The weakness of social dialogue in the Baltic countries: An employer-centric political economy perspective

Abstract

Social dialogue is underdeveloped in the Baltic countries. This is often attributed to weak labour institutions and low mobilization, but I argue that employers’ motivation to engage in multi-employer bargaining is a crucial precondition for social dialogue. I build on scholarship in comparative political economy that links the long-run stability of collective bargaining to export competitiveness, and investigate why enterprises in the Baltic countries do not use multi-employer bargaining as an institutional instrument for wage coordination, even though economic growth is export-led. Until recently, employers lacked interest in coordinated wage-setting because of macroeconomic conditions: in particular favourable price trends in international markets which resulted in significantly higher value added without additional investments in efficiency, reducing structural pressure to align wages with productivity. Therefore, the strategies currently employed by Baltic enterprises are not complementary with social dialogue institutions.

Keywords

Baltic countries comparative political economy export competitiveness export-led growth regime multi-employer bargaining social dialogue wage coordination

Introduction

The incidence and coverage of social dialogue institutions in the Baltic countries remain low, and they fail to shape the practices of employers and employees. Labour-centric and state-centric approaches have dominated industrial relations explanations of weak social dialogue in the Baltics and throughout Central and Eastern Europe (CEE). In these approaches, the main focus has been on a variety of interlinked causes related to demographic, political, historical and economic changes, institutional and organizational deficiencies and global trends. However, these explanations have a common limitation in neglecting employers’ motivation to engage in social dialogue as well as their relative power in distributional conflicts and in shaping the institutional environment according to their interests. Despite a few attempts to provide employer-based explanations for weak tripartite social dialogue in CEE, notably by Hassel (2009) and Meardi (2011), explanations with respect to bipartite and multi-employer social dialogue remain limited.

It is essential to answer the question of why enterprises are not motivated to engage in social dialogue, if scholars or political actors are to understand better the current conditions and prospects for future development. I thus attempt to fill the gap in employer-centric explanations by focusing on employers and social dialogue in the Baltic countries. Within CEE, these countries represent the most extreme cases of low labour mobilization and weak bargaining institutionalization, limited state capacity to impose formal rules, and employers’ superior power to choose rules and prioritize their interests against those of employees and the state (Bohle and Greskovits, 2012). All this suggests that in the Baltics, weak social dialogue institutions might be viewed as complementary to enterprises’ current business strategies, while their strengthening would require changes in these strategies.

Social dialogue is a broad concept covering negotiation, consultation and information-sharing between social partners at the bipartite or tripartite level. I focus on one form: multi-employer bargaining, for two reasons. First, multi-employer bargaining can produce large-scale effects on wages and working conditions, thus constituting an essential component of strong social dialogue. Second, it can be most beneficial to enterprises with respect to competitiveness improvements or reduction of transaction costs.

I examine empirically the motivation of enterprises to engage in multi-employer bargaining by linking it to developments in structural characteristics and macroeconomic conditions in the Baltic political economies after the economic and financial crisis of 2009. Since then the Baltic regimes of accumulation have become strongly reliant on exports, suggesting that coordinated labour cost moderation should be a structurally important ingredient of international competitiveness for enterprises. However, enterprises still display little motivation towards coordinated action. I argue that until recently, this lack of motivation has been macroeconomically conditioned, particularly by favourable price developments in international markets. These have provided enterprises with external relief from competition and reduced the structural pressure to align wages with productivity.

In the next section, I review the literature addressing weak social dialogue in the Baltic countries and discuss the need for an employer-centric explanation. Then I provide a theoretical account of the functional benefits of multi-employer bargaining for enterprises. I next apply this framework to analyse the structural and macroeconomic conditions that have recently emerged in the Baltic countries and explain how these conditions have shaped enterprises’ business strategies and motivation in multi-employer bargaining. I conclude by interpreting the findings with respect to the current state and future prospects for the development of social dialogue in the Baltics.

