OECD Employment Outlook 2018

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OECD Employment Outlook

4 July 2018

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Chapter 3. The role of collective bargaining systems for good labour market performance

Abstract

This chapter assesses the role of collective bargaining for labour market performance in OECD countries. It builds on the detailed characterisation of collective bargaining systems and practices presented in the OECD Employment Outlook 2017. Using a rich mix of country‑, sector‑, firm‑ and worker‑level data, this chapter investigates the link of different collective bargaining settings with employment, wages, working conditions, wage inequality and productivity. It then discusses how broad‑based employee and employer organisations, administrative extensions, organised forms of decentralisation and wage co‑ordination may contribute to better balance inclusiveness and flexibility in the labour market.

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

Key findings

Collective bargaining systems in OECD countries are confronted with serious challenges in the face of global competition, technological change and a long‑running trend towards decentralisation of bargaining. The shares of workers in trade unions and covered by collective agreements have been declining in many OECD countries and concerns are growing about the ability of collective bargaining to contribute to better labour market performance.

This chapter provides a timely assessment of the role of collective bargaining systems for labour market performance and inclusive growth. It looks at how collective bargaining matters for some of the policy objectives that policy‑makers and citizens care most about: employment, wages, quality of the work environment, inequality and productivity. The chapter brings empirical analyses, using the best macro‑ and micro‑data available and the characterisation of collective bargaining systems developed in OECD (2017[1]), together with country experiences and case studies to support policy‑makers and social partners themselves in identifying directions for reform.

The analysis builds on a characterisation of collective bargaining systems along four main building blocks:

The collective bargaining coverage – the share of workers covered by collective agreements – which is linked to membership of signatory employer organisations and trade unions, but also to extensions of agreements to other firms and workers in a sector.
The level of bargaining at which collective agreements are negotiated: firm level, sector level or even national level. Multi‑level bargaining involves a combination of firm‑ and higher‑level collective bargaining.
The role of wage co‑ordination between sector‑level (or firm‑level) agreements, such as the setting of common wage targets, to take account of macroeconomic conditions.
The degree of flexibility for firms to modify the terms set by higher‑level agreements. In centralised systems, companies have no or very little scope to modify the terms set in higher‑level agreements, in contrast to fully decentralised systems where collective bargaining can take place only at the firm level. Between these two extremes, organised decentralised systems allow sector‑level agreements to set broad framework conditions but leave detailed provisions to firm‑level negotiations.

The main empirical findings are as follows:

Within countries, at the individual level, there is a wage premium for workers who are covered by firm‑level bargaining compared with those not covered or those covered only by sector‑level bargaining. Moreover, the work environment tends to be of higher quality in firms with a recognised form of employee representation (for example a trade union or works council), largely because of lower work intensity, more training options and better prospects for career advancement.
Comparing collective bargaining systems across countries, co‑ordinated systems – including those characterised by organised decentralisation – are linked with higher employment and lower unemployment (also for young people, women and low‑skilled workers) than fully decentralised systems. Predominantly centralised systems with no co‑ordination are somewhat in between.
Collective bargaining also tends to affect wage dispersion, with greater dispersion in systems with no collective bargaining or where firms set wages independently. By contrast, wage dispersion is on average smallest among workers who are covered by sector‑level bargaining. The lower dispersion in wages associated with sector‑level bargaining in part reflects lower returns to education, seniority and potential experience for workers covered by collective agreements.
The effect on wages is also reflected in the relationship of collective bargaining with productivity growth. Centralised bargaining systems tend to be associated with lower productivity growth if coverage of agreements is high. This result suggests that the lack of flexibility at the firm level, which characterises centralised bargaining systems, may come at the expense of lower productivity growth. By contrast, higher co-ordination in systems that are not centralised is not found to have adverse effects on productivity.
Many OECD countries have taken steps towards decentralisation in the past two decades. Overall, organised decentralisation as described above tends to deliver good employment performance, better productivity outcomes and higher wages for covered workers. By contrast, other forms of decentralisation that simply replace sector‑ with firm‑level bargaining, without co‑ordination within and across sectors, tend to be associated with somewhat poorer labour market outcomes.

The chapter also provides a detailed discussion of how wage co‑ordination works and the features that make organised decentralisation capable to simultaneously achieve good labour market outcomes, provide some flexibility to firms and support adaptability to structural change. The main conclusions are:

Co‑ordination in wage bargaining helps take into account the macroeconomic effects of wage agreements by ensuring that these agreements do not undermine external competitiveness and are set in line with the business‑cycle situation. This may be one factor behind the empirical association of co‑ordinated systems with higher aggregate employment. The strongest form of wage co‑ordination establishes a wage norm that defines the maximum for the collectively‑agreed wage increase in every sector.
In countries where co‑ordination works well, it tends to be strongly supported by employer associations (since it moderates wage growth) and trade unions (since it ensures high levels of employment). To be effective, co‑ordination requires strong and self‑regulated social partners as well as effective mediation bodies.
The effectiveness of the articulation of firm‑level arrangements within framework agreements, which characterises organised decentralisation, hinges to an important extent on the degree of collective worker representation at the firm level.
In some countries, trade unions and employer organisations engage in sector‑level initiatives that aim to enhance labour market adaptability by facilitating job transitions and providing workers with the skills needed in a changing world of work.

Collective bargaining can only contribute to labour market inclusiveness and have a significant macroeconomic effect if it covers a large share of workers and companies:

Well‑organised trade unions and employer organisations with a broad support base tend to be the best way to attain high coverage. At the sector level, they ensure representativeness in wage negotiations. At the firm level, they are the basis for social dialogue between workers and employers.
Collective bargaining is often confined to large and medium‑sized enterprises and workers in standard employment. To promote social dialogue in large and small firms alike and also cover non‑standard forms of work, competition and labour law as well as bargaining and organisation practices by social partners may need to adapt.
In systems with sector‑level bargaining and no broad‑based representation, administrative extensions can help cover companies and workers not participating in collective bargaining. To avoid harming the economic prospects of start‑ups, small firms or vulnerable workers, extensions need to be well‑designed to ensure that the parties negotiating the agreements represent the collective interest of a large group of firms and workers. This can be achieved by subjecting extension requests to reasonable representativeness criteria and a meaningful test of public interest and providing well‑defined procedures for exemptions and opt‑outs of firms in case of serious economic hardship.

Introduction

Collective bargaining is under pressure in many OECD countries. Since the mid‑1980s, trade union membership has halved (OECD, 2017[1]).1 The fall in coverage of collective bargaining has been only a little less marked. In more than half of the countries, collective bargaining now covers less, and in some significantly less, than 50% of the workforce. Where coverage continues to be high, concerns are growing about the ability of collective bargaining to deliver good jobs in a time of global competition, technological change and a trend towards decentralisation of bargaining.

This chapter provides new insights on the role of collective bargaining for good labour market performance. This assessment of collective bargaining also contributes to the new OECD Jobs Strategy (OECD, forthcoming[2]), which identifies three main goals for successful labour market policies: i) more and better jobs; ii) labour market inclusiveness; and iii) resilience and adaptability. Collective bargaining has the potential to play a central role in all three. The chapter considers a variety of outcomes related to good labour market performance, including employment, wages, working conditions, inequality and productivity, while the role of collective bargaining for resilience was already investigated in OECD (2017[1]).

The chapter uses a variety of approaches including quantitative analyses and country case studies and mobilises both micro and macro data sources. The next section sets the scene by outlining a framework to illustrate how collective bargaining may matter for labour market performance and inclusive growth. Section 3.2 proceeds with a macroeconomic analysis of the role of collective bargaining for employment and inequality using a novel characterisation of collective bargaining systems. This allows going beyond previous macro‑studies, which usually concentrated on the degree of collective bargaining coverage and the level of bargaining, by also taking account of the flexibility of firms to tailor the conditions of sector‑level agreements to their needs and of the co‑ordination of wages across bargaining units. Section 3.3 uses worker‑ and sector‑level data to study the relationship of collective bargaining with wages, wage distribution and productivity, shedding light on some of the mechanisms behind the relationships found at the macro level. Section 3.4 discusses the role of workplace employee representation for the quality of the working environment. Drawing on a series of country case studies and the broader industrial relations literature, Section 3.5 discusses some policy options that social partners and governments may want to consider to make collective bargaining systems more flexible and more inclusive.

This chapter is part of a broader initiative of the OECD to better understand the role of collective bargaining and social dialogue today and in the future. The first major output of this undertaking was the comprehensive review of collective bargaining systems in OECD and accession countries in the 2017 Employment Outlook (OECD, 2017[1]). Subsequent work will analyse the role of collective bargaining for job quality and the future world of work.

3.1. The role of collective bargaining for labour market performance: An overview

Collective agreements signed by employers and unions primarily determine wage levels (or wage increases) and non‑wage working conditions, including working time, leave arrangements, training, employment protection, and health and safety provisions (Figure 3.1). Re‑negotiations of contracts by particular firms or employees may increase wages above the rate agreed at higher levels (or, in some cases, reduce wages below the negotiated rate). Outcomes such as employment or productivity are usually not part of the collective agreement, although they may be taken into account in the negotiations. The way collective bargaining influences labour market performance depends on the bargaining strategies of social partners, the structure of product and labour markets and the nature of collective bargaining institutions.

The academic literature has focused on two broad classes of bargaining strategies. In the so‑called “right‑to‑manage” model (Leontief, 1946[3]), unions bargain exclusively over wages, leading to lower employment relative to the perfect competition benchmark. Union members, usually referred to as “insiders” in this literature, are viewed as gaining at the cost of “outsiders”, unemployed individuals or individuals in vulnerable jobs not covered by collective bargaining (Lindbeck and Snower, 1986[4]). The cause of the presumed inefficiency is that employment is not accounted for in the negotiations. This could have the additional downside of reducing the resilience of the labour market against adverse macroeconomic shocks. In practice, however, unions may not only be concerned about wages but also employment and macroeconomic resilience. This has motivated the “efficient bargaining” model (McDonald and Solow, 1981[5]).2

The effect of collective bargaining depends also on the structure of the market and the degree of competition. With perfect competition in product and labour markets, raising wages above the market equilibrium wage induces unemployment. However, when product market competition is imperfect (i.e. when firms have some degree of monopoly or oligopoly power), higher wages may not induce greater unemployment but be simply the result of workers appropriating a greater share of the rents. Moreover, in imperfectly competitive labour markets, higher bargaining power and higher wage floors can increase employment. This would be the case in the presence of monopsony power, which enables firms to offer low wages, for example because workers have limited opportunities to change their employer or would incur high costs if they did so.3

Figure 3.1. Collective bargaining, labour market performance and inclusive growth

Finally, the role of collective bargaining for labour market performance also depends on the functioning of the institutional system. OECD (2017[1]) documented that collective bargaining systems differ considerably across OECD countries, even among those sharing similar characteristics. For example, the systems in the Netherlands and Portugal,4 or those in Australia and the United States, although formally similar in many respects, differ substantially in the way they function. The main building blocks of collective bargaining systems are the degree of coverage, the level of bargaining, the degree of flexibility and the role of wage co‑ordination:

Degree of coverage: Collective bargaining coverage, rather than only trade union density, is essential to measure the relevance of the system. Collective agreements covering a large share of workers can have a more sizeable macroeconomic effect – positive or negative – on employment, wages and other outcomes of interest than agreements confined to a few firms.
Level of bargaining: This defines the unit at which parties negotiate and may refer to the firm, sector or country. Sector‑level or national agreements can be expected to reduce wage inequality relative to decentralised systems, by lowering wage differentials not only between workers in the same firm, but also between workers in different firms and, in the case of national bargaining, in different sectors. Firm‑level agreements, by contrast, allow paying more attention to firm‑specific conditions, potentially raising productivity.
Degree of flexibility: Sector‑level or national agreements may differ substantially in the degree of flexibility they provide to firms. For example, the possibility of opt‑outs or leaving the application of the favourability principle to social partners can increase the flexibility of the system and allow for a stronger link between wages and firm performance, with on the upside higher employment and productivity, but on the downside higher wage inequality.
Wage co‑ordination: Wage co‑ordination between sector‑level agreements (or as in the case of Japan between firm‑level agreements) helps negotiators internalise the macroeconomic effects of the terms set in collective agreements. This is typically achieved by keeping wage increases in the non‑tradable sector in line with what can be afforded by the tradable sector or by strengthening the ability of the system to adjust wages or working time in the face of a macroeconomic downturn. Co‑ordination can therefore serve as an instrument for wage moderation and earnings flexibility over the business cycle, with potential benefits for employment and resilience.

