Wage flexibility under collective bargaining

In Portugal, there is almost universal coverage by collective bargaining with trade unions. This paper asks how this constrains firms’ ability to adjust wages to changing firm- and sector-level conditions.

If wages are set by bargaining between trade unions and employers’ associations, and almost all workers are covered, it may seem that firms have no margin to adjust wages. However, collective bargaining in Portugal and in Continental Europe does not set the actual wage of workers, but rather minimum wage floors. Indeed, firms often pay more (with the difference called the “wage cushion”) to more skilled workers, those on high demand, or if firm conditions are good.

The paper analyzes the Portuguese private sector during the recent sovereign debt crisis. The paper finds that wage floors are like minimum wages—thus, not actual wages—and on average firms pay a base salary 20% above the bargained floor. Within a contract, all job categories have a similar percent wage increase when the contract is renegotiated. So, there is no evidence that some groups in a contract have more bargaining power. Also, wages in bargained contracts react to the average conditions in the sector. So, there is no evidence that the more productive firms have more bargaining power. When a floor increases, workers close to the floor see their wage increase, but for those with a large cushion, actual wages react little.

During the recession, real wages fell via reductions in real floors, reductions in real cushions, and reallocations of workers to lower-floor jobs (as they enter the labor market, move across firms, or are promoted more slowly). This reallocation to lower contract bargaining categories (given the education and age of the worker) was particularly sharp for university graduates.

Click here to go to the paper by David Card and Ana Rute Cardoso.