Ton Korver

Peter R A Oeij

The Soft Law of the Covenant: Making Governance Instrumental

■ Covenants are agreements between the government and social partners to implement public policy. They are a form of soft law, guiding the regulation of self-regulation, and are specifically relevant in bridging the macro and meso levels of society. Covenants prove effective where actors share goals, and learn to advance policy-making by monitoring efforts, effects and possible risks, and by subsequently fine-tuning follow-up actions. Positive-sum outcomes often result. We describe successful examples of this method of cooperation in the realm of working conditions and employment, and claim that covenants can be helpful in facilitating collective-bargaining framework agreements. In terms of EU policies, covenants are an instance of so-called European Governance Arrangements, the political and institutional foundations of which are still to be developed.

Introduction

Discussion of EU regulation has given increasing attention to 'soft law', targeted at influencing the behaviour of organizations, systems and even whole polities, in contrast to 'hard law', which is most effective in regulating the behaviour of individuals. Covenants (in Dutch, convenanten) are a new variant of soft law in the field of industrial relations, covering public goals, the operationalization and execution of which is delegated to social partners and organizations ('self-regulation'). Because the government initiates or facilitates the process, or both, it can be described as 'regulation of self-regulation'.

In this article, we sketch some applications of covenants, mainly on matters of working conditions and employment. They have proved effective for issues where goals are shared, but where the path towards achieving them is uncertain and therefore risky. The method of 'learning by monitoring' is shown to be helpful in tackling the risks involved.

In certain respects, covenants have the same function as collectivebargaining framework agreements. The difference is that they explicitly

Covenants and European Regulation: Opportunities and Pitfalls

Two types of EU decision influence national policies. First, some legislation is directly applicable, prescribing what to do and how to do it. Second, most directives prescribe what to do, but not how to do it: this is the prerogative of the member states. The doctrine of 'subsidiarity' is relevant for an increasing number of themes and issues, employment and social inclusion among them, that are defined as 'common concerns' of both the EU and its member states.

Covenants, as defined in the Netherlands, are 'signed written agreements of the government with one or more other parties in order to effectuate governmental policy' (Van Ommeren, 1993: 29). They regulate 'how' themes and issues of common concern can be tackled, and like most soft law are procedural rather than substantive. Declarations of intent, 'gentlemen's agreements' or simply 'agreements' are functionally equivalent to covenants, if they entail the mutual commitment to publicly relevant common concerns and public involvement as such.

In the past 20 years, the language and practice of convenanten have gained wide acceptance in the Netherlands. In the building trades, in environmental policy, in education, in health care, and in the field of labour, hundreds have been signed. For the government, the advantage is that covenants may compensate for the defects of traditional legislation, substituting for the declining power of 'command and control'. With the covenant the government enlists the cooperation of non-public parties in order to achieve its goals. For the latter (for example, companies and social partners) the advantage is an enhanced predictability of the behaviour of public authorities: by binding themselves, they also bind the government. Paradoxically, though legally unenforceable the covenant guarantees the non-governmental parties a measure of legal security they would not otherwise have (De Ru, 1993: 27;Van Ommeren and De Ru, 1993: 297).

Covenants have also become common in Belgian Flanders, while in Germany the practice called informales Verwaltungshandeln 2 has many similarities [START_REF] Grijns | Convenanten in Duitsland[END_REF]. Here, and elsewhere, we find new instruments of public-private cooperation as part and parcel of national policies. Legally, these instruments are hybrid. They are not like regular contracts, nor are they laws: they bind, yet not in a legal sense. Rather than prescribe, they create mutual commitment. They do not stress hierarchy, but emphasize reciprocal dependence, treating dependence not as a weakness to overcome, but as a model for discovering the advantages of cooperation. They spell governance (horizontal relations between governments and other parties) instead of government (vertical relations), but are not a substitute for government. Rather, they complement it.

They presuppose a credible government, capable of assuming credible commitments. By the same token, they presuppose accountable and representative parties. At national level, in the Netherlands with its long history of consultation and negotiation, but also in Flanders and Germany, credible governments and accountable and representative parties can be said to exist. At the level of the EU, on the other hand, they are lacking, at least in the policy domains of employment and social inclusion. European governance of employment and social inclusion is governance by default, rather than by complementarity.

Recognition that the effectiveness of law is limited in the case of organizations and societal (sub-)systems has led to two reactions. One is to import economic and political criteria into law (for example, the idea of an 'efficient breach of contract' or 'optimal regulation') (Teubner, 1989: 128). The other is to 'proceduralize' law: instead of controlling social systems, legal mechanisms are designed to respond to their inner workings (Teubner, 1988(Teubner, : 307-13, 1989: 147): 147). The latter reaction is dubbed 'reflexive' law, geared to the accountability, as distinct from the responsibility, of systems and organizations. If social systems such as law, politics, the economy and organizations in general are 'black boxes' for one another, intervention will predictably produce unforeseen and possibly unwanted effects. However, covenants or other forms of regulating self-regulation can connect the relevant parties, so that black boxes 'become "whitened" in the sense that an interaction relation develops among them which is transparent for them in its regularities' (Teubner, 1988: 320). That is, systems can learn from their interaction, if only because they do not sever the ties between learning and monitoring [START_REF] Sabel | Learning by Monitoring: The Institutions of Economic Development[END_REF]. What is distinctive about covenants is not that targets are set, but that these lead to a process of identifying and tackling bottlenecks, which once resolved lead to the discovery of new bottlenecks and so on. Covenants connect targets with procedures, generating learning trajectories by and for all the parties that have to perform the actual tasks of implementation. Covenants are most valuable, therefore, when consensus can be reached on the goals and their translation into targets, but when the route to their attainment still has to be discovered.

As such, the open method of coordination (OMC) seems another clear example of reflexive labour law, soft law or the 'regulation of self-regulation'. The promotion of a 'social dialogue' [START_REF] Supiot | The Evolution of Labour Law and the Tasks of Jurisprudence in the Year[END_REF], strengthened by the promise of 'bargaining in the shadow of law' (Teubner, 1985: 336), points in the same direction. Open policy coordination, as distinct from policy competition, is the official creed of the EU. Open coordination is a soft method of influencing the decisions of more or less autonomous systems, from polities and policy domains and industrial relations down to the shop floor. On the other hand, one should not forget that the European level of decision-making in the social domain is strongly subordinated to national interests, in terms both of voting procedures (qualified majority voting) and of the demarcation of its competence (subsidiarity). The gathering, dissemination and discussion by the European Commission of information from national sources, consolidated in a common format, is still the major instance of open coordination in the field of employment.

How has the OMC fared so far? Its field of application becomes ever broader; here we restrict ourselves to the European Employment Strategy (EES). Applying the OMC means: (1) establishing guidelines for the Union; (2) translating these into national and regional policy; (3) establishing indicators and benchmarks; and (4) periodic monitoring, evaluation and peer review (De La Porte et al., 2001: 293;Jacobsson, 2004: 357). Three key documents in the EES are the guidelines, drawn up by the Commission and finalized by the Council, the National Action Plans (NAPs), in which member states apply the guidelines and report on specific measures and targets, and the Joint Employment Report by the Commission, in which progress is compared to guidelines and new recommendations are announced. According to the Draft Joint Employment Report for 2004/05, much remains to be improved. Crucial for the OMC is the adequacy of the NAPs to promote the objectives and implement the guidelines of the EES. The Commission is hardly enthusiastic about developments on this score: 'The NAPs in general do not reflect the political consensus to focus the EES on implementation and the delivery of policy . . . Important implementation gaps exist in all Member States, in particular regarding employment levels, the effective exit age from the labour market and participation and investment in education and training. One would therefore expect the exchange on good governance practices to be given a higher priority' (EC, 2005: 37).

This judgement by the Commission is not the first one in this vein. In 2002, it identified four key issues for improvement: clear objectives; simplification of guidelines; governance and partnership; and consistency and complementarity. Progress has been made in the simplification of the guidelines, the one issue on which the Commission itself has the main initiative. On the other issues, progress is still slow, at best. This may not be the final verdict: we find in the literature on the OMC many assertions of the potentiality of this mode of soft governance, and the optimists might well prove right in the future (one example, representative of many, is [START_REF] Trubek | Hard and Soft Law in the Construction of Social Europe[END_REF]. On the other hand, if the OMC is to become a success, several design requirements are in order. Among these is political muscle at European level, capable of mandating the authority at stake, and therefore relying on effective European government. For here as well, governance is no substitute for government. Also required are representative and accountable societal stakeholders. Time and again, however, the actual involvement of the social partners in the making of NAPs is judged inadequate [START_REF] Goetschy | The European Employment Strategy: Genesis and Development[END_REF]De La Porte and Pochet, 2004: 74). Also, the organizational leverage of the social partners at the EU level is weak [START_REF] Dølvik | Redrawing Boundaries of Solidarity? Paper presented to the fifth regional congress of the Industrial Relations Research Association[END_REF][START_REF] Jensen | The Voice of European Business and Industry -The Case of UNICE[END_REF]. In order to empower the OMC, a series of what [START_REF] Schmitter | What Is There to Legitimize in the European Union[END_REF] calls European Governance Arrangements (EGAs) may prove necessary. The NAPs could figure among these, provided that these plans shed their governmental slant and are, indeed, transformed into instruments of multi-party governance. The covenant may suggest the way to proceed, in a future yet to arrive.