Social partners affect labour market outcomes and hence inclusive growth and well‑being also by influencing and, sometimes, negotiating or even managing other labour market institutions, such as the minimum wage, labour laws (in particular employment protection legislation), unemployment benefits, active labour market policies, payroll taxes, and family and pension policies. Further, any effects of collective bargaining systems also depend on the other policies and institutions in place. For instance, if decentralisation increases wage inequality, the magnitude of the effect on the broader concept of disposable income inequality depends on the extent to which the tax‑and‑transfer system offsets the rise in wage inequality. While sometimes important, these issues go beyond the scope of this chapter.

3.2. The role of collective bargaining for employment and wage inequality: New evidence from macro‑data

The economic literature has long debated the role of collective bargaining for labour market performance, but paid little attention to the system of collective bargaining as a whole. Studies have mostly examined the presence or relevance of collective bargaining rather than its functioning. For example, many analyses of countries with predominantly firm‑level bargaining, such as the United Kingdom or the United States, have focused on the role of trade union membership.5 Union membership is a reasonable proxy of collective bargaining coverage in countries with predominantly firm‑level bargaining. But it is not sufficient for measuring the scope of collective bargaining, as many workers who are not affiliated to a trade union are also covered by collective bargaining – via erga omnes clauses and, in countries with sector‑ or multi‑level bargaining, administrative extensions (OECD, 2017[1]).6 Bargaining coverage is therefore in general a more appropriate proxy for the relevance of collective bargaining.7

However, to capture the role of collective bargaining for labour market performance, it is important to go beyond coverage by looking at its main features and actual functioning. Collective bargaining coverage in Italy is comparable to that in the Netherlands or the Nordic countries. Similarly, Australia and Germany have comparable coverage. As OECD (2017[1]) shows, these systems are nevertheless very different. It is therefore important to also consider the characteristics of the system itself. This echoes Aidt and Tzannatos (2008[6]) in their review of trade unions, collective bargaining and macroeconomic performance in which they concluded that, more than trade union density or coverage, what matters most is the functioning of the “entire package”.

In terms of main features, most attention has been directed to the role of centralisation, i.e. the predominant level of bargaining. In the early 1980s, the corporatist view suggested that by guaranteeing that wage‑setters recognise broader interests, centralisation, intended as national bargaining, can deliver superior outcomes in terms of macroeconomic and labour market performance (Cameron, 1984[7]).8 However, opponents pointed out that wage increases would be restrained or resource allocation would be more effective if market forces were allowed to play a larger role, bringing the example of the United States or the United Kingdom after Thatcher to support this view.

To reconcile these opposing views, Calmfors and Driffill (1988[8]) proposed the influential “hump‑shape” hypothesis, which suggested that both centralisation and decentralisation perform well in terms of employment while the worst outcomes may be found in systems with an intermediate degree of centralisation, i.e. sector‑level bargaining. In this intermediate case, organised interests are “strong enough to cause major disruptions, but not sufficiently encompassing to bear any significant fraction of the costs for society of their actions in their own interests” (Calmfors and Driffill, 1988[8]). The paper by Calmfors and Driffill had the merit to suggest that the relationship between the degree of centralisation and performance does not need to be monotonic. This hypothesis was behind the critical stance on sector‑level bargaining systems in the 1994 OECD Jobs Strategy (OECD, 1994[9]) which recommended decentralising collective bargaining given the impossibility to have full centralisation of bargaining systems.9 However, later empirical studies did not provide much backing for this hypothesis – see OECD (1997[10]), Traxler, Blaschke and Kittel (2001[11]), Aidt and Tzannatos (2002[12]), Bassanini and Duval (2006[13]) and Eurofound (2015[14]).

Another key feature of collective bargaining systems is the degree of wage co‑ordination across bargaining units. Soskice (1990[15]) suggested that co‑ordinated systems of sectoral bargaining may be as effective as national bargaining systems at adapting to aggregate economic conditions. Subsequent studies found that co‑ordination plays a key role in improving the performance of sector‑level bargaining – see the review in Aidt and Tzannatos (2002[12]) as well as the evidence in Elmeskov et al. (1998[16]), OECD (2004[17]), Bassanini and Duval (2006[13]), OECD (2012[18]) and Eurofound (2015[14]). The Reassessed OECD Jobs Strategy (OECD, 2006[19]) embraced this “augmented” version of the Calmfors‑Driffill hypothesis which entailed that decentralised and centralised or co‑ordinated bargaining systems result in better employment performance than sectoral bargaining systems.10

More recently, Boeri (2014[20]) revived the debate by suggesting that “two‑tier” bargaining systems (i.e. where firm‑level bargaining can only top up sector-level bargaining) are worse than fully centralised and fully decentralised systems, as they are not able to respond appropriately either to a microeconomic shock or a macroeconomic one.11

All in all, the characterisation and estimation of the economic effects of collective bargaining systems have proven to be a major challenge, leading to a proliferation of indicators for centralisation and co‑ordination as well as econometric specifications.

3.2.1. New country‑level evidence based on a taxonomy of collective bargaining systems

The role of collective bargaining for labour market performance should be analysed by looking at bargaining systems as a whole, rather than simply at the sum of their components. This section therefore uses a new taxonomy of collective bargaining systems for studying the links with employment and inequality.

The taxonomy of collective bargaining systems is taken from the dashboard in OECD (2017[1]). This proposed a classification scheme based on two main aspects: i) the degree of centralisation as characterised by the predominant level of bargaining as well as the rules and use of extensions, derogations, opt‑outs and the favourability principle; and ii) the degree of wage co‑ordination between sector‑level agreements. OECD (2018[21]) provides further details. The following five categories of collective bargaining systems were identified:12

Predominantly centralised and weakly co‑ordinated collective bargaining systems: Sector‑level agreements play a strong role, extensions are relatively widely used, derogations from higher‑level agreements are possible but usually limited or not often used, and wage co‑ordination is largely absent. In 2015, France, Iceland, Italy, Portugal, Slovenia, Spain and Switzerland fell in this group.13
Predominantly centralised and co‑ordinated collective bargaining systems: As in the previous category, sector‑level agreements play a strong role and the room for lower‑level agreements to derogate from higher‑level ones is quite limited. However, wage co‑ordination is strong across sectors. In 2015, Belgium and Finland were part of this group.
Organised decentralised and co‑ordinated collective bargaining systems: Sector‑level agreements play an important role, but they also leave significant room for lower‑level agreements to set the standards – either by limiting the role of extensions (rare and never automatic or quasi‑automatic), leaving the design of the hierarchy of agreements to bargaining parties or allowing opt‑outs. Co‑ordination across sectors and bargaining units tends to be strong. In 2015, Austria, Denmark, Germany, the Netherlands, Norway and Sweden were in this group.
Largely decentralised collective bargaining systems: Firm‑level bargaining is the dominant bargaining form, but sector‑level bargaining (or a functional equivalent) or wage co‑ordination also play a role. Extensions are very rare. Australia with its “Modern Awards” (see Box 3.5 for details) and Japan with its unique form of co‑ordination (Shunto) were in this group in 2015, as well as Greece, Luxembourg and the Slovak Republic. Since the enactment of the Industrial Relations (Amendment) Act of October 2015, which re‑introduced “Sectoral Employment Orders”, Ireland is also part of this group.
Fully decentralised collective bargaining systems: Bargaining is essentially confined to the firm or establishment level with no co‑ordination and no (or very limited) influence by the government. In 2015, Canada, Chile, the Czech Republic, Estonia, Hungary, Korea, Latvia, Lithuania, Mexico, New Zealand, Poland, Turkey, the United Kingdom and the United States were part of this group.

The country classification in 2015 was extended backwards to 1980 using information in the Institutional Characteristics of Trade Unions, Wage Setting, State Intervention and Social Pacts (ICTWSS) database.14 The time variation in the resulting taxonomy of collective bargaining systems for OECD countries over the period 1980‑2015 is considerable – see OECD (2018[21]). It reflects, in large part, the strong trend towards decentralised collective bargaining, but it also captures many country‑specific changes in collective bargaining practices. These differences in the time variation are exploited in the analysis to estimate the relationship between systems of collective bargaining and indicators of labour market performance.

The analysis compares labour market outcomes under different collective bargaining systems relative to the fully decentralised system, while controlling for the level of bargaining coverage as well as the possible role of the business cycle, the characteristics of the workforce and persistent country‑specific features (using country fixed effects).15 The results also account for other policy reforms that occurred at the same time, in the areas of labour taxation, product market regulation, job dismissal regulation, minimum wages and unemployment benefits. The relationships estimated in this section may nevertheless be influenced by the state of the labour market over and above the business cycle or other potentially important factors not controlled for; hence, care should be taken not to give the results a strict causal interpretation.

Co‑ordinated bargaining systems are associated with higher employment and lower unemployment relative to fully decentralised systems (Panel A of Figure 3.2). This is particularly the case for predominantly centralised systems, while for organised decentralised systems the result on unemployment is somewhat smaller and less robust. Centralised but weakly co‑ordinated systems and largely decentralised systems hold an intermediate position, with better employment outcomes than in fully decentralised ones but similar unemployment outcomes. The difference between the employment and unemployment results suggests that such systems are linked with higher employment and labour force participation. On average across all regimes, higher bargaining coverage is associated with lower employment rates (OECD, 2018[21]). Given that in centralised and co‑ordinated systems more workers tend to be covered, the extent to which these systems are linked with better employment outcomes could thus be somewhat lower than is displayed in the figure.

Empirically, the relative underperformance of fully decentralised systems is identified from variation in three countries (Ireland, New Zealand and the United Kingdom), which all undertook very significant collective bargaining reforms. The finding does not appear to be specific to these three countries, as it remains unchanged when country fixed effects are omitted from the regression. The results overall are qualitatively robust to two further sensitivity checks – see OECD (2018[21]) for details. First, they are similar when more traditional collective bargaining indicators for centralisation and co‑ordination (from the ICTWSS database) are used instead of the new taxonomy indicators.16 Second, the results with respect to collective bargaining regimes are qualitatively unchanged when collective bargaining coverage is not controlled for.