Explaining weak social dialogue in the Baltics

Two stylized facts describe the status of social dialogue in the Baltics. First, it has always been weak, and second, this weakness is worsening. As is evident from Table 1, the major quantitative indicators of Baltic social dialogue, such as bargaining coverage and, especially, multi-employer bargaining, union density, employer organization and wage-setting coordination, are among the lowest in CEE, let alone Western European countries. In contrast to what one could expect from the small numbers, these indicators have shown no stability but have declined at the same or even faster rates as in the other CEE countries that historically had stronger social dialogue. The only positive change has been a doubling in the rate of employer organization in Latvia since 2002; but this has had no positive effect on the bargaining coverage.

Table 1.

Social dialogue characteristics (%).

	Bargaining coverage^a	Change since 2000^a	MEB coverage^b	Coordination (2014)^c	Union density^d	Employer organization^e
EE	23	− 17.9	5	1	6.5	25.0
LV	15	− 16.7	–	1	13.1	41.0
LT	10	− 33.9	1	1	9.0	14.4
CZ	48	− 1.4	15	2	12.7	41.4
SK	25	− 51.2	16	3	13.3	30.5
SI	65	− 35.0	91	3	21.3	60.0
BE	96	0	86	5	55.1	82.0
DE	58	− 15.0	50	4	17.7	58.0
SE	89	− 5.3	75	4	67.4	82.0

Source: ICTWSS version 5.1 (Visser, 2016).

Adjusted rate; latest available data for coverage 2013 except for EE and LT 2012; reference year for change is 2000 for all countries except EE 2001 and LV and LT 200.

Multi-employer bargaining. Latest available data: 2014 for DE, 2013 for CZ, 2012 for EE and LT, 2008 for BE and SI, 2001 for SK, 2000 for SE and no data for LV.

1: fragmented wage bargaining confined largely to individual firms or plants; 2: mixed industry and firm-level bargaining, weak government coordination through minimum wage setting or wage indexation; 3: negotiation guidelines based on centralized bargaining; 4: wage norms based on centralized bargaining by peak associations with or without government involvement; 5: maximum or minimum wage rates/increases based on centralized bargaining.

Latest available data: 2013 for all countries except EE, LV, LT and SE 2012.

Latest available data: 2011 for all countries except LV and SK 2013 and LT and BE 2012.

Developments in the Baltics have taken a distinctive path (Bohle and Greskovits, 2012), so one should be cautious when suggesting why social dialogue is weak. In contrast to other CEE countries, the issue is not that social dialogue did exist but has since declined; rather, it has never existed and has constantly failed to be established. In this respect, the contemporary history of social dialogue in the Baltics is not a story of attempts to decentralize industrial relations, as is the case in the Visegrád countries and Slovenia, but one of failed attempts at centralization.

Why has social dialogue always been weak in the Baltics? Four groups of explanations have emerged from the literature. The first relates to historical institutional legacies. In these countries, social dialogue has never been a social or economic necessity and hence a political priority. Encompassing social dialogue institutions and practices were not inherited from the past, nor evolved as an outcome of a protracted distributional struggle between organized labour and capital (Ost, 2000). Hence there has been no established tradition and culture of social partnership, such as bargaining practices, positive attitudes towards collective action and, more broadly, social inclusion (Petrylaitė, 2017). Furthermore, normative and causal ideas (Emmerij et al., 2005) about social dialogue, specifically, beliefs about its benefits and motivation to establish it, remain shallow (Kalanta, 2015).