Covenants and Working Conditions

Sickness and disability are key issues in the Netherlands, because the proportion of the workforce registered for benefits on these grounds is exceptionally high by comparison with other European countries. In 1989, legislation was introduced to improve workplaces and to reduce sick leave, disability risks, work stress and other work-related problems. This legislation was not successful, for the country faced substantial costs for the care and rehabilitation of workers suffering from stress, musculoskeletal disorders and other physical disabilities. The law failed both because of the complexity of its enforcement and monitoring, and of organizational weaknesses in preventing work risks and reintegrating employees. The responsibility for improving working conditions was therefore delegated to the social partners, with the government retaining the role of initiation and facilitation. Here covenants proved instrumental, for they offered a new procedure to bring the interested parties together.

Covenants on working conditions are agreements (51 of which were reached between 1999 and the beginning of 2004) between the Ministry for Employment and Social Affairs and the social partners, setting quantifiable targets (Peters, 2001: 14) and designed to help employers and workers to improve working conditions. Individual companies, especially small and medium-sized enterprises (SMEs), simply lack the scale and scope to organize a thorough working-conditions policy, but can learn from one another and from the other parties gathered under the covenant. All covenants feature agreements on early reintegration into the company after sick leave, and on reduction of stress, physical workload and repetitive strain injuries. Such covenants now cover 46 percent of the Dutch working population (3.3 million workers), and about half of them have been incorporated in sectoral collective agreements.

A recent evaluation [START_REF] Veerman | Een eerste evaluatie op basis van beschikbare databronnen[END_REF] compared sectors with and without a covenant on working conditions. Those without a covenant are not inactive in the realm of working-conditions policies: they also have to reduce risks and costs. Sectors that have concluded covenants may well be self-selected, with above average problems in this area. Organizations that have pursued their own policies may indeed be in the vanguard; yet we also find sectors where the degree of self-organization is too low to permit any collective action, in the shape of covenants or otherwise. A third remark is that differences between sectors with and without a covenant cannot be exclusively explained by covenants alone. Nevertheless, there is a growing consensus as to the efficacy of the covenants.

The estimated yearly financial savings for employers are substantial (Ministerie SZW, 2004: 28). The Ministry and the social partners made a one-off investment of €275 million, not taking into account the costs of companies in implementing the measures. The estimated yearly savings (on costs for sickness leave and disability insurance benefits) are more than €650 million. Total yield cannot be assessed yet, because of the number of covenants still in the making.

For successful covenants, a number of elements are of importance: goal consensus, specific and measurable goals, commitment and actual implementation at the level of the individual organization (Tweede Kamer der Staten-Generaal, 1999: 16). We focus on a consensus concerning goals. It is with respect to this that the major changes can be observed.

Where the market and prescriptive law both fail, two consequences (not mutually exclusive) may result. The first consists in negative external effects and the shifting of costs and risks from the microlevel of organizations to sectors or society at large; the second in the underutilization of opportunities and capabilities not reached. Both may be tackled by covenants: the first is exemplified by covenants on working conditions, sickness absence and disability; the second by covenants on employment and the labour market.

During the 1980s and 1990s, the Dutch government succeeded in pushing back part of the financial burden of the social risks of inadequate working conditions to the industry and organizational level (thus transforming social into organizational risks). The expectation was that when organizations had to foot the bill, they would change their behaviour. The result at first was, not surprisingly, that working conditions became a matter of cost comparisons. Where the law prescribed specific working conditions, non-compliance might pay if the probable penalties were less than the costs of improving conditions. But with a covenant, the shared goal was a reduction of absence and disability, and the covenant brought together the expertise for designing ways and means of making reductions feasible and manageable. Also, the covenant brought the interested parties together by enlisting the cooperation of the organizations and systems ('stakeholders') involved.

However, working conditions are only one of the causes of absence from work. Consequently, the scope of the covenant widened, to include, for example, the effects of dead-end jobs, of limited opportunities for occupational mobility and more generally, of limited employability. Here again, the goal (improving employability) is a shared one, and again the problem is to design the ways and means of getting there. A few covenants to this effect are now in progress.

One final caveat: covenants are no substitute for self-regulation. Although the problems tackled are of general interest, the parties actually participating must have passed some threshold of self-organization. Only those parties who have 'in effect declared their strategic intentions but not so far as to have assured their own success' fall within the ambit of the public effort 'of convening and moderating groups of firms [and other parties] that want to cooperate' (Sabel, 1995: 14-16). The scale of the covenant is therefore limited and such is recognized also in Dutch practice: covenants have only flourished in sectors that possess selforganization [START_REF] Korver | De grenzen van het poldermodel. Arboconvenant voor loonconfectie (nog) niet haalbaar[END_REF]. Scale, by this token, does not signal the urgency of the problems, but the readiness of the partners to tackle them. If, however, the problem is such that the government feels (or is pressured to feel) that the public interest is at stake (for example, the viability of the welfare state, the boosting of participation and preparation for the knowledge economy) it may indeed move into action to convene a covenant.

Covenants and the Labour Market

We distinguish two types of labour market covenant. The first concerns the employment opportunities for categories with a weak labour market situation; the second, the employment situation in specific sectors.

As an example of the former, in May 2002 a covenant was concluded for women re-entering the labour market. Though it is still in process, the initial results are disappointing: despite a target of 50,000 jobs by 2005, only 2900 have been created. The low growth rate of the economy, and in consequence increased unemployment, are blamed for this.

Another covenant, signed by the Ministry of Social Affairs and Employment, the organization of SMEs (MKB Nederland) and the central organization of the Dutch Public Employment Service (PES), addressed the position of ethnic minorities in the labour market. It commenced in early 2000 and lasted until the end of 2002 (before the economic slowdown). The target was to create more than 60,000 jobs over the three years, half of which were to involve employment of a duration of at least six months. These targets were indeed achieved. At the start of the covenant period, the SMEs had 180,000 vacancies and had to compete in a then very tight labour market. The covenant was therefore welcome, especially since it promised to tap relatively unused reservoirs of labour. Next to satisfaction over the results, the three parties voiced their satisfaction with this form of mutual cooperation.

A further covenant, directed at the employment of ethnic minorities in large companies and again concluded with the Ministry, started in 2002 and continued through 2004. It had no specific targets, but created an enhanced sense of urgency within the companies involved, and improved collaboration between companies and other parties in the labour market, such as the PES. This covenant is first and foremost a learning experience and its criteria of success are the creation of new networks in which 'best practices' spread the initiative, improved procedures to reduce unnecessary bureaucracy and harmonizing labour market opportunities with social security constraints (Ministerie SZW, 2003).

We now turn to covenants in sectors with specific labour market problems. The Dutch Ministry of Education, Culture and the Sciences and the Sector Administration for the Educational Labour Market (SBO) concluded a covenant in 2000 on the labour market situation in the education sector; this was renewed at the end of 2002. Labour market improvements were necessary, for employees constituted an ageing workforce, sickness and absence rates were high, and the sector faced considerable difficulties in recruiting new personnel and in retaining new recruits.

The covenant had two targets: to identify the bottlenecks in the educational labour market and to promote activities for their reduction. Administratively, the covenant was complex: it both symbolized and formalized the new separation between the SBO and the minister, who until 2000 was a member of its board. Also, the SBO was dependent on the social partners as these had to be involved in the identification of, and the activities to reduce, the bottlenecks in the labour market. Moreover, the covenant was a framework, to be subdivided into a number of regional covenants. That is good policy, since labour markets have a strong regional accent and most school boards are organized, if at all, on a local or regional basis. Again, however, it exacerbates the administrative complexity of the covenant as the number of projects, parties, goals and targets also multiplied. The covenant is still in the process of execution, but its renewal shows that for the many parties concerned the balance so far has been more positive than negative.