It is sometimes argued that collective bargaining delivers good labour market outcomes for “insiders” (notably prime‑age male full‑time workers with a permanent contract) at the expense of jobs for “outsiders”, such as youth, women and low‑skilled – see Saint‑Paul (1996[22]) and Bertola (1999[23]). Moreover, by pushing the interests of “insiders”, unions may accept or even contribute to the proliferation of non‑standard forms of employment as a buffer for its members, thereby reducing the inclusiveness of the labour market. In particular, unions may make temporary contracts indirectly more attractive for firms, by increasing the labour cost of “insiders”, for instance through bargaining over severance pay or assisting workers faced with the risk of dismissal.

The evidence, however, suggests that, in most cases, co‑ordinated systems – either centralised or organised decentralised – are associated with better labour market outcomes for vulnerable groups (Panels B and C of Figure 3.2). The unemployment rates of youth, women and low‑skilled workers appear to be consistently lower (or at least not higher) in co‑ordinated systems than in decentralised ones. Co‑ordinated and organised decentralised systems are also associated with a lower share of involuntary part‑time workers. Although the share of temporary employment does not vary across different bargaining systems, it is higher in countries with higher bargaining coverage – see OECD (2018[21]). This result, while different from previous evidence on agency work in the United States by Gramm and Schnell (2001[24]) and Autor (2003[25]), is in line with the findings of Salvatori (2009[26]) who shows, looking at 21 European countries, that unionised workplaces are more likely to use temporary employment.

Collective bargaining systems that are not fully decentralised are also correlated with lower wage inequality for full‑time employees (Figure 3.3), as measured by the D9/D1‑ratio, i.e. the ratio of the wage at the ninth decile of the wage distribution to the wage at the first decile. This association is present both in the lower and upper half of the wage distribution.17 Similar results are obtained when replacing the taxonomy indicators with indicators for centralisation and co‑ordination – see OECD (2018[21]).

Strengthening the bargaining power of low‑wage workers is one of the core missions of collective bargaining, so it is not surprising that empirically collective bargaining is associated with lower levels of inequality. Detailed pay scales, where they are defined, can compress wages in the middle and top of the distribution to compensate for higher wages at the bottom; Leonardi, Pellizzari and Tabasso (2015[27]) provide evidence of wage compression within Italian firms. These mechanisms are particularly relevant when bargaining covers a substantial share of the working population. Section 3.3 provides further evidence on the positive role of collective bargaining for wage equality based on matched employer‑employee and sector‑level data. The inequality results in this chapter complement previous findings that point in the same direction, from earlier studies by Blanchflower and Freeman (1993[28]), Blau and Kahn (1999[29]), Card, Lemieux and Riddell (2004[30]) and DiNardo and Lee (2004[31]) to more recent ones including OECD (2011[32]), ILO (2015[33]) and Jaumotte and Buitron (2015[34]).

In conclusion, using country‑level data on labour market outcomes for 35 OECD countries between 1980 and 2016 and a novel characterisation of collective bargaining systems, co‑ordinated systems are shown to be associated with higher employment, lower unemployment, a better integration of vulnerable groups and less wage inequality than fully decentralised systems. Weakly co‑ordinated, centralised systems and largely decentralised systems hold an intermediate position, performing similarly in terms of unemployment to fully decentralised systems, but sharing many of the positive effects on other outcomes with co‑ordinated systems.

Figure 3.2. Collective bargaining systems and employment outcomes

Figure 3.3. Collective bargaining and wage dispersion

3.3. The role of collective bargaining for inclusiveness and flexibility: New evidence from micro‑data

By centralising or co‑ordinating negotiations over wages and working conditions, collective bargaining has a tendency to compress pay differences among workers. As a result, it weakens the link between individual performance, wages and working conditions. In the context of firm‑level bargaining, overall firm performance necessarily becomes the main reference for negotiations on pay increases rather than individual performance. Similarly, in the context of sector‑level bargaining, overall industry performance becomes the main contextual factor for pay increases. In the same vein, centralisation and co‑ordination place a greater emphasis on macroeconomic performance and therefore competitiveness and resilience.

Collective bargaining may manifest itself in a lower dispersion of wages, by defining common criteria for wages of workers, firms or sectors. But by the same mechanism, it may also lead to stronger rigidities in wages over time, as negotiating partners are less flexible to tailor wages to the individual worker, firm or sector. The effects of such rigidities are likely to depend on the context in which they occur. In some cases, they may be benign, for example when they reduce the scope for discriminatory practices or serve a specific economic purpose as in the case of co‑ordination, while in others they may raise concerns, for instance when they weaken incentives for skill acquisition.

This section uses worker‑ and sector‑level data to shed further light on the relationship between collective bargaining institutions, wage equality, productivity growth and the way wages are set in line with productivity in firms and sectors. In doing so, the analysis provides useful insights into the mechanisms that may drive some of the macroeconomic relationships documented in Section 3.2.

3.3.1. Collective bargaining and wage dispersion

In many countries, the wages of some workers are principally determined by a collective pay agreement (collective bargaining), while those of others are not (individual bargaining). This may, or may not, introduce forms of injustice or unfairness between the two groups of workers, depending on what collective bargaining actually does. Empirically, the fact that some workers are covered by collective agreements while others are not allows comparing the level and dispersion of wages between workers in different bargaining schemes, without having to rely on country‑to‑country comparisons that might be influenced by aspects other than collective bargaining.

Worker‑level data on collective bargaining coverage are available for 20 OECD countries (plus one accession country, Lithuania). Besides distinguishing workers covered by collective bargaining from those who are not, the micro‑data separately identify workers whose wage is primarily determined by a firm‑ as opposed to a sector‑level agreement.18 This creates the possibility of distinguishing three bargaining levels: i) individual or no collective bargaining; ii) firm‑level bargaining; and iii) sector‑level bargaining. The three co‑exist in the dataset for seven of the 21 countries; in the others two co‑exist. Labour earnings are defined per hour and include bonus payments. As in Section 3.2, dispersion is measured as the ratio of wages at the ninth decile to the first decile.

When comparing wage dispersion between workers who are covered by collective bargaining and those who are not, it is important to account for possible sample selection: For instance, if collective agreements cover mainly men, or certain industries, wage dispersion may be lower with collective bargaining because wages tend to be more similar among men only, or among certain industries, than in the entire working population. Different empirical techniques can be applied to adjust for these compositional differences between bargaining groups. The one used in this section goes back to Juhn, Murphy and Pierce (1993[35]) and has been widely used since.19 For each country and bargaining level separately a standard hourly wage regression is run on a large number of explanatory variables: age, gender, education, firm size, contract type, years employed in the firm, industry and occupation. Differences in composition are then corrected by replacing the coefficients and residuals in each bargaining level with those for the group of workers who are not covered. Box 3.1 describes the empirical approach in detail.

Box 3.1. Empirical approach to adjust wages and wage dispersion for differences in composition

Differences in wages and wage dispersion between workers covered by collective bargaining and those not could, in part, be due to differences in composition. A standard way to adjust for these compositional differences is provided by Juhn, Murphy and Pierce (1993[35]). Applying this method in the present context, for each country and bargaining level $b$ (no collective bargaining, firm‑level bargaining, sector‑level bargaining) separately, the following regression is run:

$l o g (w_{i b}) = x_{i b} β_{b} + ε_{i b} .$

The wage of worker $i$ is measured per hour, and weights in the survey are used to better align the sample with the actual working population. Control variables, $x_{i b}$ , include dummies for age, gender, education, firm size, contract type (permanent or temporary), job tenure, industry and occupation. A few control variables are not available for some countries. Comparing estimated coefficients, $\hat{β}$ , for the same variables allows examining, for instance, differences in the gender gap or education premium between workers covered by collective bargaining and those who are not.

The empirical approach to adjust a wage statistic, $f (w_{b})$ , such as the average wage or D9/D1‑ratio, for compositional differences is as follows. Workers whose wages are not governed by collective bargaining, $b_{1}$ , are taken as the benchmark. In Belgium, France and Spain where data for workers not covered are not available, firm‑level bargaining is taken as the benchmark. The counterfactual wage of worker $i$ covered by collective bargaining, $b_{2}$ , is then calculated as

$l o g (w_{i b_{2}}^{x}) = x_{i b_{2}} {\hat{β}}_{b_{1}} + {\hat{ε}}_{i b_{1}} ({\hat{p}}_{i b_{2}} | x_{b_{2}})$ ,

with the last expression denoting the residual from the regression for workers not covered that is at the same percentile ${\hat{p}}_{i b_{2}}$ as worker $i$ ’s residual. The assumption is that, had a covered worker become uncovered while maintaining the same characteristics, the new residual of the worker would have belonged to the same percentile of the distribution of the residuals in the uncovered sector as the percentile the old residual belonged to in the distribution of the covered sector.

The difference in the desired wage statistic using the raw data is

$f (w_{b_{2}}) - f (w_{b_{1}})$ ,

which after adjusting for differences in composition becomes

$f (w_{b_{2}}) - f (w_{b_{2}}^{x})$ .

On average, earnings dispersion is lower with collective bargaining, when accounting for compositional differences (Figure 3.4). In the first group of countries where all three bargaining levels co‑exist, wage dispersion is highest among workers not covered by collective bargaining, followed by firm‑level and then sector‑level bargaining. By contrast, for the second group of countries where there is no sector‑level bargaining, wage dispersion among workers covered and those not, at least on average, is the same. A cross‑country comparison of the averages for the first two groups suggests that firm‑level bargaining is only effective in lowering wage dispersion when it comes on top of sector‑level bargaining. One possible explanation for this may be that companies characterised by firm‑level bargaining are in most cases also covered by sector‑level bargaining. Firm‑level bargaining may then not fully undo the inequality reduction due to sector‑level bargaining. In five countries (Hungary, Korea, Mexico, Norway and Portugal), the results go in the opposite direction. Nevertheless, overall, they appear consistent with those in the previous section which suggested that the economy‑wide distribution of wages is less equal in systems without scope for sector‑ or higher‑level bargaining (see Figure 3.3).

3.3.2. What accounts for the lower wage dispersion with collective bargaining?

Empirically, two categories of factors may account for the lower wage dispersion with collective bargaining: differences in the returns to characteristics (technically, the coefficients) and unexplained differences (the residual). This issue is investigated here by focusing on the two largest country groups for which data are available: the first with seven countries (which have three collective bargaining types) and the second with nine countries (which have two types: firm‑level bargaining and no collective agreement).

Four characteristics are studied to analyse the extent to which collective bargaining may compress their returns (Figure 3.5): a higher age, being male, a better education and seniority at work (measured by the number of years in the firm). All four typically exhibit increasing returns in micro‑level analyses, meaning that older, male, more educated and more experienced workers tend to earn more.

Compared with uncovered workers, the age premium is lower for people who are covered by firm‑level bargaining and even more so for those covered by sector‑level bargaining. Collective bargaining thus lowers wage inequality, in part by flattening the distribution of wages among people of different ages. By contrast, no evidence is detected that collective bargaining compresses the gender pay gap on average. If anything, men’s wage premium over women is slightly larger among workers covered by collective bargaining than those who are not.