The second group of explanations links weak social dialogue in the Baltic countries with path-dependent effects of economic reforms taken after their independence in 1990. These reforms were aimed at rapid economic restructuring from a centrally planned to a market-led system, and relied on radical liberalization policies, the withdrawal of the state from the economy and liberalization of the foreign trade (Bohle and Greskovits, 2012). As a result, macroeconomic stabilization was given priority, leading to early adoption of currency board regimes and the euro. In addition, since the process of privatization of state-owned enterprises resulted in extensive deindustrialization, foreign direct investment (FDI) became a major source of capital inflows and technological modernization (Bohle, 2008). In these conditions, social and employment policies were not among governments’ priorities; on the contrary, flexible labour markets were seen as the primary adjustment mechanism (Kallaste and Woolfson, 2013).

The third group points to deficiencies in the adoption of the social acquis communautaire during EU accession resulting in a negligible, or even negative impact on social dialogue. While all new member states transposed the required ‘hard’ directives into their national legal systems, such as those on working time, equal treatment and information and consultation, and this transposition has been considered good, the later stage of their practical application and enforcement has been problematic (Falkner and Treib, 2008). This has especially been the case in countries without a previous social dialogue experience, like the Baltics, where the directives have been adopted only formally and literally with no intention of employing them to launch social dialogue (Eamets and Masso, 2005; Ost, 2000; Woolfson and Sommers, 2016).

The fourth approach focuses on low labour mobilization and weak unions. Indeed, the Baltics had no past experience with social dialogue since it was absent under the Soviet regime; yet during this period all employees were union members (Bernaciak et al., 2014). However, deindustrialization and privatization caused a drastic decline in membership, with unionization now concentrated mainly in state-owned enterprises and the public sector. This, in turn, has led to the degradation of a large union apparatus and infrastructure inherited from the Soviet regime (Woolfson and Kallaste, 2011). Some other conditions contributed to this decline. First, as Ost (2009) has argued, during the transformation the unions had no experience of a market economy and doubted their role in it. This led to inactivity and a narrowing of representation, and also towards stronger negative public attitudes towards unions as a Soviet heritage. Second, exit opportunities created by EU accession have effectively neutralized voice opportunities and incentives for labour mobilization, and mitigated the distributional conflict (Kaminska and Kahancová, 2011; Meardi, 2012). Third, governments have never promoted unions but ignored them by acting unilaterally (Bernaciak, 2015; Meardi, 2007).

All four explanatory approaches can be analytically reduced to the interplay between the motivation and capacity of the actors considered. In the Baltics, labour motivation to mobilize has been neutralized by a lack of experience in interest representation in a market economy, negative attitudes towards unions and wide exit opportunities. Unions have lost their former organizational capacities, while political and structural conditions to develop new capacities have been unfavourable. Although theoretically, government capacity to catalyse and build social dialogue is always stronger than that of other social partners, in the Baltics the ability to implement national and European rules has been limited. However, government motivation has always been more of an issue. Baltic governments have always lacked this motivation, for a variety of reasons including higher priority of market-building economic reforms and priority towards FDI rather than social inclusion, a lack of relevant policy ideas and the comfort of unilateral decision-making.

However, this summary clearly indicates that one actor has usually been missing from the explanation: employers or, more specifically, enterprises. It has long been evident that most MNCs lack the motivation to disseminate the social standards of their countries of origin despite potentially high capacity to do so; but the motivation and capacity of local enterprises have been largely neglected. While it is certainly true with respect to capacity, as demonstrated by the low employer organization rates, motivation emerges as a more complex and significant phenomenon. There are two theoretical reasons why deeper enquiry into employer motivation is important.

First, in market economies, enterprises are active participants in institution building and welfare provision. This has been demonstrated by studies in comparative political economy which show that the motivation of enterprises to engage in social dialogue is shaped endogenously by a complex interplay between institutions, actors’ strategies and power configuration in the political economy (Amable and Palombarini, 2009). Labour or the state can force employers to adapt their business strategies to the institutions they face; but if a domain is weakly institutionalized or institutions within it are weakly enforced, enterprises can complement their strategies by transforming institutions or even creating new one (Hall and Thelen, 2009). It has also been shown that, on one hand, employer interests can be compatible with constructing and maintaining collective industrial relations and welfare state institutions. In some countries, enterprises have been actively involved in creating these institutions, as they permit ‘decentralized cooperation’ (Culpepper, 2001: 279) with regard to skill provision, labour market risks, productivity gains and improvements in competitiveness, and support specific production or growth strategies (Iversen and Soskice, 2010; Mares, 2001). On the other hand, the state and labour are seldom capable of building these institutions without support from capital.