Two covenants were concluded in the care sector, one for health care proper (1998) and the other for youth welfare (1999). The convening partners were the Ministry of Public Health, Welfare and Sports, the social partners and the PES. The main goal of the two covenants was a reduction in the shortage of personnel, by enlarging the inflow of trainees and increasing the training effort for present personnel, reducing sickness and disability absence and stimulating reintegration, by reducing turnover and by the recruitment and selection of ethnic minorities. Here, too, the shortages were intensified by the general shortage of labour at the time.

Overall, the targets have been met, without completely solving the problem of the shortage of personnel. Again, the latter could very well be the condition for the former, especially in a sector where the demand for personnel today is matched by growing unemployment in the rest of the labour market (OSA, 2003: 13-16). A side-effect of the covenants has been better information on organizational and labour market trends, strengthening the basis for policy. Some of the same administrative difficulties that plague the education sector can be found here, with roughly the same causes. Though the case for covenants looks good, its course has not yet run.

The more successful labour market covenants were where labour shortages could be overcome by tapping unused reservoirs of labour: as in the care sector, in SMEs and, to a certain extent, in education. The covenant for women re-entering the labour market fared less well. The employment market for their services was actually shrinking and the initiative soon lost momentum. Critical, then, is the joining of publicly relevant goals (such as participation and employability) with the goals of societal actors. The covenant offers a procedure for getting the parties together and for initiating processes of mutual information, learning and communication, in the sense of identifying bottlenecks and designing ways and means to overcome them. At the same time, the actual processes of joining forces show considerable complexity. Goals, bottlenecks, procedures, processes and outcomes are related, distinct and also inextricably intertwined, and this may hamper the development of cooperative efforts precisely when they are most needed.

New forms of cooperation are always accompanied by risks. One aspect of learning by monitoring is that the actors recognize their involvement in 'the kind of high-risk situation where public action can matter most' (Sabel, 1995: 14). Covenants meet that criterion: the government has stakes in participation and employability, and in the quality of care and education. The social actors had stakes as well, for which they needed adequate forms of cooperation. All parties believed in the promise of the covenant since it mapped and institutionalized support for a common endeavour which could not otherwise have come about.

On a more general plane, covenants imply specific roles for both state and civil society. Succinctly put, the 'state should encourage or require civil society actors to supervise themselves in the provision of services and rules, and limit its own intervention to monitoring the self-supervision of civil society actors' (Sabel, 2004: 173). This, to be sure, is a programme for soft law, for accountable social and political actors and for processes of learning where those who learn supervise themselves. The latter is 'learning by monitoring'.

Learning, related to employment and employability, means acquiring the knowledge to make and do the things that (labour) markets value (and thereby unlearning the things not so valued). Monitoring means the assessment by the partners in learning of whether the gains from learning are distributed acceptably. Yet learning may lead to outcomes that favour some parties more than others, and the very possibility of this may hamper the effort of learning itself. The dilemma is that learning puts existing relations of distribution at risk, that it 'undermines the stability of relations normally required for monitoring' (Sabel, 1994: 231).

Coupling learning and monitoring can thus lead to blockages. Learning produces winners and losers. On a micro-scale, new processes will lead to an upgrading of some positions and a downgrading of others. Nevertheless, to guarantee the progress of learning, one may have to enlist the endeavours of both prospective winners and eventual losers. Also, it is likely that we do not know beforehand where gains are going to accrue and losses be incurred. On a macro-scale, the present prediction is that the advancing knowledge economy will exacerbate the inequality of incomes. If uncorrected, this development might end in jeopardizing the attempt to enhance rates of participation and employability.

Learning by monitoring attempts to evade such blockages. It does not sever the relations between learning and monitoring; rather, it strengthens them. In so doing, it puts the idea of accountable self-regulation to the test. The concept as such is an elaboration of several insights of Hirschman's studies on the economics and politics of economic development, where the idea of sequence assumes centre stage. Instead of a master plan pre-empting all further decisions, the emphasis is on induced decision-making, in which one action leads to the next problem (or 'bottleneck'), where learning by doing is prominent and is continuously fed back into the decisions and planning of new moves and actions. Instead of given resources and optimal allocation, induced decisionmaking focuses on 'calling forth and enlisting . . . resources that are hidden, scattered, or badly utilized' and on the process of combining them. Tapping such resources depends on the presence or construction of 'pressure mechanisms' or 'pacing devices' (Hirschman, 1958: 5, 25-6). Resources are not the final constraint; nor is optimal allocation known beforehand. What is optimal and which combinations work is a matter of finding out in a process of 'muddling through' (Hirschman, 1971: 63-84). Instead of planning, we have exploring, and the need for an adequate pacing device. Learning by monitoring is such a device, and the covenant is the instrumental shape it can assume.

Covenants and Transitions

Covenants are needed most to handle issues for which it is not yet clear what exactly is required of the participants to achieve commonly set and publicly valued goals and targets. Successful covenants reduce the risks of projects which are necessary, but uncertain in terms of process, outcome and the distribution of costs and benefits. If the subject transcends the scope of collective bargaining (as with the integration of new or non-participants in the labour market), the results of covenants can be consolidated in PECs (Freyssinet and Seifert, 2001: 619). Even when the subject matter of the covenant is within the scope of collective bargaining, such bargaining is to no avail when the definition, the magnitude and the distribution of risks are themselves unknown. Such situations require governmental initiative or support to facilitate interaction between the social actors. Collective bargaining may, of course, lead to socially and publicly valued outcomes, but this is not its purpose. The public dimension is, however, one of the defining characteristics of a covenant, and if need be, the 'task of convening and moderating' falls to the public authorities 'by default' (Sabel, 1995: 16).

How do covenants relate to socio-economic transitions? In order to secure the durable participation of men and women in the emerging knowledge economy, new arrangements for combining work, care and lifelong learning are needed. Also, the erstwhile separate spheres of working, caring for one's family and education need bridges for two-way transitions between these spheres. According to [START_REF] Schmid | Employment Insurance for Managing Critical Transitions During the Life Cycle[END_REF], such transitions are the prime target for the reform of social security and the labour market: the slogan is to make transitions pay rather than to make work pay. The latter is still emphasized in the latest Draft Joint Employment Report; the former is conspicuously absent.

Instituting a system of transitional labour markets requires a radical reorientation in the matter of risks. Risks can be of two kinds. Many traditional labour risks involve danger: involuntary unemployment, work accidents, ill-health and disability. Though coverage for these risks is essential, they are not the risks we emphasize in the present context: our focus is not on risks which are largely involuntary, but on those which are to a greater extent chosen. What were once dangers may have become, and may be helped to become, risks that can be managed. In the context of transitional labour markets, one needs to discuss risks that we choose to take, for instance when moving from one job to the next, from one employer to the next, from one combination of activities in work, care and education to the next and so forth. Here the issue involved in risk is not danger, but trust. Not only do we need to insure against accidents, ill-health, unavoidable old age or other contingencies, we want assurance in moves we choose to make during our career and, indeed, in our chosen life-course trajectories. And as we make such moves in the expectation that they conform to the general goals of more mobility, more transitions and more training, we want to be able to cash in on our insurance when these expectations are disappointed [START_REF] Luhmann | Familiarity, Confidence, Trust: Problems and Alternatives[END_REF]. The opportunities for covenants in the framework of transitional labour markets are in the transformation of risks: from danger to trust.

Trust is a two-way process. One needs to trust one's partner and the partner has to trust us. In bargaining, trust may be obtained by binding oneself: it is a device for coping with the freedom of others, and for others to cope with our own freedom. If our partner believes our 'credible commitment', then she or he may accept reciprocal commitments. Reputation (and the damage it may suffer) is an assurance for commitments. While a contractual commitment is also possible, private contracts have the disadvantage that keeping them depends on a cost/benefit calculation. In other words, in order for contracts to be trusted, they depend in their turn on other kinds of commitment (collateral, a confession or a promise) [START_REF] Frank | Passions within Reason[END_REF]Schelling, 1963: 22-8). In that respect, covenants may perform better. On the other hand and for the very same reason, it will prove harder to muster the commitment of parties to enter into such contracts.

We lack an adequate theory of the genesis of trust (Elster and Moene, 1989: 4-5;Gambetta, 1988: 231). In the learning-by-monitoring example, trust is sort of a 'by-product' of cooperating, but how is it generated? Under what conditions do we need trust in order to achieve and maintain cooperation? Trusting someone means 'believing that when offered the chance he or she is not likely to behave in a way that is damaging to us, and trust will be typically relevant when at least one party is free to disappoint the other, free enough to avoid a risky relationship, and constrained enough to consider that relationship an attractive option' (Gambetta, 1988: 219). That is, trust presupposes exit (avoiding a risky relationship is viable only if functional equivalents for that relationship are available), and it requires for its growth and maintenance both voice (demanding safeguards (monitoring devices, for example) against disappointment, otherwise the relationship will not be upheld) and loyalty (combining attractions and constraints). Exit requires competing possibilities; voice requires modes of communication; and loyalty requires binding oneself.

