The impact of collective labor bargaining extensions

The recent crises raised a number of questions about the role of structural reforms in promoting economic growth. One area that has received greater attention is collective bargaining: the interactions between firms and employees in setting of pay and many other working conditions can be highly relevant promoting micro and macro flexibility, increasing resilience during a crisis and growth during the recovery.

This paper studies the causal impact of collective bargaining on the labor market. This study is focused on extensions, a key dimension of collective bargaining in many countries, related to the intervention of the State in widening the coverage of agreements to all firms and workers in each sector, regardless of union or employer association membership.

The study exploits the consequences of the immediate suspension of extensions by the new government in Portugal in June 2011. The results, based on a regression discontinuity design are:  extensions tend to reduce employment growth (see Figure), with effects that are potentially large, which in part may reflect the specific context of Portugal in 2011; these effects tend to be concentrated amongst the firms that are not affiliated with an association, suggesting that the lack of representativeness of employer associations is a potentially important factor; and extensions tend to boost the wages of low-productivity workers and reduce wage inequality. Consequently, their adverse effects on employment growth should be weighed against their positive effects on wage compression.

Click here to go to the paper by Alexander Hijzen and Pedro S. Martins.