The second reason concerns possible paths to social dialogue in countries where it has initially been weak. While in the West, the role of unions in establishing social dialogue was crucial in the past, strong evidence indicates that employers rather than employees have become the force driving contemporary developments. First, unions have been losing membership and power since the 1990s, and views on possibilities of their revitalization across the EU are pessimistic (Avdagic and Baccaro, 2014; Hyman, 2016; Ibsen and Tapia, 2017). Second, bargaining coverage strongly correlates with the rate of employers’ organization but not with union density, high coverage rates mostly depend on employer mobilization (Traxler, 1998). Third, the importance for enterprises of social dialogue, particularly, multi-employer wage coordination, has increased over time for reasons related to international competitiveness (Hancké, 2002, 2013).

If studying the motivation of enterprises to engage in social dialogue is important, we must ask why enterprises should be motivated to do. The next section addresses this question.

The role of multi-employer bargaining in export competitiveness

There is substantial evidence that multi-employer bargaining can be highly beneficial for enterprises. Accounts of these benefits, however, differ between the industrial relations literature (Traxler, 1998), which traditionally has been more labour-centric, and the comparative political economy literature, which is commonly enterprise-centric.

Scholarship in comparative political economy sees the benefits of multi-employer bargaining to enterprises in complementary inter-institutional links. The possibility of revealing these links, notably between industrial relations institutions on one hand, and skill formation and product market institutions and monetary and fiscal regimes on the other, opens when the industrial relations system is studied within the broad national and international context of political-economic institutions. Studies within this analytical tradition have demonstrated that the importance of multi-employer bargaining (and more specifically, coordinated wage-setting) for enterprises has not diminished but rather increased in internationalized economies. The remainder of this section reviews this argument in more detail.

It is already conventional wisdom that multi-employer bargaining can reduce competition between enterprises both on labour costs and for labour, eventually leading to higher employment stability and lower turnover. It can also perform a wage protection function that enables employees to estimate their lifelong earnings (Estevez-Abe et al., 2001). Through inter-institutional links, these two effects have in turn been found capable of securing employees’ and employers’ investments in company- and industry-specific skills, making high-quality high-value-added production strategies possible (Hall and Soskice, 2001; Thelen, 2001).

More complex mechanisms, however, are set in motion when a dimension of international competitiveness is added. Hall (2012) lists three ways in which enterprises can ensure that their products remain competitive on international markets: they can hold down labour costs, produce high value-added goods or substitute capital for labour to improve quality and productivity. The evidence suggests that multi-employer bargaining can have positive, but not always direct effects on all of these, by aligning wages with productivity and thus restraining labour costs in both tradeable and sheltered sectors of the economy. This occurs via two channels.

First, moderating labour costs has a direct impact on the cost competitiveness of exports, as it prevents real unit labour costs (RULC) from growing (Hancké, 2002; Iversen and Soskice, 2013). Although wage restraint is in the direct interest of both employers and the government (if it chooses to support an export-led growth model), it can be achieved only if employers are organized and engage in multi-employer bargaining with centralized unions. Unions can agree with wage restraint if they see that increasing demand for exports can provide the prospect of higher employment stability. Higher demand for exports also increases demand for labour in the tradeable sector, which in turn helps unions absorb new workers while containing shop-floor pressure against wage restraint (Iversen and Soskice, 2010). Wage moderation in the tradeable sector, however, cannot be implemented if wages in domestically oriented sectors are also not moderated. Horizontal bargaining coordination, which can take the forms of state-sponsored or inter-associational coordination, or pattern bargaining, helps overcome this obstacle (Traxler, 2003; Traxler et al., 2008).