Trust is like knowledge: it grows when used, and depletes when unused. The covenants on working conditions match the requirements of trusting cooperation. The agreements are not legally binding, the voice of the parties concerned is enlisted, and the performance standards and supporting timetables are included. However, there has been no similar advance in the case of covenants on labour market issues, at least those for weak categories in the labour market. Again, the agreements are not legally binding, but the commitment of the parties enlisted is much more restricted. Nevertheless, in one evaluation of the covenant on improving the opportunities for ethnic minorities, gains are reported in improved relationships between the government and the participating companies, in improved cooperation between the enlisted parties, in organizations learning from one another and in the emergence of networks of organizations (Ministerie SZW, 2003). The improved record in cooperation may in time produce enough trust for stronger performance standards and the enlistment of more partners, needed to effect the performance goals.

However, our case concerning the build-up of transitional labour markets is more complex than the examples given so far. The goals, enhancing the possibilities for durable participation and improving employability, are widely shared. Yet before these can be made operational, clarity as to the accountability of governments and social partners is required. In our view, the government should take the lead; subsequently, the other questions (what cooperation is needed, with what partners, in which timeframe, and towards what targets) can be approached. Learning by monitoring, and developing accurate and acceptable standards along the way, is the only way to proceed here: in particular, if as we have hypothesized, the development of standards will also produce the trust needed to continue cooperating. We emphasize at this point that cooperation does not and should not exclude competition. The possibility of not joining is important for covenants to work, as is the possibility of opting out after joining. Competition is its own method of learning and monitoring and it may contribute to better performance.

Concluding Remarks

The grand design for soft law is in combining 'covenant and commonwealth', as Selznick puts it. Covenants are 'prepolitical, foundational, and consensual', while a commonwealth is 'a going concern that must balance interests and harmonize functions' (Selznick, 1992: 477-8). The task of governments is indeed to balance interests and harmonize functions, and to do so in a lawful and democratic manner. To fulfil this task, governments rely, and today must rely more and more, on the self-regulating capacity of civil society. The covenant depends on a commonwealth, the commonwealth on the covenant. The commonwealth presupposes effective government, the covenant presupposes and expresses the promise of effective governance.

Covenants, thus, are all about the relation between state and civil society. In that respect, they resemble the regulation of industrial relations, though industrial relations pertain to collective interests, as distinct from public interests.3 Indeed, covenants are a mechanism for bridging the public and the collective spheres of interest. As such, they are highly demanding, on the quality of government and on the quality of civil society. Covenants are not all-purpose tools: they are specific and even 'dedicated' investments of viable states and civil societies, and their actual application can be fraught with difficulties. Much more knowledge is needed of the factors critical for success in order to make the most of the instrument and to test its scale and scope. As it stands, we feel confident that in the Dutch context the covenant has been useful and should be pursued, in particular in developing the potential of transitional labour markets (Korver and Oeij, 2004a). In the broader European context, the reality of both commonwealth and covenant seems, to date, a bridge too far. On the other hand, furthering the interests of the OMC might very well profit from a better insight into the conditions and results of the covenant and of its many functional equivalents in regulating self-regulation. NOTES

Korver & Oeij: The Soft Law of the Covenant

For a case study at the EU level, where employability policy is hampered by the absence of credible and accountable government, see[START_REF] Korver | Employability Through Covenants[END_REF].

This expression (literally, 'informal administrative action') is difficult to translate meaningfully. For, 'informales' does not mean 'informal' in its English sense: it denotes the implementation of public policy through nonor extra-juridical mechanisms, which can take a multitude of forms. The key feature is that government prepares the basis for implementing policies of common concern (environmental to employment policies) in close cooperation with those directly involved.

3 By 'collective interests' we denote those specific to particular groups and organizations as against those that are general and societal.


Werner Schmidt

Bernd Dworschak

Pay Developments in Britain and Germany: Collective Bargaining, 'Benchmarking', and 'Mimetic

Keywords: industrial relations, pay determination, pay developments, collective bargaining, cross-country comparison, United Kingdom

■ This article examines the impact of national industrial relations institutions on pay movements in Britain and Germany between 1980 and 2000. Pay increases are slightly higher in Britain, despite the breakdown of multi-employer bargaining and agreements in the UK and their persistence in Germany. Evidence shows that pay decisions in Britain are mainly determined by imitation and not by markets. The article suggests that a system of 'pay benchmarking' in Britain acts as a substitute for the German 'sectoral agreement model' and explains similarities in pay movements.

Industrial Relations in Britain and Germany

Industrial relations institutions in Britain and Germany have diverged during the past quarter century. In Britain, multi-employer bargaining and collective agreements at sectoral level have almost disappeared. In Germany, while the institution of the sectoral agreement has been weakened, it remains basically intact.

In the German system of industrial relations, pay and conditions are negotiated at sectoral level, while statutory works councils monitor the implementation of collective agreements and statutory employment rights, and day-to-day conditions of work at establishment level. In other words, employers' associations and trade unions are responsible for regulating the terms of trade for labour as a commodity, while managers and works councils deal with the practical conditions of employment.

In recent years, there have been some changes: many sectoral agreements now include 'opening' or 'hardship' clauses, which allow management and works councils to renegotiate parts of the agreement. There are an increasing number of illegal violations of sectoral agreements, often tolerated or even approved by works councils. This shift towards the establishment level can be regarded as a sign of erosion [START_REF] Bahnmüller | Vom Vorzeige-zum Auslaufmodell? Das deutsche Tarifsystem zwischen kollektiver Regulierung, betrieblicher Flexibilisierung und individuellen Interessen[END_REF][START_REF] Hassel | The Erosion of the German System of Industrial Relations[END_REF], as can the decrease in union density from 39.7 percent in 1980 to 29.8 percent in 2000 [START_REF] Ebbinghaus | Dinosaurier der Dienstleistungsgesellschaft?[END_REF]. However, the coverage of collective bargaining remains high. In 2002, according to the Establishment Panel of the German Institute for Employment Research (IAB), 70 percent of employees in West Germany and 55 percent in East Germany were covered by collective agreements and a further 15 percent and 23 percent, respectively, worked in firms which observed the collectively agreed conditions. Thus, only 14 percent and 22 percent, respectively, did not work under conditions influenced by collective agreements [START_REF] Wsi | Tarifbindung 2002[END_REF]. Works councils remain important [START_REF] Frege | A Critical Assessment of the Theoretical and Empirical Research on German Works Councils[END_REF]. Hence we can still speak of a system of industrial relations in Germany [START_REF] Locke | Conclusion: The Transformation of Industrial Relations? A Cross-National Review of the Evidence[END_REF], or at least in West Germany, on which we focus.

In Britain, the decline of collective bargaining has been more pronounced. Multi-employer bargaining in the private sector has largely collapsed, giving way to single-employer bargaining or, increasingly, none at all. According to the Workplace Employment Relations Survey (WERS), the collective bargaining coverage rate fell from 70 percent of all employees in 1984 to 54 percent in 1990 and to 41 percent in 1998. By 2004, only 34 percent of employees in private manufacturing had their pay set by collective bargaining, as against 75 percent in the public sector (Kersley et al., 2005: 20-1;Millward et al., 1999: 242). It seems questionable whether one should speak of a system of industrial relations in Britain any longer, and the term 'industrial relations' is often replaced by 'employee relations' [START_REF] Cully | Britain at Work: As Depicted by the 1998 Workplace Employee Relations Survey[END_REF][START_REF] Hollinshead | Employee Relations[END_REF].

The Impact of Industrial Relations on Pay

From established, 'orthodox' perspectives the impact on pay of these institutional trends is clear. The demise of multi-employer bargaining in Britain, and the decline of collective bargaining more generally, should result in stagnant or falling pay or, at best, smaller pay rises. Decentralization of pay determination should also lead to wider wage dispersion between and within sectors. From a neo-classical point of view, wages will fall to a market-clearing level (one which eliminates unemployment). Pay should not increase until full employment is achieved, and may not do so even then because of weak union power.

By contrast, more strongly institutionalized industrial relations in Germany should enable wages to rise above the market level; while multiemployer collective agreements should lead to pay uniformity within industrial sectors. If one assumes that industrial relations institutions matter, one would expect higher pay increases in Germany than in Britain, and a lower dispersion of wages. A contrary effect would occur only if the more institutionalized German system imposed pay discipline not only on employers, but also on trade unions.

