Wage determination and the bite of collective contracts in Italy and Spain

In several OECD countries employer federations and unions fix skill-specific wage floors for all workers in an industry. One view of those “explicit” contracts argues that the prevailing wage structure reflects the labor market conditions back at the time when those contracts were bargained, with little space for renegotiation. An alternative view stresses that only workers close to the minima are affected by wage floors and that the wage structure reacts to current labor market conditions. We disentangle between those hypotheses by testing whether wages react more to local contemporaneous unemployment or unemployment at the time of contract renewal in Italy and Spain. The results suggest that most wages in the metalworking industry adjusted to the cycle between 2005 and 2013, and that rigidity generated by lack of renegotiation is confined to wages close to the floors (about 12-15% of the total).