The second effect links labour cost moderation with improvement in productivity and higher value-added production. Two mechanisms have been found here. First, coordinated wage restraint tied to productivity may provide strong incentives for unions, works councils or individual employees to cooperate with management in improving establishment-level productivity, quality or innovation in return for local wage and benefit improvements and expectations of a wage increase in the next bargaining round (Hancké, 2002). Second, since the tradeable sector is usually the most advanced in the economy, coordinated wage restraint increases the demand for high-skilled labour. More specifically, the higher availability of skilled labour induced by wage restraint is one of the main features of a contemporary high-value-added production regime that Sorge and Streeck (2018) describe as diversified quality production mark II and of which Germany is the most characteristic example.

The link between multi-employer bargaining and the export-oriented product market strategy is striking. Coordinated wage-setting can strongly support international competitiveness and is essential to the export-led growth regime. Macro-level evidence shows that economies with coordinated wage-setting are the most successful and competitive in exports; as a result, their share of exports is higher (Iversen and Soskice, 2010, 2015). These economies include all the advanced coordinated market economies (CMEs) of the North-Western core of the EU (Hope and Soskice, 2016). In these economies, at the micro level, coordinated wage-setting institutions are primarily and highly beneficial for enterprises because they align wages with productivity and contribute to innovation, quality and competitiveness. Since these institutions serve the interests of enterprises, they have been found resilient to decentralization and deregulation (Hancké, 2002). This can explain why the decline in union density in recent decades was not followed by a corresponding decrease in bargaining coverage in most of the North-Western countries (Iversen et al., 2016). It also suggests that countries at the macro level and enterprises at the micro level, both aiming to pursue export-led growth and production strategies, would benefit from adopting coordinated wage-setting institutions.

Relevance of multi-employer bargaining to the Baltics

I now consider whether the capability of multi-employer bargaining to strengthen international competitiveness of enterprises through wage moderation and productivity improvement could be relevant to enterprises in the Baltic countries.

Baltic exports

The economies of Estonia, Latvia and Lithuania are strongly oriented towards exports. Table 2 shows their ratios of exports of goods and services to GDP, with countries chosen for comparison which represent a variety of types of political economy: export-led CMEs (Germany, Belgium and Sweden), demand-driven liberal market economies (the UK), demand-driven mixed market economies (Italy) and coordinated post-communist economies (CEE). The ratios in the Baltic States are among the highest in the EU, above that in Germany, for example, and all three export far more proportionately than domestic demand-led economies such as Italy and the UK.

Table 2.

Export performance.

	Export to GDP ratio (2013–2017 average, %)	Change in ratio, 2007–2017	Share of intra-EU exports^a	High value added (%, 2015)^b
EE	80.4	22.8	71.7	23.5
LV	60.4	57.1	66.7	20.2
LT	79.4	61.3	58.2	23.3
BE	82.6	9.8	72.0	47.9
CZ	79.8	19.4	83.7	49.8
DE	46.3	10.0	58.5	60.8
IT	29.8	14.2	55.6	40.6
PL	49.9	39.9	79.7	31.3
SE	44.8	−7.2	59.2	56.6
UK	28.8	22.5	47.6	41.4

Source: Eurostat.

All products, %, 2017.

Share of high- and medium-high technology value added in total manufacturing, 2010 for SE.

A strong focus on exports has been characteristic of the Baltic economies since independence in 1990. This focus has since increased, with the growth rates of exports being among the highest in the EU. In Latvia and Lithuania, the ratio was approximately 60 percent higher in 2017 than in 2007, a pre-crisis year in which these economies grew the fastest. In Estonia, the share grew in more moderate terms, because it had initially been high. During the same period, the Baltic countries increased their market shares of world exports of goods by 25 percent in the cases of Latvia and Lithuania and by 8 percent in the case of Estonia (source: AMECO). Again, these increases were among the highest in the EU.