However, the assumption that wages above the market level necessarily decrease without the distorting impact of industrial relations institutions is not common to all explanations of wage determination. From the perspective of efficiency wage theories, wages are neither purely determined by the market nor necessarily a result of power relations between capital and labour. According to the classical formulation by Marshall, these wages are paid 'with reference to the exertion of ability and efficiency required of the worker' (1920: VI.III.9). A variety of models have been developed within this framework, emphasizing the incompleteness of the labour contract, which gives workers the chance for opportunism (or shirking). Since monitoring the achievement of employees is usually costly and imperfect, employers pay above equilibrium wages in lieu of extensive monitoring. Such efficiency effects may be more prominent under the less institutionalized conditions found in Britain.

A variant of this approach is Bewley's 'morale theory' of wage determination, which aims to explain why, in the USA, 'wages don't fall during a recession'. He observes that 'the level of pay itself has little impact on morale, unless pay is so low as to be perceived as grossly unfair . . . Only pay cuts or inadequate raises affect morale, and do so negatively.' Morale, he argues, 'is important in large part because management finds it prohibitively expensive to monitor employees closely', and additionally, 'workers are likely to be so cooperative only if they have good morale' (Bewley, 1999: 432-5).

From this perspective, the different trends in industrial relations institutions in Britain and Germany may be of minor importance. However, Bewley does not explain what 'inadequate raises' are, and which pay rises would be adequate. Although he states that 'most workers know little about pay levels outside their own organization', he argues further that the relation to outside pay is important for 'a firm's supply of labor, which in practical terms means turnover and the number and quality of workers the business can attract and retain'. Besides a touch of contradiction in this statement, it is a labour market argument which is juxtaposed to his crucial argumentation. We can assume that the pay levels of other firms are important, although the relations between employers' wage decisions are not sufficiently explained.

Neo-institutionalist theorists offer an alternative approach. Even though not originally developed to explain wage determination, their concepts may be helpful for our purposes. Meyer and Rowan observe that organizations 'incorporate elements which are legitimated externally, rather than in terms of efficiency', and that 'institutional isomorphism promotes the success and survival of organizations. Incorporating externally legitimated formal structures increases the commitment of internal participants and external constituents ' (1977: 348-9). DiMaggio and Powell cite three mechanisms through which institutional isomorphism occurs: '(1) coercive isomorphism that stems from political influence and the problem of legitimacy; (2) mimetic isomorphism resulting from standard responses to uncertainty; and (3) normative isomorphism, associated with professionalization ' (1983: 150). These mechanisms are effective within 'organization fields', that is, areas of institutional life that include 'key suppliers, product consumers, regulatory agencies, and other organizations that produce similar services or products' (DiMaggio and Powell, 1983: 148). This definition comes near to that of industrial sectors, but includes not only competing firms and allows differentiation between distinct dimensions of institutionalized fields with differing ranges. For example, a firm can belong to different organizational fields with regard to wages or product markets.

Applied to the issue of wage determination, in particular to decisions over pay rises, influences other than the labour market and traditional industrial relations institutions need to be considered. In Germany, coercive determination by means of sectoral agreements may be the prevailing feature, while in Britain wages could be determined to a larger extent by, for example, mimetic mechanisms, since pronounced uncertainty remains in consequence of the absence of multi-employer bargaining. According to this neo-institutionalist approach, pay rises within organizational fields may not be higher or more uniform in Germany than in Britain. Nevertheless, some questions remain open in this alternative approach, particularly, how the different mechanisms can be assessed and what consequences can be expected in pay movements.

Pay Trends in Britain and Germany

Our research is based on two sectors which differ markedly within both countries: engineering and retail distribution. In both Britain and Germany, engineering has a strong tradition of collective bargaining. In British retailing, multi-employer agreements were established in 1951, but never gained the same importance as in engineering. Wages were formerly regulated by Wages Councils and are now underpinned by the National Minimum Wage (which has virtually no effect in engineering). Multi-employer bargaining was abandoned in both sectors at the end of the 1980s. In German retailing, in contrast to engineering, sectoral agreements until recently usually received statutory extension to nonsignatory employers.

We briefly describe wage trends in both countries since 1980, using data from the British Office for National Statistics (New Earnings Survey or NES) and the German Federal Statistical Office (Statistisches Bundesamt, Verdiensterhebung). We also refer to published data from the OECD (2001), the former German Federal Ministry of Labour and Social Affairs (BMA, 2001), the British Workplace Employee Relations Survey 1998 (WERS98) [START_REF] Cully | Britain at Work: As Depicted by the 1998 Workplace Employee Relations Survey[END_REF][START_REF] Millward | All Change at Work: British Employment Relations 1980-1998[END_REF], and the Industrial Relations Research Unit's Pay and Working Time Survey (Arrowsmith andSisson, 1999, 2001).

In addition, we conducted a postal company survey for Germany in 1998 [START_REF] Jauch | Industrielle Beziehungen im Umbruch: Die Regulierung von Lohn, Gehalt und Arbeitszeit in Deutschland und Großbritannien[END_REF][START_REF] Schmidt | Gehalts-und Lohnstrukturerhebung[END_REF]. The questionnaire consisted of 25 pages and included detailed questions concerning pay levels, pay rises, pay components, grading structures, and collective bargaining. The survey was targeted at engineering, retail, and printing. In order to avoid a bias towards companies covered by collective agreements, we did not use addresses from employers' associations or trade unions, but purchased addresses from a commercial supplier; unfortunately, many addresses were outdated or the companies belonged to other sectors. The response rate was about 15.5 percent, with 346 returned questionnaires from the engineering sector and 133 from the retail sector. We do not claim statistical representativeness for this survey, but for engineering the proportion of companies in the sample with 100-499, 500-999, and more than 1000 employees comes near to that of the population; in retail, larger companies are over-represented.

We have also drawn on the work of Arrowsmith and Sisson and on the WERS98 publications. In addition, we conducted 14 interviews in Britain between 1998 and 2002 and 15 in Germany (in some cases with Peter Jauch). We spoke to managers, trade unionists, and representatives of employers' associations. Furthermore, in the German case, we also spoke to works council members in four companies active in both Britain and Germany, and in the British case, to the Department of Trade and Industry (DTI) and two organizations involved in collecting information about pay settlements. The interviews with managers were conducted at a UK-owned manufacturer of electronic security systems, a UK-owned aviation company, a German-owned car supplier and a UK-owned highstreet retailer. In Germany, we spoke to works council members at all workplaces and with officials from IG Metall and Ver.di. In Britain, we conducted interviews with representatives of the Trades Union Congress (TUC), the Transport and General Workers' Union (TGWU), the Amalgamated Engineering and Electrical Union (AEEU, now Amicus) and the Union of Shop, Distributive and Allied Workers (USDAW). Interviews with employers' associations were carried out with the Engineering Employers' Federation (EEF) and the British Retail Consortium (BRC) in the UK, and with the Association of German Trade and Retail (HDE) and a regional officer from the Employers' Association for the Metal and Electrical Industry (VMI, now Südwestmetall) in Germany. The interviews were semi-structured and lasted about two hours. The focus was on pay and working-time arrangements as well as on general developments in industrial relations in the sectors.

The following description focuses on quantitative changes in average pay levels, the dispersion of pay, and the incidence of variable pay, with particular attention to engineering and retail. Because the sectoral agreement model is not well established in East Germany, the German data refer to West Germany. Data from the NES only include Great Britain.

Since 1980, real hourly wages for full-time male and female manual workers in Germany and Britain have increased at the same rate, while salaries per hour for non-manual workers have grown faster in Britain than in Germany. Thus overall, hourly pay increased slightly more in Britain. This is true in both engineering and retail (see Table 1), as well as other sectors. Because of working-time reductions in Germany, the increase in real, monthly gross earnings was considerably greater in Britain than in Germany. In both countries, pay increased faster in engineering than in retail.

In Britain, the 'labour share' for the economy as a whole (that is, the share of employees' gross earnings in GDP) was fairly stable over the two decades, whereas in Germany there was a marked decrease (BMA, 2001). The most evident differences can be found in pay inequality, which has increased in Britain in recent years (although all categories of employees received both nominal and real pay increases); whereas in Germany, small increases in inequality between male employees are partly offset by a decreasing gender pay gap (OECD, 2001: Ch. 2, Derived Indicators Table 1; direct additional information from the OECD).

German sectoral agreements mandate the same percentage of pay rise for all workers employed under the same agreement, and structural change in the composition of the labour force has been limited. Between 1980 and 2000, relative pay across job grades was fairly stable for nonmanual employees, though among manual workers there was increasing inequality in the 1990s, especially for the lowest grades (Statistisches Bundesamt, 2002).

