workers 8,00 \euro\ (east) and 8,40 \euro\ (west), and 9,00 \euro\ and 9,80 \euro\ for letter-delivering workers, respectively \\ 
01.01.2008 & Full Market Liberalization in Germany \\ 
09.01.2008 & Competitors file lawsuit against the German government \\ 
25.01.2008 & PIN AG requests insolvency procedure \\ 
07.03.2008 & Administrative Court Berlin (VG\ Berlin) declares minimum wage void \\ 
20.03.2008 & TNT expresses optimism concerning its future in Germany \\ 
31.03.2008 & About 50\% of about 11400 jobs shed at PIN \\ 
19.06.2008 & DG Internal Market: Commissioner Charlie McCreevy announces infringement procedure preparation \\ 
23.09.2008 & TNT announces thoughts about delivery speed improvement (J+2 to J+1 service) \\ 
30.10.2008 & Labor Court Cologne (AG K\"{o}ln) decides that GNBZ cannnot make tariff-agreements \\ 
22.01.2009 & AEntG changed, parliament (Bundestag) decision \\ 
13.02.2009 & Bundesrat accepts new AEntG \\
28.01.2010 & Bundesveraltungsgericht (Federal administrative court) finally declares minimum wage rules void for the plaintiffs that went to court \\
31.04.2010 & Expiry of minimum wage ordinance (by sunset clause) \\
%\end{tabular}
\end{longtable}
\end{center}