The benefit of better education, in terms of higher pay, is lower with firm‑ and even more so sector‑level bargaining. A lower payoff from education, while reducing inequality, may also negatively affect productivity growth if this leads to lower investment in education. Finally, monetary rewards for seniority are also found to be an explanatory factor for why in countries with firm‑ and sector‑level bargaining wage dispersion is lower with collective bargaining than without, although the picture is the opposite in the group of countries with only firm‑level bargaining.

Even if reduced returns to age, education and seniority go some way towards explaining the lower wage dispersion with collective bargaining, overall it is mainly unobserved factors that reduce wage dispersion (Figure 3.6).

Figure 3.4. Composition‑adjusted wage dispersion by level of collective bargaining

3.3.3. Collective bargaining wage premium

This section has so far focused on wage dispersion within each bargaining type, i.e. wage dispersion among workers not covered by collective agreements and wage dispersion among workers covered by collective bargaining. Results can be interpreted as illustrating what would happen to wage inequality if in a country collective bargaining moved from inexistent to full coverage or from full to no coverage. This naturally seems extreme. When considering less extreme scenarios, account should also be taken of pay differences which may exist between workers covered by collective agreements and those not. Such pay differences are sometimes referred to as the collective bargaining wage premium.

Figure 3.5. Wage returns by level of collective bargaining

Workers are paid more with firm‑level bargaining, while sector‑level bargaining is not associated with relatively higher pay on average (Figure 3.7). This is not surprising as firm‑level negotiations can often only raise wages relative to sector‑level agreements. The differences in wages may also signal higher productivity in companies with firm‑level bargaining. The results are in line with a large body of the literature which finds that sector‑level bargaining is not linked with higher wages on average – see Dell’Aringa and Lucifora (1994[36]), Hartog, Leuven and Teulings (2002[37]), Rycx (2003[38]) and Cardoso and Portugal (2005[39]). The variation for sector‑level bargaining across countries is large, with a positive premium in some countries and a negative one in others. By contrast, wages of workers covered by firm‑level agreements are higher than those of uncovered workers in all countries except Latvia. In countries with low collective bargaining coverage, wage inequality can thus rise as firm‑level bargaining expands to include more workers, even if wage dispersion is smaller among workers covered by firm‑level bargaining than among those who are not.

Figure 3.6. Accounting for the differences in wage dispersion with and without collective bargaining

3.3.4. Collective bargaining and wage‑productivity misalignment

The analysis above has shown that collective bargaining tends to be associated with lower wage dispersion. The stronger wage compression with collective bargaining may reflect a more pronounced misalignment of wages with a firm’s or sector’s productivity, because centralisation or co‑ordination of negotiations makes pay in part determined by factors other than the firm or sector. In this sense, lower wage flexibility at the sub‑national level and lower wage dispersion could be seen as two sides of the same coin.20

The extent to which wages in a particular firm or sector correspond to the productivity in the firm or sector can be estimated with available data. By comparing countries with one another, the analysis that follows provides suggestive evidence that wages tend to be less aligned with labour productivity in countries where collective bargaining institutions have a more important role.21

Figure 3.7. Wage premium by level of collective bargaining

The analysis relies on insights using sector‑level data, examining the correlation between wages and productivity across sectors. Sector‑level data have the advantage that they cover the same number of units (i.e. sectors) for many countries over a long period of time. They are available for 27 OECD countries (plus Lithuania) from 1980 to 2014, covering 24 sectors. Box 3.2 describes the estimation approach.

Countries show marked differences in the degree to which wages and productivity are aligned for different sectors (Figure 3.8).22 The correlation is relatively high in many Eastern European countries (the Czech Republic, Estonia, Hungary, Latvia, Lithuania and Poland). It is also high in Korea, Portugal, Spain and the United Kingdom. By contrast, misalignments of wages with productivity appear to be strong in some Nordic countries (Denmark, Finland, Norway and Sweden), as well as Belgium, Greece, Luxembourg and Slovenia.

Box 3.2. Empirical approach to estimate the role of collective bargaining for wage‑productivity alignment

The alignment of wages with productivity is estimated through the strength of the correlation of the hourly wage rate with hourly labour productivity. The baseline regression uses sector‑level data and is as follows:

$l o g (w_{s c t}) = β_{c} l o g ({L P}_{s c t}) + α_{c t} + ε_{s c t}$ .

If wages, $w_{s c t}$ , and labour productivity, ${L P}_{s c t}$ , are positively correlated across sectors in country $c$ , $β_{c} > 0$ . The inclusion of the country‑year fixed effects, $α_{c t}$ , ensures comparing sector $s_{1}$ in a given country and year to other sectors in the same country and year. When investigating the relative roles of wage co‑ordination, centralisation and bargaining coverage, productivity is interacted with indicators for co‑ordination, centralisation and bargaining coverage.

The approach comes down to studying the role of collective bargaining for the distribution across sectors of the labour share, i.e. the share of value added going to workers. Pak and Schwellnus (forthcoming[40]) use sector‑level data to study the role of, among others, collective bargaining for the size of the labour share.

Figure 3.8. Elasticity of wages with respect to productivity across sectors: Country estimates

Several features of collective bargaining could affect the flexibility of firms in a sector to set wages in line with sector‑level productivity. Possibly the most natural candidate is wage co‑ordination across sectors, which actively seeks to limit differences in pay across sectors by establishing some cross‑sectoral wage norm for the purposes of collective bargaining. This is borne out in the data. Wages and productivity at the sector level are more aligned in countries without co‑ordination in wage‑setting. The difference is stark: On average across countries, the elasticity of wages with respect to productivity is 0.26 without and 0.16 with cross‑sector wage co‑ordination. This means that if productivity is 10% higher in some sector than another, wages tend to be 2.6% higher in this sector in non‑co‑ordination countries and 1.6% higher in co‑ordination countries.23

Wage co‑ordination is correlated with other features of collective bargaining such as coverage rates and the degree of centralisation. Centralisation may matter for wage‑productivity alignments because in industries with stronger trade unions workers may appropriate a greater share of the production surplus. Coverage may matter since without coverage wage co‑ordination and centralisation have no role. Moreover, in countries with no explicit wage co‑ordination but high coverage and centralised bargaining, negotiations in one sector may nevertheless serve as an implicit benchmark for others. Thus, some cross‑sector co‑ordination can happen even if co‑ordination is not institutionalised.

Sectoral wages are set less in line with sectoral productivity in systems with cross‑sector wage co‑ordination, even when differences in coverage rates are accounted, or controlled, for (Figure 3.9). As coverage rates tend to be higher in countries with wage co‑ordination, taking account of this reduces the difference in the wage‑productivity correlation between countries with and without co‑ordination. Centralisation, too, is found to be related with a weaker alignment between wages and productivity across sectors – see (OECD, 2018[21]) for the full regression results.

Co‑ordination, collective bargaining coverage and centralisation jointly predict lower wage‑productivity alignment. The empirical evidence, which is based on cross‑country comparisons, is not enough for proving that such features of collective bargaining are the driving, or causal, factors behind the differences across countries in wage‑productivity alignments. It is nonetheless suggestive that collective bargaining has an important role for how wages in a sector correspond to sector performance.

The analysis in this subsection has focused on sector‑level data. In related work, and in line with the results in this section, Berlingieri, Blanchenay and Criscuolo (2017[41]) show, based on harmonised micro‑aggregated firm‑level data covering many countries, that trade union density and co‑ordination in wage‑setting tend to be associated with a lower dispersion of average wages across firms and a weaker link between productivity and average wage dispersion across firms in the same sector.

This section has used data on actual wages in different sectors in the economy. Typically, however, collective bargaining sets negotiated wages which may depart from actual wages. In the euro area, negotiated wages have grown at a lower rate since 2000 than actual wages and labour productivity (Box 3.3). Negotiated wages have tended to follow productivity only with a considerable lag, which appears to have induced a misalignment of wage and productivity growth rates at the macroeconomic level in the short run.

Figure 3.9. Elasticity of wages with respect to productivity across sectors: The role of collective bargaining

Overall, in countries where wage co‑ordination has an important role or wages are more centralised at the sector level, the correlation of wages with productivity at the sub‑national level is weaker. This suggests that wage co‑ordination “works”, in the sense that it co‑ordinates wages, and by partially delinking wages from productivity may end up in a less dispersed wage distribution. Centralisation and co‑ordination may also affect how wages can respond to individual firm performance. In the longer term, such delinking of wages from productivity could have potentially important implications for productivity growth. It could reduce incentives for workers to innovate, work hard and move to a better‑paid job. However, stronger misalignments of wages from productivity do not need to have such negative effects; for example, they may even increase innovation incentives, if firms would reap the full benefits of productivity gains. Box 3.4 summarises the existing literature on collective bargaining and productivity. It also provides exploratory evidence that certain forms of sector‑level bargaining may come at the expense of lower productivity growth within sectors.

Box 3.3. Negotiated wages in euro area countries

Analyses on wage developments and collective bargaining almost exclusively focus on actual wages. However, collective agreements usually define contractual wages which in most countries apply only to a subset of workers. Actual wages also reflect the trends among non‑covered workers as well as supplements at the company, plant or individual level (such as bonus or overtime pay). The difference between the actual wage outcome and the negotiated wage is generally referred to as the “wage drift”, i.e. the movement of wages above the negotiated floor.

Data on negotiated wages are not easily available and when available not easily comparable. The European Central Bank (ECB) provides “experimental” statistics on the evolution of negotiated wages for the euro area as a whole (European Central Bank, 2002[42]),24 while the Collectively Agreed Wages In Europe (CAWIE) database developed by the European network of Trade Union related Research Institutes (TURI) provides the underlying national statistics.25 Similar data are also collected and published by Eurofound (2017[43]). Figure 3.10 shows the trends in negotiated wages, actual wages and labour productivity in real terms for the euro area as a whole from 2000 to 2016 using the ECB data. The aggregate data show that, on average, negotiated wage growth has been relatively limited, or at least well below productivity growth both before and after the crisis. Actual wage growth exceeded negotiated wage growth but remained below productivity growth, reducing the labour share. Only during 2008‑09 negotiated (and actual) wage growth increased above productivity growth due to the unexpected deflationary shock of the crisis and the staggering of collective agreements. Staggering refers to the inability to renegotiate agreements signed under more favourable economic conditions, which can amplify the aggregate shock, as shown by Diez‑Catalan and Villanueva (2015[44]) for Spain.

Country‑specific data (OECD, 2018[21]) show that in all countries (except in Italy, as a result of dismal productivity growth, not “excessive” wage increases) negotiated wages have grown in line with, or often less than, labour productivity growth, apart from 2008‑09. Interestingly, negotiated wages in the Netherlands have barely moved since 2000 – in fact, negotiated wages in the Netherlands are practically unchanged since the 1970s in real terms (de Beer and Keune, 2017[45]) – but thanks to a sizeable wage drift actual wages have grown in line with productivity. By contrast, in Germany actual wages have grown considerably less than productivity and less than negotiated wages, showing a negative “wage drift”. This unique trend of negative wage drift (at least among the European countries for which data are available) means that actual wages are not bound by negotiated wages, which is probably the result of decreasing bargaining coverage in Germany and the use of opening clauses which allow companies to deviate from sector‑level agreements (Schulten, 2013[46]).