The British case deserves more scrutiny. If we take the ratio of the lowest and the highest deciles to median earnings as 100 in 1978, this ratio fell by 1998 for the lowest decile of male manual workers to 90.7 in mechanical engineering (90.5 for non-manual males), 86.0 in electrical engineering (83.0 for non-manual males), and 94.8 in retail (89.7 for nonmanual males). The ratio for the highest decile rose for manual males to 101.4 in mechanical engineering (113.5 for non-manual males), 113.2 in electrical engineering (110.1 for non-manual males), and 118.9 in retail (118.8 for non-manual males). The comparable figures for female employees were similar, with two marked exceptions: the increase in the ratio of the highest decile to the median for non-manual females was markedly higher than for males, while that for the lowest decile for female manual workers in mechanical engineering actually increased (ONS, 1978(ONS, , 1998: Tables C74-7, C21-4, own calculations).

Between 1978 and 1998, the dispersion of wage increases for male employees within the relevant sectors did not grow very much (see Table 2). The changes for female employees were more pronounced, but these may reflect changes in the composition of the female labour force more than the effects of decentralized wage determination. [START_REF] Arrowsmith | Decentralization and Internationalization? The Significance of the Sector within European Industrial Relations[END_REF] compare the standard deviations of average increases for the years 1985 and 1994 (a period which is markedly shorter, but without any classification changes; Standard Industrial Classification 1980 in both years) and report little change. Based on their own survey, which generally confirms these findings, but was not restricted to pay changes alone, Arrowsmith and Sisson (1999: 63) state: 'the results suggest that, although the settlement of pay and working time has formally become more localized in engineering and retail, this has not necessarily involved a seachange in outcomes'.

The incidence of variable payment (pay related to output, achievement, performance, and so on) is often regarded as an indicator of management's room for manoeuvre; a connection with industrial relations European Journal of Industrial Relations 12(1)

TABLE 2. Dispersion of Increases in Gross Weekly Earnings for Full-Time Employees in Britain

Industry

Males Females Manual Non-manual Manual Non-manual 19781998[START_REF]New Earnings Survey[END_REF]1998[START_REF]New Earnings Survey[END_REF]1998[START_REF]New Earnings Survey[END_REF]1998Mechanical engineering (1978: SIC 1968 (1978,1998).

institutions should therefore be assumed. An Anglo-German comparison of variable pay is, however, difficult. According to the NES, incentive pay for manual workers decreased considerably in Britain between 1976 and 2000 (for 'all industries and services' as well as for 'engineering', though 'retail' is an exception). For non-manual workers, however, a slight increase is reported (again with the exception of 'retail'). In 2000, the proportion of incentive pay to total pay was nearly the same for manual and non-manual workers, and amounted to 3 percent on average for males. According to our German survey in 1998, the shares for both engineering and retail are remarkably higher: in engineering, for manual workers it was 15 percent and for non-manual workers almost 7 percent, while for non-manual workers in the retail sector it amounted to 9 percent. Other data indicate that the proportion of employees receiving incentive-related pay has not changed in recent years in engineering [START_REF] Gesamtmetall | Die Metall-und Elektro-Industrie der Bundesrepublik Deutschland in Zahlen[END_REF]Statistisches Bundesamt, 1981, 1993/94, 1998). In Germany as well as in Britain, there has been a shift from traditional incentive pay (piecework) to newer bonus schemes, particularly among non-manual employees, which may explain the increase in incentive pay for this group.

Though the data from the two countries are not entirely comparable, the message seems clear: the proportion of incentive pay in Germany is higher and has remained unchanged, whereas in Britain the figures for all employees indicate a decrease. However, the NES fails to record the full scope of variable pay in Britain [START_REF] Casey | Payment Systems: A Look at Current Practice[END_REF]. Some forms (such as merit pay, competency-related pay, and performance-related pay) do not always clearly separate basic pay from incentive-related pay. Pay rises dependent on individual performance, even though not absolutely unknown in Germany (in particular, in workplaces not bound by collective agreements (Schmidt, 2004: 188)), seem to be more widespread in Britain. These differences, however, are of limited importance: Arrowsmith and Sisson (1999: 58) report very little evidence of the individualization of pay. Even workplaces with performance-related pay rises often make only a part of these dependent on performance; according to Lawson (2000: 312), a cost-of-living increase is usually given to all employees. Given the differences in schemes as well as in terminology, an exact comparison between Britain and Germany is not possible. Nevertheless, there is no evidence that incentive pay is more important in Britain than in Germany.

Altogether, comparing Britain and Germany we detect more similarities than differences. Because the findings for pay increases are of particular interest from an industrial relations angle, in the following discussion we focus on possible explanations.

Surface Divergence, but Convergence of Substance?

German wage trends to some extent match the expectations of both institutional and neo-classical perspectives, but neither would predict the British experience. Despite a massive decline in collective bargaining, wage increases have on average been higher than in Germany. Can it be that, behind the façade of formal agreements, the actual power relations between capital and labour in Germany and Britain may be quite similar? [START_REF] Kelly | Rethinking Industrial Relations: Mobilization, Collectivism and Long Waves[END_REF] offers an approach which focuses on workers' interests and power relations between workers and employers. He criticizes industrial relations theories which are centred around job regulation, the joint institutions of capital and labour, and pleads for an approach which focuses on the mobilization of workers' autonomous power. Kelly's approach can be seen as a new version of a bargaining approach based on Marxist class theory. Reformulating industrial relations according to this approach promises a solution to the puzzle described above.

Union density has fallen in both Germany and Britain, and is now less than 30 percent in both countries. Given that in the 1970s union density in Britain was much higher than in Germany, it is justified to speak of a convergence. The incidence and volume of strikes has shown a similar trend, though working days lost in Britain are still considerably higher than in Germany. As long as union membership and industrial action can be seen as indicators of trade union strength and working-class power, the influence of employees on determining pay should be no stronger in Germany than in Britain. From this perspective, both the decrease of the 'labour share' in Germany and its stability in Britain are less surprising.

However, closer analysis does not support the mobilization approach as an explanation for wage trends: the increase in real wages in Britain in the 1980s and 1990s, which exceeded that of the 1970s, does not correlate with the decline in union density and industrial action. In addition, today pay settlements in non-union firms are nearly the same as in unionized establishments. Whether the British unions are as strong as or even stronger than the German unions, the simultaneous decrease in union membership and growth in real pay cannot be explained with an approach that defines industrial relations merely as antagonistic power relations.

This neither means that there has been no connection between worker mobilization and pay movements in the past, nor that there will be none in the future. For the relevant period, however, there is no support for such a link. Possible effects are, at least, more mediated than can be explained by using the mobilization approach. It is necessary to return to issues of efficiency, morale and mimetic isomorphism.

'Mimetic Wages' The Problem of Uncertainty

As a starting-point, we set out our explanation in an ideal-typical fashion. In principle, any single employer's pay decisions (like other managerial decisions) face the problem of uncertainty. Considering both the competition for employees in the labour market and cost competition in commodity markets, the appropriateness of pay decisions depends not only on internal calculations or negotiations, but also on the decisions of other employers. In addition, as Ross (1948: 79) noted, 'wage bargaining looks forward, not backward'. Since no employer is able to anticipate what other employers will decide, a constellation of 'double contingency' exists. Theoretically, no employer knows what an adequate pay decision will be. But in practice, procedures are found which come close to a solution.

The German system of industrial relations offers such a solution through multi-employer bargaining. Once ratified, sectoral agreements are binding for both employers and unions until their termination. Downward deviation from the agreement is illegal for unions as well as for members of the employers' associations; only better conditions for employees can be agreed at establishment level. Although not all German employers are members of an association, 'outside employers largely follow the outcome of sectoral bargaining' (Traxler, 1994: 178). Wage agreements in one region set the intra-sectoral pattern for other regions and are usually seen as a pattern for other sectors. One should not overestimate the inter-sectoral effects of 'pattern bargaining', but the sectoral agreement still provides a strong signal that orients most employers within the sector.

Since multi-employer agreements have collapsed in Britain, this solution is no longer available. However, multi-employer bargaining never played as central a role as it does in Germany; it was adapted by plant or company bargaining within a two-tiered system. Here, the contingency problem was solved in another simple, but effective way. Unions at workplace level usually demanded 'more' than other unions had achieved within the same establishment or in other establishments in the region, whereas the employer's objective was to achieve a settlement markedly below the union claim. For British employers, therefore, it was more important to have a good tactic to counter union demands or a strategy to avoid union representation within the company. As long as most pay settlements were negotiated, solving the wage problem remained comparatively simple. Non-unionized companies could orient their decisions towards pay settlements in similar companies or the local 'going rate'. As Ross (1948: 50) argued, such comparisons were important for the wage decisions of an employer, 'whose greatest anxiety, in the absence of imperative economic pressures, is to avoid "getting out of the line"'. However, the need to follow the collective agreements in unionized establishments has obviously lost importance for non-unionized establishments today.