The EU is the biggest market for the Baltics, accounting for approximately two-thirds of total Estonian and Latvian exports. In Lithuania, the share is 78.8 percent if oil, tobacco and fertilizers are deducted from the total exports. This indicates strong reliance on the single market, even stronger than the largest exporters.

The Baltic manufacturing industry – a good proxy for measuring export composition – focuses on low- and medium-low technology goods, suggesting that these types of goods also dominate exports. High- and medium-high technology manufacturing value added accounts for approximately 20–23 percent, in strong contrast both to the advanced exporting economies such as Germany and Sweden, and other CEE countries such as the Czech Republic and Poland. This should imply higher cost sensitivity of exports, as has been demonstrated by Carlin et al. (2001).

Competitiveness of Baltic exports

Above, I noted a strong link between the export competitiveness of the economy and its capacity for the non-market coordination of wages, as demonstrated in the cases of Belgium, Germany and Sweden. These three countries are export-led and have well-developed social dialogue, with mostly multi-employer bargaining covering more than half of employees, and highly centralized wage-setting systems. Although all CEE countries deviate from this rule to a large extent, the Baltic countries are the greatest exception. All three are also export-led economies, but bargaining coverage is low and wages are mostly set on by individual contracts. This raises an important question. Expanding exports suggest that Baltic enterprises are indeed competitive in international markets. How do they achieve this? I address this question with an overview of competitiveness in all three Baltic countries as well as a more detailed analysis of the Lithuanian case. (Findings on Estonia and Latvia are similar and are available from the author on request.) The analysis covers the period since EU accession in 2004, but the post-crisis recovery years are the main focus.

Figure 1 demonstrates the dynamics of manufacturing RULC in both the Baltic and other CEE countries and in the EU15 at the aggregate level. It compares how cost competitiveness has changed since accession to the EU single market even though, as discussed previously, in terms of technological intensity these countries’ exports do not always compete directly. Not all major CEE economies have succeeded in preserving and improving the competitiveness of their manufacturing industries. Poland, Czech Republic, Slovenia and Hungary have followed the EU15 trend: currently, they are in a better competitive position than before the crisis or even in 2004. Slovakia, Latvia and Estonia experienced the biggest deterioration in competitiveness during the pre-crisis years, and while all three countries succeeded in restoring their competitiveness during and immediately after the crisis, they all seem to have reverted to the same negative trend. Lithuania presents a rather different picture: it did not experience significant competitiveness problems before the crisis, and achieved the biggest and longest lasting improvements during and after the crisis. Nevertheless, these gains were not stable and currently show a diminishing trend.

Figure 1.

Real unit labour costs in manufacturing, index.

How the Baltic countries achieved significant competitiveness improvements during the crisis and afterwards is a puzzle with potentially strong implications with respect to multi-employer bargaining. To solve this puzzle, attention should be paid to individual components of ULC – labour compensation and labour productivity – and their dynamics throughout the boom, bust and recovery. As demonstrated in Figure 2, in Lithuanian manufacturing, nominal wages grew constantly for the entire period from EU accession to the pre-crisis years. During the crisis wages decreased but only slightly, by approximately 10 percent: much smaller than in the public sector, where wages were cut by 17 percent on average (Nakrošis et al., 2015); and this was only temporary, lasting no longer than a year. Nominal wages rose by 55 percent up to 2016 and the trend seems to continue.

Figure 2.

Nominal compensation per employee and labour productivity in manufacturing in Lithuania, index.