Figure 3.10. Negotiated wages in the euro area

3.4. The role of workplace representation for the quality of the working environment

While the interest of past work on collective bargaining has to a large extent focused on its role as a “wage‑setting institution”, much of the content of collective agreements is dedicated to non‑wage working conditions, such as employment protection, working time, health and safety, training and social protection. This section provides some empirical evidence on the role of employee representation at the workplace for the quality of the working environment as defined by the OECD/G20 Job Quality Framework (OECD, 2014[47]).

At least since the seminal book “What do unions do?” by Freeman and Medoff (1984[48]), trade unions and collective bargaining are seen not only as institutional means for articulating and pressing demands for higher wages, but also as vehicles for collective communication and exchange between workers and their employers. Unions can influence job quality directly (by negotiating non‑wage working conditions in collective agreements) or indirectly (by providing workers with a platform to voice their concerns and requests).

Box 3.4. Collective bargaining and productivity growth

How does collective bargaining influence productivity? Theory suggests that effects could go either way. On the one hand, collective bargaining can increase aggregate productivity by setting higher wage floors (and making it more difficult to cut costs through lower wages) which may force unproductive firms to exit the market (Braun, 2011[49]). More rigid wages may also increase the incentives of the firms’ owners to innovate, as they would reap the full benefits of productivity gains – see Acemoglu and Pischke (1999[50]) and Haucap and Wey (2004[51]). Other ways through which collective bargaining could promote productivity growth are higher “efficiency” wages, better non‑wage working conditions and the possibility for workers to voice concerns.

On the other hand, a more compressed wage structure may reduce the incentives to work hard and move to a more productive firm, harming firm productivity and the efficient reallocation of workers. Union power could also allow workers appropriating the benefits of investments by employers, giving rise to the so‑called “hold‑up” problem (Malcomson, 1997[52]) and reducing investment incentives for firms. Further, limitations to adjustments in the organisation of work (such as in working time, shifts or leave) could lower productivity. Finally, decentralisation of bargaining may promote productivity through a more frequent use of incentive schemes (such as performance pay).

The empirical literature has examined quite extensively the role of union coverage for productivity. According to a meta‑analysis (Doucouliagos, Freeman and Laroche, 2017[53]), the evidence overall suggests that union coverage increases productivity in non‑manufacturing industries, but not in manufacturing industries. Some papers studied empirically the relevance of collective bargaining for the “hold‑up” problem and investment, with inconclusive results overall. Card, Devicienti and Maida (2014[54]), using matched employer‑employee data from Italy’s Veneto region, obtain little evidence of hold‑up. Based on sector‑level data for OECD countries, Cardullo, Conti and Sulis (2015[55]) find that union coverage reduces investment in sunk‑capital‑intensive industries relative to others.

The results in this section suggest that certain collective bargaining systems can be associated with stronger misalignments of pay and productivity, with possible consequences for productivity growth. However, few papers have directly studied the role of different features of bargaining systems, such as centralisation or co‑ordination, for productivity, in part due to lack of suitable data. Andreasson (2017[56]) finds that in Sweden companies for which wage‑setting is more decentralised have higher value added per employee and higher productivity. Similarly, Garnero, Rycx and Terraz (2018[57]) obtain a positive link between decentralised bargaining and productivity, using Belgian firm‑level data. For developing countries, Lamarche (2013[58]; 2015[59]) argues that firm‑ instead of sector‑level agreements could yield productivity gains. However, Hibbs and Locking (2000[60]) document that decentralisation in Sweden in the 1980s reduced aggregate productivity growth by slowing down the exit of inefficient firms. Taking the evidence from these papers together, decentralisation appears to improve firm productivity, while it may slow down the cleansing effect of higher wages and therefore, due to composition effects, not translate in higher aggregate productivity growth.

To study the links of centralisation and co‑ordination with productivity growth, the following variant of the sector‑level approach by Rajan and Zingales (1998[61]) is used. The premise is that collective bargaining reforms tend to affect sectors more where collective bargaining coverage is high and therefore productivity growth in these sectors should be affected more. The estimating equation is:

${P G}_{s c t} = {β_{1} C o v e r a g e}_{s c} \times {C e n t r a l i s a t i o n}_{c t} + {β_{2} C o v e r a g e}_{s c} \times {C o o r d i n a t i o n}_{c t} + P_{s c t - 1} + α_{c t} + γ_{s c} + ε_{s c t} .$

The dependent variable, ${P G}_{s c t}$ , indicates productivity growth in sector $s$ , country $c$ and year $t$ . The lagged level of productivity, $P_{s c t - 1}$ , accounts for convergence. Regressions are run for total factor and labour productivity. Estimation of the coefficients of interest, $β$ , requires variation in coverage across sectors and centralisation or co‑ordination across time. This is the case for seven countries with available data: Austria, Denmark, Finland, France, Germany, the Netherlands and Spain.

Centralisation is linked with lower productivity growth, both for total factor and labour productivity – the full set of empirical results is available in OECD (2018[21]). Productivity growth is higher in high compared with low coverage sectors when collective bargaining is more decentralised. No association is estimated for wage co‑ordination. The estimation, which relies on sector comparisons, does not readily allow conclusions on aggregate productivity growth. It also does not rule out issues of endogeneity, despite relying only on within‑country variation. Yet, the results suggest that centralised bargaining may come at the expense of lower productivity growth, although analysis beyond these empirical explorations is needed to examine the links between bargaining regimes and productivity further.

The literature has focused mostly on job satisfaction, in particular to understand the apparent puzzle highlighted by Freeman and Medoff of a negative correlation between job satisfaction and unionisation. Ensuing studies confirmed this negative link but came to the conclusion that it is a selection rather than a causal effect – see Doucouliagos, Freeman and Laroche (2017[53]) who review 59 studies on the topic. People enter a union because they are less satisfied; it is not unions that make them unhappy: poor job quality and bad management are strongly linked with the desire for union representation in the United Kingdom and the United States (Bryson and Freeman, 2013[62]). Moreover, as Bryson and Green (2015[63]) note, by offering employees an opportunity to address poor job quality via bargaining and worker voice, dissatisfied union employees are less likely to quit than dissatisfied non‑union employees – see also Box 4.6 in OECD (2017[1]). On the other hand, relatively little is known about the role of unions and collective bargaining for intrinsic measures of job quality. Green and Whitfield (2009[64]) find that employees in workplaces with recognised unions are more likely to say that they have no time to complete tasks and are less likely to agree that they have influence over the pace of work and how tasks are done. Bryson and Green (2015[63]) argue that unionised jobs are subject to lower task discretion but higher skill use and increased exposure to a learning requirement.

The analysis in this section takes advantage of the information provided by the European Working Conditions Survey for 25 OECD countries (plus Lithuania) to study the link between the presence of a recognised form of employee representation (trade union, works council or similar committee representing employees) and the quality of the working environment, one of the three dimensions of the OECD/G20 Job Quality Framework. The quality of the working environment captures non‑economic aspects of jobs, including the nature and content of the work performed, working‑time arrangements and workplace relationships. It is measured as the incidence of job strain, which occurs when workers face high job demands with low job resources. The job demands considered are: i) physical demands; ii) work intensity; and iii) inflexibility of working hours; while job resources consist of: i) task discretion and autonomy; ii) training; and iii) perceived opportunity for career advancement.

The results show that the presence of a recognised form of employee representation, on average, is associated with lower job strain and hence a better quality of the working environment (Figure 3.11). In particular, the effect is the result of a negative link between the presence of a recognised form of employee representation and the intensity of the work (working long hours) and a positive correlation with the number of days spent in training over the last 12 months and the perceived prospects for career advancement. No significant link is found with the physical demands (the probability of carrying or moving heavy loads), the inflexibility of working hours and task discretion. These regressions control for age, education, gender, temporary contract, occupation, tenure, establishment size, industry and country dummies. The industry dummies ensure that the results are not driven by the working environment being of better quality in highly unionised sectors, independent of employee representation.

Although not necessarily providing causal evidence, these results suggest that employee representation at the workplace can play a significant role in improving job quality, in particular by reducing work intensity and increasing training opportunities and prospects for career advancement. Indeed, in all countries, even those where sector‑level agreements still play a prominent role, bargaining and consultation at the workplace level are key to voice workers’ concern and find viable and pragmatic solutions to improve the quality of the working environment. These results also confirm the importance of looking at collective bargaining beyond its role as a “wage‑setting institution”. Nevertheless, more research in this area is needed and subsequent OECD work will analyse the role of collective bargaining for job quality in further detail.

3.5. Balancing inclusiveness and flexibility in collective bargaining systems

The future of collective bargaining, its relevance and function, will depend on how it will adapt to changing labour market conditions. Social partners and governments should aim to reap the benefits of collective bargaining for employment and inclusiveness while avoiding that collective bargaining becomes a straitjacket, by ensuring that firms are able to adjust wages and working time when their business situation requires it.

This chapter has put forward new evidence based on a range of data sources (country‑, sector‑, firm‑ and worker‑level data) that suggests that, to a certain extent, collective bargaining has historically meant a trade‑off between inclusiveness and flexibility. In countries and periods when collective bargaining was not confined to firm‑level bargaining (or simply absent), wage inequality has been lower and employment, including of vulnerable groups, has been higher. Wage co‑ordination can also have the benefit of strengthening the resilience of the economy against business‑cycle downturns (OECD, 2017[1]). This chapter and the literature, however, have also provided evidence that more centralised bargaining at the sector or national level may come at the cost of reduced flexibility to adjust pay and working conditions in line with business conditions for the individual sector or firm, with potentially adverse implications for productivity.

Figure 3.11. Employee representation is linked with a higher‑quality work environment

This section discusses possible pathways going forward, through the combined use of tools that help promote inclusiveness (Section 3.5.1) and tools that help promote flexibility (Section 3.5.2). Inclusiveness in this context is to a large extent about being represented; hence, a strong emphasis is placed on broad‑based collective bargaining and social dialogue. Flexibility can be attained in many ways, but the challenge is to nest it within systems that deliver broad‑based coverage. Organised decentralisation (which leaves space for firm‑level agreements to set the terms of employment within a broader framework of sector‑level agreements), high levels of representation at the local level and wage co‑ordination across sectors are among the elements that hold most promise to effectively balance inclusiveness with flexibility.

3.5.1. Promoting broad‑based collective bargaining and social dialogue

Broad‑based employer and employee organisations tend to be the best way for countries to attain high collective bargaining coverage

For collective bargaining to have meaningful macroeconomic effects, it needs to involve and cover a large share of workers and companies. Well‑organised social partners – unions and employer organisations with a broad support base – are often the condition for attaining high coverage. Declining coverage rates in several countries have reduced the potential role of collective bargaining for promoting earnings equality and social cohesion. In countries where coverage has held up but trade union density has declined, questions about the legitimacy and representativeness of trade unions are sometimes raised.