No matter how 'efficiency' is defined and how convincing the particular theoretical arguments are, the underlying problem is that under the condition of widespread efficiency wages (or wages to maintain 'good morale', according to Bewley), single employers cannot know what are the equilibrium wages. Therefore, employers in non-unionized establishments have only two means at their disposal to decide what adequate wages are: they can haggle with single employees about pay changes or (like firms which still bargain with unions at company level) they can look at other employers' pay settlements ('watch each other', as [START_REF] White | Where Do Markets Come From?[END_REF] puts it). The first method would cause high labour turnover and transaction costs. Negative effects on employees' 'morale' and 'efficiency' could be anticipated. The second method is essentially imitation. Wages resulting from imitation should be called 'mimetic wages', rather than 'market wages' or 'efficiency wages'.

Like efficiency wages, mimetic wages can avoid shirking and motivate employees as if they were based on an 'implicit contract', although they do not actually result from an employer's estimation of 'efficiency' effects at a particular workplace. In an ideal-typical system of mimetic wages, 'paying what others pay' is the only rule for employers to follow. Consequently, if all employers participated in the game, pay would be determined entirely by earlier settlements. Thus, mimetic wages are determined by history, not by the rules of the market. If this is the case, the value of labour power is determined by 'a historical and moral element', in a more radical sense than Marx thought, because there is no quantifiable relationship to any 'means of subsistence'. On the contrary, wages determine what [START_REF] Marx | Marx and Engels Collected Works[END_REF] says is 'practically known' as the necessary means of subsistence: what is perceived as the normal standard of living is an outcome of the wages that are usually paid.

Although employees and unions are in most cases not included in the determination of mimetic wages (in this sense, decision-making is unilateral), the employees' consent is indispensable. Mimetic wages have to substitute for the legitimating effects of both market pressure and efficiency wages. This substitution occurs in a simple, but still efficacious mechanism that results from the imitation process itself. Normally, employees have two standards to which they can compare their current wages: the level of wages they received in the past and the wages other employees earn. In the case of mimetic wages, both comparisons lead to satisfactory results. As long as employers 'pay what others pay', employees will 'get what others get'. Moreover, they receive the same as or, in the empirical case of Britain, a bit more than they got before. Of course, the mechanism of mimetic wages always depends on environmental preconditions, but assuming that these do not change, the mechanism is self-stabilizing.

Preconditions, Actors, and Limitations

The first precondition concerns the maintenance of employee satisfaction. Employees have to rate the wages as 'fair', that is, as following the principle of reciprocity. Because equilibrium wages are unknown and, therefore, it is unclear what an 'equal exchange' would be, reciprocity can only mean an exchange of money for services perceived as appropriate [START_REF] Akerlof | Labor Contracts as Partial Gift Exchange[END_REF][START_REF] Akerlof | The Fair Wage-Effort Hypothesis and Unemployment[END_REF]. To a certain degree, the acceptance of reciprocity can be described as a customary rule embedded in everyday routines [START_REF] Dimaggio | Introduction[END_REF]. Since no absolute criterion exists for the fairness of a pay decision, following the pay rises of other employers becomes itself a matter of fairness. Thus, the imitation of pay rises is not only a consequence of uncertainty and mimetic isomorphism, but determines what is to be regarded as fair.

However, what is perceived as fair pay is not independent of other societal influences; it depends on public discourse. Reciprocity can be redefined by the actors. The demands of both owners and employees may increase and thus destabilize the mechanism of imitation. Shareholders may demand higher dividends and trade unions may agitate against management rewards and worker exploitation. Such effects are historically evident, but the latter, in particular, has obviously been weak in recent years. To summarize, the maintenance of fairness and of the proportional development of demands is an indispensable precondition of the mimetic wage mechanism, which seems to have an 'elective affinity' with social partnership: the latter is favoured by the former and vice versa.

A second prerequisite is the employers' ability to pay. Although it is not possible to say what the adequate level of pay is, wages are limited by sales and production costs. In a closed economy, the cost limit can be regarded as elastic because wage increases can cause inflation in lieu of sales decreases. In the extraordinarily internationalized British economy [START_REF] Hirst | Globalization in One Country? The Peculiarities of the British[END_REF], this possibility is limited: cost reduction without pay cuts requires redundancies. Arrowsmith and Sisson identify these as the 'downside' of efficiency wages and stress that, in contradiction to the postulated political objectives of decentralized wage determination, 'the employed "insiders" benefit at the expense of the unemployed "outsiders" ' (2001: 149).

Third, the mechanism of producing mimetic wages requires great transparency: a company's management requires information on standards in other firms in order to match these (or to pay more or less). But even if the information about former pay rises is available, management cannot predict future decisions by its competitors. Mimetic wages depend on high transparency concerning past decisions and a convincing assumption about future trends. This implies a stable 'system' integrated by common norms, procedures, or other institutions.

The mechanism of pay determination in Britain is driven by several actors. There are employers and managers, who have the formal right to decide; the state has gained more importance in recent years (the National Minimum Wage); and employers' associations still play a certain role. In addition, agencies gathering and providing information on pay and conditions have gained importance. Trade unions are also still among these collective actors: today, mainly at company level and only in a minority of workplaces. Analysing data from WERS98, Forth and Millward (2000: 14) conclude that bargained arrangements were more likely than non-bargained ones to have produced settlements that were comparable to those of similar workers in the same industry or locality. Some 87 per cent of bargained arrangements generated settlements that were in line with the industry norm, whilst 79 per cent of settlements were in line with the local average. The figures for non-bargained settlements were 72 per cent and 67 per cent respectively. These figures 'lend support to the idea that trade unions reduce the variability of pay settlements'.

This does not mean that union pressure leads to higher wages, but it does help to bring settlements closer to the average. According to WERS98, managers reported that industrial action or its threat had practically no effect on the size of pay settlements (Millward et al., 2000: 205-12). It seems that British unions participate in the process of pay determination, but the objective of meeting the normal level of pay settlements is not really under discussion. In some workplaces, unions are very likely better informed about other establishments' pay settlements than are the employers. In addition, since receiving the 'going rate' can be seen as a matter of 'fairness', shop stewards might gain more support from the workers for pressure for standard increases than for higher pay rises.

Asking managers about the factors influencing pay rises, the results of WERS98 show two major influences:

Employers very commonly cite the inflation rate as a major influence upon the size of settlements, but they also commonly say that settlements are the same for their employees as for others in the same industry. It is difficult to disentangle these two influences. However, we produce some empirical evidence that both are at work: private sector settlements were probably higher when background inflation was higher; and there is some evidence of employers following a 'going rate' [of increase] in their industry. (Forth and Millward, 2000: 25) Trade unionists confirm this, in particular with respect to engineering industries:

Although there is no longer any national bargaining . . . the Engineering Employers' Federation both at regional and national levels does provide an awful lot of information. The unions obviously know what the rates are as well. And there's just huge consensus about going rates. I can't explain that. It just happens to be the case and it's almost as if it's taking pay out of the sphere of dispute really. You're arguing about half a percentage point here and there. (Trade union officer, UK) Regular pay rounds, still widespread according to Arrowsmith and Sisson (1999: 58), contribute to both transparency and reasonable expectations about temporary wage stability. Without them, it would be more difficult to know what pay rises take place, and assessing future developments would be much harder. Regular pay rounds are a survival of collective bargaining and traditional industrial relations. Whether formally agreed or not, a limited term is a natural feature of a pay agreement. Although regular pay rounds are also functional for the mechanism of mimetic wages, it is doubtful whether they would emerge under the precondition of a non-bargaining environment. Apparently, a history of widespread collective bargaining is a necessary condition for establishing a formal, unilateral, but stable and successful mechanism of wage determination. Therefore, distinct bargaining histories cause differences between isomorphic mechanisms in the engineering and retail sectors. In engineering, a history of multi-employer bargaining had created favourable conditions for the mimetic wage mechanism. The bargaining legacy in retail is more heterogeneous. Whereas large employers had agreements with trade unions (for example, Tesco) or substituted for unions by being a 'good employer' (for example, Marks & Spencer), small retailers often offered poor pay and conditions. The second report of the Low Pay Commission (2000: 42) states that the 'retail sector has the largest number of workers affected by the introduction of the National Minimum Wage', but that these effects are almost completely restricted to small firms. Although statistically retail is regarded as one sector, it actually seems to be divided into more than one 'organizational field'. In summary, whereas the engineering sector almost completely participates in the mimetic wage mechanism, positive wage isomorphism applies only to a segment of the retail sector. This marks a difference with Germany, where until recently collective agreements became binding for the whole retail sector through statutory extension.