This high wage growth in manufacturing poses the question of whether there was any need for wage coordination between sectors or coordinated alignment between manufacturing wages and productivity in Lithuania. For three reasons this was not necessary. First, the prevalence of decentralized wage-setting system, as demonstrated earlier, suggests that larger wage cuts could have been imposed, but this option was not implemented. Second, wage-setting issues in the private sector were not among the objectives of the 2009 social pacts concluded in all three countries. These were primarily targeted at fiscal consolidation, public-sector wage cuts and securing both electoral support and social peace, but not at improving cost competitiveness in the tradeable sector (Gruževskis and Blažiene, 2013; Meardi, 2011). Third, none of the industry-level and only few of the enterprise-level collective agreements signed during 2007–2013 covered wage issues (ESTEP, 2016).

Summing up these facts, Lithuanian enterprises did not need large wage adjustments. Obviously, wage cuts were not the primary source of significant improvements in Lithuania’s international competitiveness. One should turn to labour productivity, another component of ULC, instead. Here, gains have been more pronounced. The dynamics of labour productivity, expressed as gross value added per person employed, demonstrate that major competitiveness improvements in manufacturing occurred through a steep increase in labour productivity, not through wage cuts, as shown in Figure 2. (While real labour productivity is better for tracking dynamics over time, I use the nominal term because it better reflects productivity gains, as perceived by enterprises.) During the pre-crisis boom period, labour productivity grew more or less aligned with labour compensation, but it soared much faster from its recovery in 2009 onwards. Over the next 5 years, labour productivity increased by almost 64 percent, as against a 36 percent increase in employee compensation.

Understanding the causes of the sudden increase in labour productivity is clearly crucial for assessing the potential role of multi-employer bargaining in export competitiveness. The literature on this issue is rather scarce and the findings are far from thorough. Some studies, for instance, Blanchard et al. (2013) for Latvia, have argued that strong labour shedding at the peak of the crisis was among the main factors responsible for the subsequent labour productivity increase. However, this effect could only be short-term; this argument is not sufficient to explain the continuous strong growth in labour productivity that occurred in Lithuania during the entire after-crisis period. Other, longer term effects must have been at work.

One hypothesis might be that labour productivity grew because of improvements in efficiency or because of changes in enterprise size or sectoral shifts within manufacturing. In the latter case, positive enterprise size effects on productivity could be expected if the proportion of small and micro enterprises decreases, since these are usually less productive. Labour productivity would also increase if more productive sectors gained a larger share in total manufacturing value added. However, neither hypothesis is supported empirically. The quantity of fixed capital in manufacturing – a proxy for efficiency improvements – measured as a share of gross fixed capital formation in gross value added has declined significantly – to a third of its pre-crisis level – and has not yet been restored (AMECO macroeconomic database, my calculation).

The share of small and micro enterprises, in contrast, has been increasing, while the composition of the five largest manufacturing sectors, accounting for almost half of the total manufacturing value added, remained unchanged; furthermore, labour productivity grew by almost 33 percent less in these sectors than in the remainder (Eurostat data, my calculation).

It is obvious that no internal factors can fully explain how the cost competitiveness of manufacturers in Lithuania in terms of labour productivity improved during and after the crisis. The lack of internal explanations suggests that external factors might have been important. Support for this comes from Blanchard et al. (2013) and Notten (2012) on Latvia and Lithuania, respectively. Their findings rest on an assumption that both countries have small market shares in world exports. Their products can be easily substituted, and thus demand for their exports mainly depends on their capacity to supply. Thus, Latvian and Lithuanian exporters are price-takers that are highly responsive to price incentives. Their export prices mainly depend on import prices, especially when the latter increase, but not on ULC. This implies that decreases in ULC are not translated into competitiveness improvements and higher market shares but into higher profits instead.