Currently, the union membership rate is above 50% only in OECD countries with the so‑called “Ghent system”, i.e. where union‑affiliated institutions administer unemployment benefits (Denmark, Finland, Iceland, Sweden and partly Belgium), and in Norway. However, even the Ghent system has been gradually eroded through the development of private insurance funds (OECD, 2017[1]). The use of administrative extensions and erga omnes clauses that extend collective agreements to non‑unionised workers and non‑covered companies may have weakened the incentives to join a union (as non‑union members enjoy the same rights as union members). Several countries use fiscal incentives to promote trade union membership. Norway, for instance, subsidises union membership through tax breaks. Barth, Bryson and Dale‑Olsen (2017[65]) show that the increase in the generosity of the subsidy from 7% of the average membership fee in 2001 to 21% in 2012 was important for slowing the decline in trade union density. Other examples are Sweden, which has just reintroduced a subsidy for union members that had been abolished in 2007, and Finland, where union membership fees and employer confederation fees are tax‑deductible.

Affiliation to employer organisations is significantly higher (50% on average) and has been quite stable over the last few decades, in contrast to the strong decline in union membership. An extreme case is Austria where membership to the sectoral branch of the chamber of commerce (Wirtschaftskammer Österreich or WKÖ) in each region (Bundesland) is compulsory for all companies. Sector‑level agreements signed at the regional or in some cases national level therefore necessarily cover all firms in the sector, obviating the potential need of formal extension measures by the government. Studying the trends in 13 European countries, Brandl and Lehr (2016[66]) argue that employer organisations have been able to remain relatively strong by adapting their organisational structures and activities to the changing needs of businesses. Moreover, the use of administrative extensions of collective agreements in many countries strengthens the incentives for membership to employer organisations since the terms of agreements also apply to non‑members (whose objectives may be different to those of members).

Even in countries where company‑level bargaining plays a significant role, it is often mostly confined to large and medium‑sized enterprises. To extend social dialogue to all segments of society, some governments have tried to promote social dialogue in small firms. One example is the 2017 labour market reform in France. This introduced the possibility for companies with less than 20 employees to have a company‑level agreement even in the absence of a union delegate, provided at least two‑thirds of employees support the agreement. It also allowed companies with 20 to 50 employees to negotiate with an elected representative even if not explicitly mandated by the unions. Unions fear that these initiatives to promote social dialogue in small businesses will in fact lead to abuses by employers who have stronger bargaining power than employees. However, in France the role of firm‑level bargaining remains quite tightly defined by sector‑level agreements which, very often (at least until the 2017 reform), explicitly block renegotiations and derogations at the firm level on most topics. Another example comes from Italy, where the government in 2017 increased tax incentives to promote negotiations on performance‑related pay and welfare provisions at the firm level with the stated aim of extending firm‑level bargaining also to medium and small firms and strengthen the link between productivity and wage increases at the firm level (D’Amuri and Nizzi, 2017[67]).

The rise of non‑standard and new forms of work represents a major challenge for collective bargaining systems. The meaning of “employer”, “employee” and “place of work” becomes increasingly blurred, impeding the ways in which employers and employees have negotiated traditionally. Unions are making efforts to reach out to workers in new forms of work.26 Non‑union labour movements to defend workers’ interests are also emerging.27 Technology and social media help workers organise by facilitating building communities and engaging in protests, boycotts and petitions. Moreover, direct forms of voice such as regular meetings, team briefings and problem‑solving groups may contribute to fill in for unions and representative bodies (Bryson, Forth and George, 2012[68]; Bryson et al., 2017[69]).

Such alternative forms of collective organisation are a tool for preserving some form of workers’ voice at times of rapid changes to work relationships. But these new bodies are often not entitled or may not even want to engage in direct negotiations with employers. Hence, some employers fear that these alternative forms of organisation represent a threat to the traditional forms of collective bargaining that have been based on negotiations and industrial peace. Moreover, some restrictions to worker and employer organisation may come from labour and competition laws which are often based on traditional concepts of “employer” and “employee”. For instance, in the case of platform workers, but also of the self‑employed more generally, a key challenge is that bargaining collectively on wages would be against the traditional interpretation of competition rules which tend to consider them as “undertakings” (Daskalova, 2017[70]). This highlights the importance of legal reform to clarify the scope for collective bargaining and support the emergence of new forms of social dialogue.

Extensions can be an alternative to support wide coverage of collective agreements when social partners are weak, but have to be well regulated

In the absence of broad‑based social partners, another way of making collective bargaining coverage more inclusive is through the use of administrative extensions. These extend the coverage of collective agreements beyond the members of the signatory unions and employer organisations to all workers and firms in a sector. Extensions level the playing field across firms in a sector and reduce the burden associated with lengthy and detailed negotiations, which can be particularly relevant for small firms. In addition, they support the sustainability of “public goods”, including sectoral training and mobility schemes funded by collective agreements. However, extensions can also have downsides, as they may be used as a tool for unfair competition and harm the economic prospects of those not represented at the negotiation table, such as start‑ups, small firms or vulnerable workers – see Haucap, Pauly and Wey (2001[71]), Magruder (2012[72]) and Hijzen and Martins (2016[73]).

To avoid or minimise the potential negative effects, it is important that the parties negotiating the agreement represent the interests of a wide range of firms and workers and leave some “escape valves” for specific cases. This can be achieved by requiring reasonable representativeness criteria and a meaningful test of public interest, while establishing well‑defined procedures for exemptions and opt‑outs in case of serious economic hardship (OECD, 2017[1]).28

As discussed above, extensions may weaken incentives for trade union membership. This, in turn, may have adverse consequences for the quality of labour relations but also make it harder to introduce more flexibility in the system through the use of decentralised organisation (see Section 3.5.2). Extensions therefore can play a useful role for ensuring that all employees in a sector are covered but do not provide a one‑to‑one substitute for collective organisation.

Extensions of collective agreements can only be used in countries with some form of sector‑level agreements. The case of Australia, where a government body determines minimum standards for each sector, represents an alternative approach for ensuring basic terms of employment among all firms in a sector (Box 3.5). The main challenge of this system is the difficulty to establish appropriate sectoral standards, as this presupposes detailed knowledge of the sector which may often require a strong involvement of the social partners.

3.5.2. Ensuring that collective bargaining systems are able to respond to changing and unexpected challenges

Collective bargaining and social dialogue should also support strong economic outcomes, which may require ensuring that working conditions are sufficiently well‑aligned with economic conditions. This can be achieved by allowing some degree of flexibility at the firm or worker level or through the use of mechanisms to co‑ordinate bargaining outcomes across sectors and firms with a focus on macroeconomic performance. Moreover, social partners can play a key role in supporting job transitions and ensuring that workers are equipped with the skills needed.

Leaving more scope for company‑level bargaining does not require disavowing sector‑level bargaining

Debates on collective bargaining have largely focused on the level of negotiation. The introduction of flexibility in predominantly sector‑level systems has therefore often been considered as requiring a shift from sector‑ to firm‑level bargaining. While such a shift would indeed provide more flexibility to firms, it may also induce a decline in coverage, undermining the inclusiveness of the system.29 However, experiences from a number of countries show that less radical options, typically referred to under the heading of “organised decentralisation” (Traxler, 1995[74]), are available. These have the advantage of preserving sector‑level bargaining, while enabling a closer link between productivity and working conditions at the firm level.

Organised decentralisation occurs within the framework provided by sector‑level agreements, while explicitly allowing elements of working conditions and work organisation to be negotiated or determined at the company or even worker level under certain conditions through specific procedures. In principle, the sector‑level framework should preserve collective bargaining coverage and give firms and workers more freedom to set working conditions. Decentralisation usually takes place through company collective agreements with trade unions, but in some cases also through agreements by the management with non‑union worker representatives (such as works councils) or individual employees. For Traxler (1995[74]), who coined the term, organised decentralisation stands in contrast to “disorganised decentralisation”, a system where firm‑level agreements entirely replace sector‑level agreements and many workers are left without representation.

Organised decentralisation can take several forms – see Ibsen and Keune (forthcoming[75]) for more details. In a first model, sector‑level agreements provide a general framework but leave room for lower‑level agreements to tailor the terms of employment. This approach is thus predicated on multi‑level bargaining and strong local representation (or extensions) and can be found in Denmark, Norway and Sweden, for instance. In these countries, the favourability principle is not set in the law but entirely left to the bargaining parties who decide whether and in which case it applies.

Box 3.5. An alternative to sector‑level bargaining? The case of Modern Awards in Australia

Australia¹ does not have sector‑level bargaining, but a form of industry‑ or occupation‑wide regulations, so‑called Modern Awards, which set industry‑specific wage floors that vary by skill level. While some 36% of employees are covered directly by collective agreements, another 23% are covered by awards only. That is, around three‑fifths of employees have wages that are not determined by the employer and the individual employee but instead either through collective bargaining or an external regulator. This is well above the average rate of collective bargaining coverage across the OECD. The system has been in place for several decades and a similar organisational arrangement was in place in New Zealand until 1991.

Awards in Australia set sectoral minimum wages that vary according to the skill level of the job, with provisions for night and weekend premiums (“penalty rates”), overtime pay, working time and other dimensions of working conditions. A Modern Award covers a whole industry in most states and territories (some states have retained their workplace relations practices). Australia also has a “national minimum wage”, but this is usually fixed at the lowest rate in any award and adjusted every year at the same time as the rest of the award pay structure.

Awards are set by a federal tribunal, the Fair Work Commission, whose members are chosen by the government and selected among employer bodies, unions, lawyers and government officials. Unions and employers make submissions on the content of Modern Awards and then the Fair Work Commission decides. The Commission is also tasked with revising, after consultations, wage rates (recently every four years). Outside these reviews, the relationship between awards is quite stable and award wage increases in one industry rarely outpace, or fall behind, those in other industries.

With the support of employees, employers can deviate from the terms set in the awards, in particular those relating to working hours, through specified processes, but workers should still be better off overall. Mechanisms exist to adjust to temporary, special circumstances, but these are not widely used.

Modern Awards do not represent a form of sector‑level bargaining, but they create a set of industry‑specific skill‑varying wage floors which, while significantly different, can be compared with the use of administrative extensions in countries with sector‑level bargaining.

Note:

1. This box has been prepared in collaboration with David Peetz (Griffith University).

In this first form of organised decentralisation, sector‑level agreements can take the following forms or a mix of them:

Minimum agreements: They set minimum standards but leave the setting of actual wages and working conditions up to company agreements, with the condition that they respect the minimum standards.
Corridor agreements: They set the boundaries (minimum and maximum) between which the terms of employment in company‑level agreements can be set.
Default agreements: They set wages and working conditions, but these come only into force in case local parties do not find an agreement. Hence, company agreements can also set wages and working conditions below the default levels.
Figureless agreements: They contain no wage standards which are entirely left to the company level.

In practice, few “pure” agreements exist, as even default agreements may include some common standards.

Sector‑level agreements can also allow for a different type of decentralisation where working conditions are not set by a company agreement but by individual workers. Such à‑la‑carte arrangements offer individuals the option to exchange, within predefined limits, wages, working time and free time. In some cases, company‑level agreements introduce this option for the workforce (“mandated à‑la‑carte”). In others, this is done in the sector‑level agreement, regardless of a company‑level agreement (“un‑mandated”). À‑la‑carte arrangements tend to be important in the Netherlands where the scope for bargaining at the firm in addition to the sector level tends to be limited beyond certain industries and larger firms, given relatively low levels of local representation (Visser, 2016[76]).

