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30,000 minimum wages: The economic effects of collective agreement extensions

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  • Pedro S. Martins

Abstract

Several countries extend collective bargaining agreements to entire sectors, therefore binding non-subscriber workers and employers. These extensions may address coordination issues but may also impose sector-specific minimum wages and other work conditions that are not appropriate for several workers and firms. In this paper, we analyse the impact of such extensions along several margins drawing on firm-level monthly data for Portugal, a country where extensions have been widespread until recently. We find that both formal employment and wage bills in the relevant sector fall, on average, by 2% - and by 25% more across small firms - over the four months after an extension is issued. These results are driven by both reduced hirings and increased firm closures. On the other hand, informal work, not subject to labour law or extensions, tends to increase. Our findings are robust to several checks, including a falsification exercise based on extensions that were announced but not implemented.

Suggested Citation

  • Pedro S. Martins, 2014. "30,000 minimum wages: The economic effects of collective agreement extensions," Working Papers 51, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    • Handle: RePEc:cgs:wpaper:51
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    File URL: http://webspace.qmul.ac.uk/pmartins/CGRWP51.pdf
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    References listed on IDEAS

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    1. Haucap, Justus & Pauly, Uwe & Wey, Christian, 2001. "Collective wage setting when wages are generally binding An antitrust perspective," International Review of Law and Economics, Elsevier, vol. 21(3), pages 287-307, September.
    2. Pedro S. Martins & Gary Solon & Jonathan P. Thomas, 2012. "Measuring What Employers Do about Entry Wages over the Business Cycle: A New Approach," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(4), pages 36-55, October.
    3. Boeri, Tito, 2012. "Setting the minimum wage," Labour Economics, Elsevier, vol. 19(3), pages 281-290.
    4. Ana Rute Cardoso & Pedro Portugal, 2005. "Contractual Wages and the Wage Cushion under Different Bargaining Settings," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 875-902, October.
    5. Sanvi Avouyi-Dovi & Denis Fougère & Erwan Gautier, 2013. "Wage Rigidity, Collective Bargaining, and the Minimum Wage: Evidence from French Agreement Data," The Review of Economics and Statistics, MIT Press, vol. 95(4), pages 1337-1351, October.
    6. Pedro Martins, 2009. "Rent sharing before and after the wage bill," Applied Economics, Taylor & Francis Journals, vol. 41(17), pages 2133-2151.
    7. David Neumark & William Wascher, 2006. "Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research," Working Papers 060708, University of California-Irvine, Department of Economics, revised Jan 2007.
    8. Luís M B Cabral & José Mata, 2003. "On the Evolution of the Firm Size Distribution: Facts and Theory," American Economic Review, American Economic Association, vol. 93(4), pages 1075-1090, September.
    9. David Card & Francesco Devicienti & Agata Maida, 2014. "Rent-sharing, Holdup, and Wages: Evidence from Matched Panel Data," Review of Economic Studies, Oxford University Press, vol. 81(1), pages 84-111.
    10. Pedro Martins & Andy Snell & Jonathan P. Thomas, 2010. "Downward Wage Rigidity in a Model of Equal Treatment Contracting," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(4), pages 841-863, December.
    11. Philip Du Caju & Erwan Gautier & Daphne Momferatu & Melanie Ward-Warmedinger, 2009. "Institutional Features of Wage Bargaining in 23 European Countries, the US and Japan," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 12(2), pages 57-108, Winter.
    12. Pedro S. Martins, 2009. "Dismissals for Cause: The Difference That Just Eight Paragraphs Can Make," Journal of Labor Economics, University of Chicago Press, vol. 27(2), pages 257-279, April.
    13. Pedro Portugal & Olivier Blanchard, 2001. "What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets," American Economic Review, American Economic Association, vol. 91(1), pages 187-207, March.
    14. Pedro Portugal & Ana Rute Cardoso, 2006. "Disentangling the Minimum Wage Puzzle: An Analysis of Worker Accessions and Separations," Journal of the European Economic Association, MIT Press, vol. 4(5), pages 988-1013, September.
    15. John A. Abowd & Thomas Lemieux, 1993. "The Effects of Product Market Competition on Collective Bargaining Agreements: The Case of Foreign Competition in Canada," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 983-1014.
    16. Hugo Vilares & Pedro Portugal, 2013. "Labor unions, union density and the union wage premium," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    17. Dias, Daniel A. & Marques, Carlos Robalo & Martins, Fernando, 2013. "Wage rigidity and employment adjustment at the firm level: Evidence from survey data," Labour Economics, Elsevier, vol. 23(C), pages 40-49.
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    19. John M. Abowd & Patrick Corbel & Francis Kramarz, 1999. "The Entry And Exit Of Workers And The Growth Of Employment: An Analysis Of French Establishments," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 170-187, May.
    20. Murtin, Fabrice & de Serres, Alain & Hijzen, Alexander, 2014. "Unemployment and the coverage extension of collective wage agreements," European Economic Review, Elsevier, vol. 71(C), pages 52-66.
    21. Pedro S. Martins, 2008. "Worker churning and firms' wage policies," International Journal of Manpower, Emerald Group Publishing, vol. 29(1), pages 48-63, March.
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    Citations