From this perspective, the after-crisis labour productivity increases in Lithuania can be explained by favourable developments in export markets: increasing world prices of manufactured goods: exporters could sell their goods at higher prices that aggregated into larger value added without a need for more labour or investments. World prices of non-fuel goods – food and intermediate industrial goods that account for the biggest share in manufacturing in Lithuania – indeed increased significantly, up to 60 percent in 2011 compared to 2007. While prices have been falling since 2011, only those of intermediate industrial goods returned to their 2007 level and below; food prices remained 30 percent higher (IMF commodity price database, my calculation). The dynamics of the capital share of total value added in the manufacturing industry strongly correspond to these price trends. This shows that Lithuanian exporters have successfully used increases in world prices as a source for higher labour productivity.

Conclusion

Certain forms of social dialogue, particularly multi-employer bargaining, can indeed be compatible with the interests of enterprises even in a globalized environment. This compatibility has been emphasized in the literature, which attempts to explain the stability and strength of social dialogue institutions in advanced export-led European economies. In these economies, multi-employer bargaining is widely employed as an instrument for the moderation of economy-wide labour costs and their alignment with productivity, which coupled with non-accommodating monetary and restrained fiscal policies contribute to containing inflation, preventing real exchange rates from rising and, consequently, improving the competitiveness of the tradeable sector.

In the Baltic countries, social dialogue has not become more prevalent since EU accession, even though the growth regimes of all three countries have become export-led. My aim has been to demonstrate how Baltic enterprises could sustain high export competitiveness during the past decade, as a basis for explaining why enterprises have lacked the motivation to pursue coordinated wage-setting in particular and social dialogue in general.

The manufacturing sector in the Baltics has strongly improved its export competitiveness since the peak of the crisis, recovering a stronger position than it occupied in 2007, a boom year. This is indicated by the biggest RULC gains among CEE countries. Although this improvement came ostensibly from higher labour productivity, it was not the result of genuine efficiency gains: it did not follow from capital investments or structural changes within manufacturing or the tradeable sector. The main explanation was the increase in world prices, which allowed for higher value added without additional real labour inputs. This explains why labour productivity grew much faster than labour compensation during the post-crisis period. While the latter also took off at a high speed, the impact of prices on the former was stronger. Profits increased faster than labour costs. In this situation, clearly, coordinating or moderating labour costs was not a structurarlly important issue because the need to do so was effectively mitigated by favourable external conditions.

My findings suggest that multi-employer social dialogue, as an institutional toolkit for labour cost coordination and productivity improvement, is not a component of the current business strategies of manufacturing enterprises in the Baltics. Instead, enterprises rely on ‘price-taker’ strategies that, coupled with low-skill, low value-added production, take advantage of favourable market opportunities rather than competitiveness improvements through coordination at the intra- or inter-sectoral level or the labour performance at the establishment level. Therefore, these strategies are not complementary with social dialogue institutions. This suggests a convincing explanation of why Baltic enterprises do not demonstrate any motivation to adopt multi-employer bargaining and why measures aimed at strengthening social dialogue do not return any positive outcomes.

If a path towards stronger social dialogue in the Baltics exists, it leads not through labour, which has been continuously weakly mobilized and without political support, but through stronger employer motivation and mobilization. During the past decade, the business strategies of Baltic enterprises were shaped by favourable price-related conditions in export markets. While these external conditions last, it does not seem likely that enterprises will pursue coordinated competitiveness improvements in terms of costs and productivity. However, the labour compensation growth rate has recently overtaken that of labour productivity, signalling that a new critical juncture is about to occur. If no positive external shocks supporting the current business strategies emerge, it may open new opportunities for social dialogue in the Baltics, on one hand, and create incentives to increase the sustainability of these countries’ export-led growth regimes, on the other.

Footnotes

Acknowledgements

The author thanks Vytautas Kuokštis, Jurgita Pesliakaitė, Vadimas Ivanovas and two anonymous reviewers for valuable comments on an earlier version of this article.

Funding

The author(s) received no financial support for the research, authorship and/or publication of this article.

Author biography

Marius Kalanta is a Senior Analyst in the Research and Analysis Division at Enterprise Lithuania.

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