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Wage flexibility under sectoral bargaining
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Abstract(s)
Sectoral contracts in many European countries set wage floors for different occupation groups. In
addition, employers often pay a wage premium (or wage cushion) to individual workers. We use
administrative data from Portugal, linked to collective bargaining agreements, to study the interactions
between wage floors and wage cushions and quantify the impact of sectoral wage floors. Although
wages exhibit a “spike” at the wage floor, a typical worker receives a 20% premium over the
floor, with larger cushions for older- and better-educated workers and at higher-productivity firms.
Cushions also allow wages to covary with firm-specific productivity, even within sectoral agreements.
Contract negotiations tend to raise all wage floors proportionally, with increases that reflect average
productivity growth among covered firms. As floors rise, however, cushions are compressed, leading
to an average passthrough rate of about 50%. Finally, we use a series of counterfactual simulations to
show that real wage reductions during the recent financial crisis arose through reductions in real wage
floors, reductions in real cushions, and a re-allocation of workers to lower wage floors. Offsetting
these effects was a rapid rise in education of new cohorts, which in the absence of other factors would
have led to rising real wages.
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Citation
Card, D., Cardoso, A. R. (2022) Wage flexibility under sectoral bargaining. Journal of the European Economic Association, Vol. 20 (5), October 2022, pp. 2013–2061