In a second model of organised decentralisation, notably present in Germany and Austria, sector‑level agreements set the standard terms of employment and allow for exceptions to the favourability principle via opt‑out or derogation clauses. These clauses, often also known as competition, hardship or opening clauses, allow company‑level agreements to deviate downwards from wages and working conditions set in a sector‑level agreement. Traditionally, such clauses were intended to apply to companies in serious economic problems for a temporary time period under predefined conditions.30 Since 2004 in Germany, opening clauses have been used more generally by companies to reduce labour costs. Some clauses allow companies to postpone or cancel parts of the sector‑level agreement, notably wage increases, depending on the type or economic situation of the company.

In Germany, opening clauses are usually contingent upon an initial agreement between the signatory social partners in the industry or region. There is some leeway in designing the clause, in terms of what substantive issues it includes (wages, working time, employment guarantees, etc.) and under what conditions and according to which procedures the derogation can be made. According to Schulten and Bispinck (2017[77]), company‑level parties (management and works council) usually make a joint application to the signatory parties at the sector level which take the final decision. It is, however, also possible to derogate the final decision‑making competence to the company‑level parties. According to a recent study (Amlinger and Bispinck, 2016[78]), derogation agreements concern mainly working time (14% of all companies covered by a collective agreement), wages (10%), allowances (10%), annual bonuses (10%) and apprenticeship pay (3%). The clauses in sectoral agreements mainly define the rules and conditions under which the derogation can be made, in particular:

Companies have to disclose their financial information to justify a derogation.
Parties at the company and industry level need to have the time to scrutinise the company’s financial status and the measures taken.
The duration of the derogation should be limited to ensure terms and conditions will return to the standards in the sectoral agreement.
Derogations are conditional on the safeguarding of jobs or investment plans to make the company more viable.

In addition to these bi‑partite procedures, unions have instated their own procedural requirements to avoid that derogations are agreed between local parties without workers getting something in exchange. According to Haipeter and Lehndorff (2014[79]) and Schulten and Bispinck (2017[77]), such internal union procedures have helped ensure a controlled use of opt‑outs. Baccaro and Benassi (2017[80]) are less optimistic, as control through internal procedures is only strong in some sectors, notably metalworking where unions are still strong locally. In the German retail sector, by contrast, decentralisation has been less “organised”, since unions and works councils are less prevalent and employers have rather opted for non‑binding membership to the employer association or no membership at all. With limited use of extensions, this has led to a substantial decrease in bargaining coverage.

Although strict conditions on the use of opening clauses help ensure that the decentralisation process remains organised, they may also severely diminish their role. Where opening clauses exist, opt‑outs are mostly used by large firms which are not necessarily those most in need. Small firms are often not able to make use of derogations and opt‑out clauses because they lack the capacity or worker representation. In a possibly extreme, but not totally unlikely scenario, opt‑outs with very strict conditions may become an anti‑competitive tool: Large firms could first negotiate relatively generous conditions in sector‑level agreements and then opt out to improve the terms in their favour, leaving competitors to bear the brunt of the generous terms they negotiated (OECD, 2017[1]).31

Overall, organised decentralisation appears to be able to increase the flexibility of the system, at least to some extent, without being accompanied by a substantial decline in the number of workers being represented. This is the case in countries where well‑regulated extensions help attain high collective bargaining coverage (as in the Netherlands), where membership of trade unions is high (as in the Nordic countries) and where employer association density is high (as in Austria). In Germany, the introduction of opening clauses has been accompanied by a reduced use of extensions and a decline in bargaining coverage. Special forms of membership with the employer association (so‑called Ohne Tarifbindung‑Mitgliedschaft), which do not bind companies to collective agreements, have added to the disengagement of employers from bargaining. The experience of Germany exemplifies the difficulty of organised decentralisation in a context where the degree of local representation is relatively weak. In such a context, the scope for opt‑out is limited for some firms, increasing incentives for disengaging from employer associations altogether, contributing to the decline in collective bargaining coverage. In the end, decentralisation in Germany represents a combination of organised and disorganised elements, as Visser (2016[76]) and Oberfichtner and Schnabel (2017[81]) also noted.

Several countries, especially in Southern Europe in the wake of the euro area crisis, introduced reforms to increase the flexibility of their collective bargaining systems along the lines of the German model. Examples are Spain (OECD, 2014[82]), Portugal (OECD, 2017[83]) and, to a different extent, Greece (OECD, 2018[84]). Special attention should be paid in the coming years to a careful evaluation of the introduction of opening clauses in countries which did not have them and their possible interaction with other elements of the collective bargaining system. The absence of strong worker representation at the local level in the form of unions or works councils limits the scope of such reforms and may increase incentives for firms to leave an employer association in the absence of extensions or to opt for less organised forms of collective bargaining.

Wage co‑ordination can strengthen flexibility to macroeconomic conditions

OECD (2012[18]) and OECD (2017[1]) have found that wage co‑ordination across sectors can contribute to labour market resilience in the aftermath of an economic downturn thanks to greater flexibility in earnings (i.e. working time and wages) and better employment outcomes based on wage moderation. The new evidence reported in Section 3.2 on the link between collective bargaining systems and employment provides further support for these results.

Co‑ordination works either by having sector‑ or firm‑level agreements following the guidelines fixed by peak‑level organisations or a social pact or by identifying a leading sector (or group of companies) which sets the mark for others to follow (“pattern bargaining”).

Guidelines by peak‑level organisations define norms or objectives that should be followed when bargaining at lower levels. They are present in several countries but they tend to be binding only in countries where peak‑level unions or employer organisations are relatively strong and centralised (in the Nordic countries and to a significantly lower extent in France and Italy).

A social pact is a peak‑level deal over a comprehensive policy package that is negotiated between the government, trade unions and employer organisations. By bringing all parties to the same table at the national level, it helps devising a widely shared response, especially in the case of macroeconomic shocks. This therefore represents a strong form of co‑ordination. As argued in OECD (2017[1]), peak‑level co‑ordination and social pacts can reduce transaction costs involved in the negotiation of temporary wage and working‑time reductions and make these more acceptable to workers by ensuring that they are widely shared.

The objective of pattern bargaining is to support macroeconomic performance based on international competitiveness, both in good and bad times. A concrete example of pattern bargaining is Sweden, where the tradable sector (mainly manufacturing) sets the “cost mark” (an increase in the wage bill for that year), looking at productivity and wage developments in other countries. The cost mark represents a reference ceiling for the other sectors. In this case, the role of firm‑level bargaining is mainly called to decide on the distribution of wage increases within the firm (with exceptions).32 Pattern bargaining, in different forms, is also present in Austria, Denmark, Germany, Japan, the Netherlands and Norway.

A precondition for a well‑functioning co‑ordination of wage bargaining is to have strong and representative employer and employee organisations. Wage co‑ordination requires a high level of trust in and between the social partners and the availability of objective and shared information on the labour market situation. Enforcing maximum wage targets is not straightforward, especially if some non‑tradable sectors can afford more than the agreed “cost mark”. Ibsen (2016[85]) highlights the role of mediation bodies for the functioning of pattern bargaining in Denmark and Sweden. In Denmark, the mediation institution can call for the approval of all agreements into one majoritarian union ballot, which effectively forces potential defectors into the agreement. In Sweden, the mediation process works rather through persuasion and naming and shaming. Conversely, the lack of effective mediation bodies is considered as one of the reasons behind the decline of pattern bargaining in Germany. The unique degree of self‑regulation by the social partners makes co‑ordination fundamentally different from centralisation which is commonly written in laws or regulations.

A further consideration is that the share of manufacturing in total employment and GDP has been decreasing in most countries, putting into question its role as leading sector in pattern bargaining and the sustainability of co‑ordination through pattern bargaining in the future. In the Swedish context, the Labour Market Policy Council highlighted that, if this situation were to persist, there is a risk of a collapse of the current co‑ordination system (Arbetsmarknadsekonomiska rådet, 2017[86]). This could make it more difficult to secure wage moderation. One way to prevent this may be to take account of productivity and price developments in all tradeable sectors beyond just manufacturing when setting the “cost mark”.33

All in all, co‑ordination remains a unique tool to strengthen the resilience of the labour market and increase the inclusiveness of collective bargaining, while safeguarding the competitiveness of the national economy. However, co‑ordination not only requires strong social partners at national and local levels, but it also faces increasing challenges to remain effective in a changing economic structure.

Social partners can play an important role in supporting transitions and strengthening the adaptability of the labour market

In several countries, social partners play an important role in supporting workers who move from one job to another, a role that may be particularly important during times of structural change due to globalisation and digitalisation. Chapter 4 in this Employment Outlook discusses in detail the role of public policies and social partners in managing labour market transitions. It presents, for example, the case of Job Security Councils in Sweden which are jointly owned by employer organisations and unions (i.e. the government has no role) and play a key role in case of plant closures and other mass layoffs. Similarly, Austria’s Outplacement Labour Foundations offer assistance, guidance, reskilling, practical training and direct help to workers who have been dismissed for economic reasons. But in addition they provide extended unemployment insurance, especially to workers in most need. Austria also has In‑placement Labour Foundations which are more forward‑looking, helping companies obtain qualified personnel in case of shortage.

In some countries with sector‑level bargaining, unions and employer organisations collaborate to invest in the skills of the workforce. In the Netherlands, for example, the sectoral training and development O&O funds (Opleidings‑ en Ontwikkelingsfonds) are social partner initiatives that are financed primarily through a payroll levy fixed in collective agreements. They provide learning possibilities to workers to keep them “up‑to‑date” and ready to find new jobs in the future. Constant exchanges between the social partners allow O&O funds to anticipate skill needs. However, even these models face challenges and need to be adapted to the new world of work. For instance, the sectoral structure of the O&O funds could become less relevant in a world where job‑to‑job transitions may take place increasingly across sectors.

3.6. Concluding remarks

Collective bargaining systems are at a crossroads in many OECD countries. Technological and organisational change, global competition and a trend towards decentralisation of bargaining through reforms in the 1990s and during the global financial crisis have affected the role of unions and employer organisations and reduced the scope of collective bargaining.

This chapter has shed new light on the role that collective bargaining can play for good labour market performance. By using a mix of available cross‑country micro‑ and macro‑data, it has provided evidence on the role of collective bargaining for employment, wages, working conditions, inequality and productivity. The results show that co‑ordinated collective bargaining systems are associated with higher employment, lower unemployment, a better integration of vulnerable groups and less wage inequality than fully decentralised systems. Previous evidence also showed that these systems help strengthen the resilience of the economy against business‑cycle downturns. Uncoordinated centralised systems hold an intermediate position, performing similarly in terms of unemployment to fully decentralised systems, but sharing many of the positive effects on other outcomes with co‑ordinated systems. However, centralised systems may reduce the flexibility of firms to adjust pay and working conditions in line with business‑cycle conditions and hamper reallocation across firms and sectors, with potentially adverse implications for productivity.

The world of work is changing rapidly, with workers increasingly having different jobs and even careers over their working life and holding more than one job at the same time. In this context, it is necessary to rethink the role of collective organisation and collective action. These changes to the world of work are especially challenging for social dialogue and collective bargaining which, more than other labour market institutions, are deeply embedded in the social fabric of each country and based on decades of practices and traditions. However, a comparison with countries facing similar challenges can provide useful inspiration to policy‑makers, trade unions and employer organisations who are considering how to adapt their systems.

