"...It is impossible for any community to have very full employment and completely free collective bargaining and stable prices. Either one of the three will be completely sacrificed, or else all three will have to be modified."

"...In the last resort the answer will be given not by economists or by administrators but by the public opinion. At each corner of the triangle, the limiting factor is what public opinion will stand, and the degree of comprehension that public opinion will show for an economic policy that tries to preserve balance between competing objectives."

(The Economist, August-October, 1952: 376, 435)

Can Germany in the 1990s provide a contemporary example of the “uneasy triangle” posited by The Economist in the early 1950s? As the millennium approached, Germany’s inflation rate was very low; its unemployment rate unacceptably high; and its system of collective bargaining arguably the strongest to be found in any major industrial country. Public opinion appears to have played a more limiting role in the first of these corners of Germany’s triangles than in the other two.

Why, at the onset of a downturn in economic activity and an upswing in unemployment (in the early 2000’s), did the leading trade unions in Germany decide to demand-and in some cases strike for- larger wage increases and denounce a government-led policy of wage moderation, rather than strengthen their adherence to such a policy? Two (related) explanations of this apparently nonrational behavior were offered by German unionists at an informal conference on union policy-making in Germany, Japan, and the U.S. In the first place, it was claimed that at the grass roots union members might be expected to accept wage restraint only if they are convinced that they would be punished for failure to do so (e.g. to accept subcontract wages in marginal enterprises) or if acceptance would be virtually certain to ensure reward in the form of increased job security and employment (e.g. by the adoption of more expansionist fiscal or monetary policies). And second, some of the union participants at the conference claimed that the failure of real wages to grow as rapidly as productivity tends to engender feelings of unfair on inequitable treatment among unionists, which, if allowed to persist, could override the requirements of rational self-interest in pursuing wage policies aimed solely at maximizing the net wealth of the membership.

Substantial evidence shows that North Americans are generally more accepting of the market than Europeans and attribute market outcomes to a larger degree to effort or skill. Thus, we expect North Americans to be more accepting of layoffs and pay cuts than Germans and that Germans will be more sensitive to the procedures and conditions under which pay cuts and lay-offs occur. The empirical results from our quasi-experimental study are largely in line with our hypotheses. These results may help explain and be explained by the different labour market in-stitutions in the different regions.