Because average pay increases within the 'isomorphic sectors' are currently above the rate of inflation, the latter cannot determine the final amount of rises. Nevertheless, the cost-of-living increase is an important figure. However, since assumptions on future developments cannot be avoided, even pay rises based on the rate of inflation can be a problem for employers, especially when inflation is high and fluctuating, as it was in the 1970s. In such an environment, a settlement always bears the risk of being considerably above or below the inflation rate. Therefore, each party tries to pass on the risk to the other, which makes it difficult to achieve an agreement without taking industrial action. In recent years, inflation has been low, which has had an impact on rationalizing pay decisions. Moreover, pay rises which meet or slightly exceed the inflation rate seem to be highly legitimized.

However, stability and transparency are also important influences on pay rises, which have exceeded inflation in recent times. Without assistance, single employers would not have enough information on wage movements, and several specialized agencies have been established to provide (sectorally differentiated) pay data for employers. While the primary function of these agencies is to spread information on current trends, their assessment of future developments also has an impact on employers' pay decisions. Their accumulated expertise also allows these agencies to act as business consultants in a broader sense: they can tell an employer not only what others do, but what should be done. In other words, they not only mirror pay decisions, but play an active role in influencing further decisions by recommending 'best practices'. Incomes Data Services (IDS), Industrial Relations Services (IRS) and the Hay group are three of these agencies and their activities are not restricted to the issue of pay rises. For example, Hay's pay databank includes not only pay rates, but also points resulting from many companies' analytical job evaluation.

After the demise of multi-employer bargaining, some employers' associations have changed their function and have also become information agencies for their members. The EEF, for instance, is still an important information source for its member companies. The Confederation of British Industry (CBI) has its own pay databank and the Labour Research Department (LRD) regularly offers pay data to trade unions. Based on their panel survey, [START_REF] Arrowsmith | Pay and Working Time: Towards Organization-Based Systems?[END_REF] also stress that when management networks are taken into account, there is less fragmentation in determining pay and conditions in Britain than the absence of multi-employer bargaining would imply. In order to emphasize the role of the 'pay-and-conditions information agencies' within this system of determining pay and conditions, we speak of it as 'the benchmarking system'.

Finally, we have to return to the question of labour market effects. We do not completely deny such influences, since the possession of otherwise scarce qualifications by some specialists in the engineering sector may be rewarded by 'merit pay' or 'performance-related pay' above the average. But against a background of staff reductions this hardly explains the wage trends described for this sector. (Despite sectoral agreements in German engineering, similar effects occur there anyway.) In the British retail sector, the opposite deviation from sectoral wage trends can be found. However, probably this does not signal labour market effects for individual employer's wage decisions, but distinct fields of wage determination connected to different retail formats (that is, distinct 'organizational fields'). The example of retail shows, nevertheless, that mimetic wage isomorphism does not guarantee pay increases. Firms with poorly qualified and easily replaceable employees can follow an alternative course of organizational development. However, this should be regarded as a form of 'bad isomorphism' rather than be equated with market determination.

Concluding Remarks

We have focused on analysing the benchmarking system with respect to pay rises. In principle, its mechanisms are not restricted to mimetic wages. De facto, much management knowledge of 'best' or even common practices is transferred to companies by 'information agencies' or by unmediated orientation towards other companies' practices. This applies to grading structures and incentive pay, but here the differences between companies are more distinct: benchmarking effects produce less isomorphism on these issues, partly because it is more difficult to obtain data in a comparative form (Arrowsmith and Sisson, 2001: 144).

Compared with the sectoral agreement model, the benchmarking system lacks the capability of control. Within this system neither employees and trade unions nor employers can articulate and push for their collective class interests. Pay and conditions are a result of decentralized action, despite some relevant effects from the 'information agencies'. In Germany, employers and trade unions can agree on 'moderate' pay rises without risking negative efficiency effects or damaging employees' morale in a single organization. The British benchmarking system, however, does not allow for consciously controlled changes without state intervention. As a result, in a situation of weak union power, small wage increases are more likely to occur in Germany than in Britain.

The current high earnings inequality in Britain represents an important difference from both Germany and the former British situation. In this respect, trade union participation obviously matters. Metcalf et al. (2000: 16) conclude that even today 'workers in the organised sector have much lower pay dispersion than those in the unorganised sector' and that 'unions narrow the wage differentials between women and men, blacks and whites, those with health problems and those without, and between manual and non-manual workers'. In order to avoid problems for social cohesion, state intervention seems to be more necessary under current British conditions than in Germany. Thus, the British state has to act to limit social inequality via the National Minimum Wage legislation.

Apparently, the main difference between the British and German models is that between a voluntary mechanism to achieve isomorphism and a coercive one. However, this difference is less decisive than it seems. Although German sectoral agreements are legally enforceable, employers can leave their associations and subsequently escape the sectoral agreements. As noted earlier, unaffiliated employers have always decided voluntarily whether to observe the sectoral agreement through mimetic isomorphism. If single employers withdraw from multi-employer bargaining and refuse to adapt voluntarily, German and British unions are in a similar situation.

The stability of both the German sectoral agreement model and the British benchmarking system depend on the employers' willingness to participate. But whether this can be maintained depends on each employer's calculations as well as on normative rules and customary practices. Experiences in East Germany are one of the factors which cast doubt on practices once taken for granted in West Germany. If individual employers leave multi-employer agreements, they place pressure on trade unions for concession bargaining at sectoral level, but may still decide on pay and conditions with regard to the agreement. Under these circumstances, free riding is an attraction for German employers. But abandoning the imitation process results in the risks mentioned previously: the difficulties of knowing the market level for wages and conditions, and the erosion of employees' commitment. Therefore, a change from the sectoral agreement model to the benchmarking system seems more likely than a switch to market determination.

Thus, if the sectoral agreement model in Germany continues to erode, it seems improbable that this would lead to a determination of pay and conditions by the market, but rather to mechanisms similar to those in Britain: mimetic wages and uncontrolled isomorphism, along with growing earnings inequality between employees. With state assistance both inequality and pay rises could be restricted, but the latter seems unlikely in the foreseeable future. Especially for employers, therefore, dismantling the German sectoral agreement model would hold serious risks. Although the behaviour of single employers within a benchmarking system can be explained not only by institutionalized routines, but also by rational decisions under conditions of uncertainty, the system as a whole lacks rationality and is beyond societal control.

TABLE 1 . Index of Real Hourly Wages for Full-Time Male Employees in (West) Germany and Great Britain, 1980-2000 (1980 = 100)

 1

			Manual males				Non-manual males
		Mechanical	Electrical	Mechanical	Electrical	Retail
		engineering	engineering	engineering	engineering
		Germany	GB	Germany	GB	Germany	GB	Germany	GB	Germany	GB
	1980	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0
	1982	97.9	100.5	98.9	100.1	98.1	105.1	98.7	102.5	98.7	99.8
	1984	98.0	103.0	98.8	102.7	100.0	111.5	100.9	107.6	93.7	104.1
	1986	105.6	108.2	105.9	106.7	111.2	120.1	111.5	114.0	100.5	113.2
	1988	113.4	111.9	114.3	109.4	120.1	129.3	121.2	119.7	106.6	127.0
	1990	117.5	112.1	118.9	109.4	126.0	130.9	126.9	124.3	110.3	125.4
	1992	120.5	118.1	121.3	117.9	127.0	132.4	130.5	129.5	118.2	126.2
	1994	120.7	120.0	123.4	118.3	129.3	136.9	133.8	138.4	117.0	126.7
	1996	128.0	125.2	129.0	120.8	140.0	144.4	144.4	142.0	110.7	136.5
	1998	128.8	134.0	129.5	126.8	142.5	156.2	145.4	152.6	111.6	136.8
	2000	130.8	139.1	130.6	130.2	143.5	155.8	144.7	159.4	111.6	143.4

Notes: Real hourly wages are derived from Gross hourly wages (gross monthly salaries divided by agreed working hours for non-manual employees in Germany) deflated by consumer prices. Source: Office for National Statistics, Statistisches Bundesamt, Sachverständigenrat. Own calculations.

European Journal of Industrial Relations 12(1)

Schmidt & Dworschak: Pay Developments in Britain and Germany

ACKNOWLEDGEMENTS

We are grateful to Richard Hyman and two anonymous referees for their comments on an earlier draft of this article.