The Employment Effects of Collective Bargaining

This paper studies the wage and employment effects of Italian collective bargaining. For this purpose, it analyses monthly data derived from administrative archives on the population of private-sector employees, matched with extensive information on contractual pay levels settled in industry-wide agreements bargained by trade unions' and employers' representatives at the national level. The research design is based on a generalised differences-in-differences method, which exploits the numerous contrasts generated by the Italian wage setting rules and controls for space-specific sectoral unobserved time-varying disturbances in a fully non-parametric way. Results show that a growth in contractual wages produced sizeable increases in actual pay levels for all workers, determining at the same time strong and negative effects on employment. The resulting confidence interval of the implied own-price labour demand elasticity ranged between -0.4 and -1.2, and it was even slightly more negative among incorporated companies. Studying interactions of this parameter with firm-level outcomes –value added per worker, size, the labour share and capital intensity - we found associations broadly consistent with Hicks-Marshall laws and with traditional models of centralized wage bargaining. Further analyses carefully document the presence of dynamic employment adjustments to contractual wage levels and assess the overall robustness of the results.