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    Cited by:

    1. Addison, John T. & Portugal, Pedro & Varejão, José, 2014. "Labor demand research: Toward a better match between better theory and better data," Labour Economics, Elsevier, vol. 30(C), pages 4-11.
    2. E. Gautier & D. Fougère & S. Roux, 2016. "The Impact of the National Minimum Wage on Industry-Level Wage Bargaining in France," Working papers 587, Banque de France.
    3. Martins, Pedro S., 2016. "The Third Worker: Assessing the Trade-off between Employees and Contractors," IZA Discussion Papers 10222, Institute for the Study of Labor (IZA).
    4. Alexander Hijzen & Pedro S. Martins, 2016. "No Extension without Representation? Evidence from a Natural Experiment in Collective Bargaining," Working Papers 68, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    5. Martins, Pedro S., 2016. "Should the Maximum Duration of Fixed-Term Contracts Increase in Recessions? Evidence from a Law Reform," IZA Discussion Papers 10206, Institute for the Study of Labor (IZA).
    6. Fernando Martins, 2015. "On the wage bargaining system in Portugal," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    7. Ernesto Villanueva, 2015. "Employment and wage effects of extending collective bargaining agreements," IZA World of Labor, Institute for the Study of Labor (IZA), pages 136-136, March.
    8. Savšek, Simon, 2018. "What are the main obstacles to hiring after recessions in Europe?," Working Paper Series 2153, European Central Bank.
    9. Dierk Herzer, 2016. "Unions and Income Inequality: A Heterogeneous Panel Co-integration and Causality Analysis," LABOUR, CEIS, vol. 30(3), pages 318-346, September.
    10. Katrin Oesingmann, 2016. "Extension of Collective Agreements in Europe," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 14(2), pages 59-64, 07.
    11. repec:wsi:jicepx:v:08:y:2017:i:01:n:s1793993317500028 is not listed on IDEAS
    12. repec:ces:ifofob:84 is not listed on IDEAS
    13. Hugo Vilares & Pedro Portugal, 2013. "Labor unions, union density and the union wage premium," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    14. Martins, Pedro S., 2017. "Economic effects of overtime premium flexibility: Firm- and worker-level evidence from a law reform," GLO Discussion Paper Series 102, Global Labor Organization (GLO).
    15. repec:ces:ifodic:v:14:y:2016:i:2:p:19235742 is not listed on IDEAS
    16. Denis Fougere & Erwan Gautier & Sébastien Roux, 2016. "Understanding Wage Floor Setting in Industry-Level Agreements: Evidence from France," Sciences Po publications 10290, Sciences Po.

    More about this item

    Keywords

    Collective agreements; Worker flows; Wage rigidity;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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