The effect of collective bargaining on economic performance largely depends on the specific features of national collective bargaining system, how they interact with other key parameters of labour market institutions, such as employment protection or minimum wage legislation, but also on prevailing macroeconomic and labour market conditions and policies. Box 1 summarises the functions of collective bargaining and the main arguments of economic theory on the effect of collective bargaining.
Enhancing sectoral collective bargaining in Chile
Collective bargaining can entail both benefits and side effects for firms, workers and labour market functioning. At a micro-level, collective bargaining can make labour markets function more efficiently by correcting market failures (i.e. the existing asymmetry of information and bargaining power between workers and firms, possibly reflecting monopsony and other labour market frictions) and reducing transactions costs involved in individual bargaining. It can ensure that workers’ requests for pay to increase with productivity are heard therefore preventing excessive turnover of staff and limiting the extent of costly procedures for handling grievances and complaints.
Moreover, collective bargaining can also improve the working environment and the quality of employment relationship between workers and firms, leading to more efficient allocation of resources, greater motivation possibly productivity gains. Indeed, while often considered mainly as a wage setting institution, collective bargaining also plays an important role for setting other conditions of employment such as job security, working-time regulation, occupational safety and health, provision or access to training. Unions and employer organisations also provide important services to their members such as legal support, public advocacy, as well as training facilities.
At a macro level, collective bargaining can have an impact on earnings distribution and inequalities more in general (i.e. by affecting employment but also through its influence on management pay at firm level and payroll taxes and family and pensions systems at country level), unemployment levels and competitiveness as well as the way the labour market responds to unexpected shocks. Moreover, it can represent a useful tool for self-regulation between workers and employers and bring about more stable labour relations and industrial peace, leading to a more efficient allocation of resources, greater motivation and ultimately productivity. Finally, collective bargaining systems, and social dialogue in general, can constitute an efficient tool to promote effective consultation and implementation of structural reforms. When collective bargaining is well organised and representative, it can help manage and reduce the extent of any trade‑offs between different policy objectives.
Collective bargaining hence aims at ensuring a fair sharing of the benefits of training, technology and productive growth (inclusive function), at maintaining social peace (conflict management function) and at guaranteeing adequate conditions of employment (protective function). Beyond those functions, collective bargaining is also a key tool of market control, i.e. reining in wage competition between companies or, on the opposite, limiting the monopsony power of firms which in some cases may profit from a lack of bargaining power of workers. It can increase incentives for companies to invest in innovation if the presence of a bargaining setting prevents the option of increasing profits by simply reducing wages.
At the same time, economic theory argues that collective bargaining can introduce market distortions (e.g. “rent seeking behaviour”) by strengthening the power of insiders – both workers (e.g. those with full-time permanent contract) and firms (e.g. companies already operating in the market). When it comes to workers, the logic is that unions are less likely to take into account the interests of outsiders.1 However, empirical evidence backing this theory is scarce.
1. Such as less‑skilled, temporary or young workers or young/small firms. However, empirical evidence backing this theory is scarce.
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 7). Re‑negotiations of contracts by 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 strategies1 of social partners, the structure of product and labour markets and the nature of collective bargaining institutions.
Source: OECD. (2019[1]), Negotiating Our Way Up: Collective Bargaining in a Changing World of Work, https://doi.org/10.1787/1fd2da34-en.
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 fix wages below those fixed by the market, for example because workers have limited opportunities to change their employer or would incur high costs if they did so.
Finally, the role of collective bargaining for labour market performance also depends on the functioning of the institutional system. The main elements that are used to characterise the bargaining systems and conduct the economic analysis include:
The degree of coverage, as collective agreements covering a large share of workers are likely to have a more sizeable macroeconomic effect – positive or negative – on employment, wages and other outcomes of interest than agreements confined to a few firms.
The level of bargaining as sector-level can be expected to reduce wage inequality relative to decentralised systems, by lowering wage differentials in different sectors, while firm-level agreements, may allow paying more attention to firm-specific conditions, potentially raising productivity.
The possibility of opt-outs or leaving the application of the favourability principle to social partners, since it 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.
The wage co‑ordination2 between sector-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.
← 1. The academic literature has focused on two broad classes of bargaining strategies. In the so-called “right-to-manage” model (Leontief, 1946[31]), 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[29]). 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 might not only be concerned about wages but also employment and macroeconomic resilience. This has motivated the “efficient bargaining” model (McDonald and Solow, 1981[30]).
← 2. Wage co‑ordination can be defined as the extent to which wage targets are pursued and/or minor players follow what major players decide. Wage co‑ordination can be more or less strong and can take different forms: State imposed (like in Belgium), pattern bargaining (like in the Nordic countries, Austria, Germany, or the Netherlands) where a sector sets the target first (usually the −manufacturing− sector exposed to international trade) and the others (or some of them) follow; finally, co‑ordination can also take the form of inter-or intra associational guidelines where peak level organisations set some norms or define a common objective that should be followed when bargaining at lower level.