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Supplementary material for Chapter 3

Supplementary material for Chapter 3 is available online only in English at the following DOI: http://dx.doi.org/10.1787/empl_outlook-2018-13-en.

Notes

← 1. See OECD (2017[1]) for a detailed portrait of trends in membership in trade union and employer organisations as well as collective bargaining coverage in OECD countries over the past three decades.

← 2. In “efficient bargaining” models, employers and unions bargain jointly over wages and employment in a way that maximises the surplus after deduction of their outside options.

← 3. Recent evidence from the United States suggests that monopsony power may be higher than previously thought – see Azar, Marinescu and Steinbaum (2017[103]) and Benmelech, Bergman and Kim (2018[101]).

← 4. See Hijzen, Martins and Parlevliet (2018[93]) for a detailed comparative analysis of the collective bargaining systems in these two countries.

← 5. For OECD countries, Freeman (1988[95]) found no effect of unionisation on unemployment, while Nickell (1997[89]) and Nickell and Layard (1999[90]) found a positive correlation. Scarpetta (1996[88]) suggested that a high unionisation rate tends to reinforce the persistence of unemployment. Other papers exploited policy reforms in particular countries to study the relationship of unionisation with employment: Blanchflower and Freeman (1993[28]) used the Thatcher reforms in the United Kingdom, finding no effect on unemployment and the probability of leaving unemployment. Maloney (1997[92]), by contrast, found that the reform in New Zealand that led to a sharp reduction in unionisation caused a significant increase in employment.

← 6. Erga omnes (literally in Latin, “towards everybody”) refers to the extension of agreements to all workers in the same firm, not only the members of signatory unions. Erga omnes differs from the administrative extension of a collective agreement which refers to the extension of a collective agreement at the sector level to workers in firms which have not signed the agreement or are not affiliated to an employer organisation which signed the agreement.

← 7. Nickell and Layard (1999[90]), for instance, find a positive effect of coverage on unemployment and a negative one on employment, while Baker et al. (2005[102]) find insignificant effects. At the OECD‑level, de Serres and Murtin (2014[100]) find that bargaining coverage, especially if larger than union coverage, can lead to rigid adjustments in wages and may be detrimental to employment. Several studies have also used the difference between bargaining coverage and trade union density, the so‑called “excess bargaining coverage”, to study the effect of administrative extensions, while in fact this measure mixes erga omnes clauses and administrative extensions. For example, Murtin, de Serres and Hijzen (2014[91]) study the interaction of extensions and the tax wedge and find a negative effect of the tax wedge on unemployment in countries with higher “excess coverage”. Gal and Theising (2015[94]) find a negative effect of “excess coverage” on employment, but the effect appears to be driven by Germany, New Zealand and Spain. Égert and Gal (2017[97]) also find that higher “excess coverage” is associated with lower employment rates.

← 8. Corporatism is a “system of social organisation that has at its base the grouping of men according to their community of their natural interests and social functions, and as true and proper organs of the state they direct and co‑ordinate labour and capital in matters of common interest” (Cameron, 1984[7]).

← 9. In the original Jobs Strategy, centralised or co‑ordinated bargaining arrangements were viewed more positively than sector‑level bargaining but not explicitly supported. While countries with such systems typically managed to sustain relatively high employment levels, the empirical evidence based on country panels was judged to be weak. Moreover, strong employment performance in those countries reflected, to an important extent, developments in the public rather than the private sector. More fundamentally, the ability to foster fully centralised bargaining systems or systems that are effectively co‑ordinated so as to promote resilience and contain wage spirals was put in doubt.

← 10. The Reassessed Jobs Strategy also acknowledged that collective bargaining arrangements are deeply embedded in countries’ social fabric and this was seen as the main reason why so little progress was made since the original Jobs Study of 1994.

← 11. However, it is not clear whether the result by Boeri (2014[20]) is driven by the “two‑tier” structure of the system or the lack of wage co‑ordination in those countries that have a two‑tier structure.

← 12. Classifying countries in these categories of collective bargaining systems necessarily comes with some simplification. The detailed discussion in OECD (2017[1]) should thus be kept in mind when comparing and assessing the functioning of the different bargaining systems across countries.

← 13. In the Employment Outlook 2017 (OECD, 2017[1]), Spain and Switzerland were mentioned in an intermediate group between the predominantly centralised and organised decentralised ones. The number of observations between 1980 and 2015 for such an intermediate group is, however, too small for it to be used for econometric purposes.

← 14. The ICTWSS database is available at http://www.uva-aias.net/en/ictwss.

← 15. To avoid a reduction in the sample size, missing values among control variables have been redefined at zero and dummies for missing observations have been included among the controls.

← 16. Separately controlling for the degrees of centralisation and co‑ordination delivers qualitatively similar results (OECD, 2018[21]): Centralisation is associated with lower employment rates (although the relationship is not monotonic as it becomes weaker for extreme forms of centralisation) and not related with the unemployment rate. Wage co‑ordination is linked with higher employment rates and lower unemployment rates.

← 17. While decreasing wage inequality among full‑time workers, collective bargaining may increase earnings inequality between full‑time employees and other workers, in the spirit of an insider‑outsider model. Since the data in this analysis are based on hourly wages of full‑time workers, they cannot be used to study effects on overall earnings inequality among all workers.

← 18. For European countries, the bargaining variable that is reported in the data is a characteristic that is associated with the firm, not the individual. Hence, all workers in one firm are classified in the same way, whether or not this type of bargaining applies to every single worker in the firm. The data only indicate the agreement that is the most relevant, even if both a sector‑ and a firm‑level agreement are in place. For a few other countries, even if the variable is not missing, there is no within‑country variation in the data, and the data are therefore not used.

← 19. Compared with an OLS regression that includes one or two collective bargaining dummies, the Juhn‑Murphy‑Pierce (JMP) decomposition has the advantage that it nests all the different parts of the analysis in this section. The alternative to the JMP decomposition would be to employ reweighting methods, such as those popularised by DiNardo, Fortin and Lemieux (1996[98]). These reweighting methods are, however, especially sensitive to the problem of lack of common support, i.e. characteristics being common in one collective bargaining scheme, but not in another. For this reason, they cannot be used in this context.

← 20. Misalignment of wages and productivity may come at an efficiency cost, in particular weaker productivity growth. The possible link between efficiency, wage‑productivity alignment and wage dispersion gives collective bargaining, potentially, a central role in the productivity‑inequality nexus – see OECD (2016[104]) and OECD (2016[106]).

← 21. In a frictionless economy, wages in one sector should equal marginal productivity in this sector. The analysis uses average rather than marginal productivity, as marginal productivity is more difficult to measure. With a standard Cobb‑Douglas production function, marginal productivity equals average productivity. In practice, however, the parameters of the production function may not be constant across sectors, competition may be imperfect and the distribution of sectoral wages may not be aligned with that of average productivity also for reasons that have nothing to do with collective bargaining (e.g. because of differences in capital intensity across sectors and over time; see, for example, Chapter 2).

← 22. The analysis of cross-sector correlations controls for the level of aggregate productivity in the economy through country fixed effects.

← 23. When annual growth rates of wages and productivity are analysed instead of their levels, the results are similar. With growth rates capturing more short‑run adjustments, this suggests that collective bargaining may influence the way wages are set both in the short and longer term.

← 24. The euro area aggregate statistics are based on non‑harmonised data for ten countries which include all larger countries and cover more than 95% of the euro area (Schulten, 2013[46]). The ECB labels as “experimental” those data for which compromises in terms of harmonisation, coverage and methodological soundness of the source data have to be made.

← 25. For a methodological note on CAWIE data, see Van Gyes and Vandekerckhove (2015[87]); for policy analyses, see Schulten (2013[46]) and Delahaie, Vandekerckhove and Vincent (2015[99]). Compared to the discussion in this chapter, Schulten (2013[46]) also examines sectoral developments of negotiated wages but does not find clear patterns across European countries.

← 26. In Germany, the metalworkers’ union IG Metall opened itself to self‑employed members in 2016 and set up a website http://faircrowd.work/, which allows platform workers to connect to one another, rate platforms and join the trade union. IG Metall also established an ombudsman office to settle disputes among crowd workers, clients and platforms by mutual out‑of‑court agreement. Unions in several other countries have taken similar initiatives.

← 27. Worker centers in the United States are one example (Fine, 2006[96]): They are non‑profit community‑based organisations, not unions. This allows them to keep more freedom to engage in collective action and boycotts and to reduce the amount of bureaucracy they are subject to and opens opportunities to alternative sources of funding (including foundations and governments). Worker centers engage in advocacy and aim to improve working conditions through policy change rather than bargaining. Another model is co‑operatives which organise self‑employed workers and provide a range of services to them. One example of this is SMart, a co‑operative originally set up to support artists in Belgium, but now offering services to other atypical workers and operating in nine countries. SMart provides the self‑employed with a wide range of services, including: help with invoicing and the declaration of income; getting paid as an employee (and therefore gaining access to social protection); debt collection; salary advancement (through a mutual guarantee fund); and the provision of training and co‑working spaces.

← 28. See pages 140‑145 of the Employment Outlook 2017 (OECD, 2017[1]) for a detailed discussion of the pros and cons of the different options and OECD (2017[107]) for an application in the context of France, where extensions up to the recent reform used to be semi‑automatic.

← 29. Last year’s Employment Outlook (OECD, 2017[1]) showed that in Europe the proportion of workers covered by shop stewards, worker representatives, works councils or other forms of employee representation in the workplace is lower in countries where firm‑level bargaining dominates. By contrast, representation tends to be high in multi‑level systems characterised by complementarity between sector‑ and firm‑level agreements.

← 30. A special type of opening clauses concerns the short‑time working scheme Kurzarbeit which allows companies in times of economic crisis to put part of their workforce temporarily on unemployment benefits. These measures are meant to preserve valuable personnel for a company in crisis. It differs from the “normal” opening clauses in that generally the government has a key role in these measures, since it regulates the use of unemployment benefits.

← 31. In a few other countries (including France – at least until the 2017 reform –, Italy and Portugal), company‑level bargaining plays a sometimes significant role, but either due to a strict application of the favourability principle or the practice of social partners to “lock” the content of sector‑level agreements, firm‑level agreements can only improve the standards set at the national or sector level. In principle, these two‑tier structures could still allow balancing high coverage, macroeconomic stability and some margins of adjustment at the firm level. Indeed, the main advantage of such a system is that it does not rely on local representation in small or less productive firms. However, Boeri (2014[20]) argues that these regimes “combine the rigidity in pay of centralised systems with a lack of consideration of macroeconomic constraints” (Boeri, 2014, p. 17[20]). This may be because those who can afford more favourable agreements at the company level impose generous working conditions on others through their involvement in the negotiation of sector‑level agreements. But it could also reflect the absence in those countries of a proper system of wage co‑ordination which has been proven to be key for macroeconomic flexibility (OECD, 2017[1]).

← 32. For example, during the bargaining round in 2016 the “cost mark” was set at about 2.5% but assistant nurses received an agreed wage raise of about 3.5%. All social partners agreed on this exception due to many years of comparatively small wage increases for assistant nurses despite labour shortages in their profession.

← 33. The IMF (2017[105]) in its Article IV review for Sweden called on social partners to find ways to make wages more responsive to Swedish conditions at both the macroeconomic and sector level.

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