While each collective bargaining system is embedded in its national institutional framework, and cannot as such be exported to another country, recent initiatives and debates in OECD countries such as the Fair Pay Agreements introduced in 2022 in New Zealand can offer some lessons for introducing sectoral bargaining in Chile. The use of automatic extensions in France or the importance of institutions such as the mediation office in Sweden, can provide further inspiration and insights for Chile.
Enhancing sectoral collective bargaining in Chile
If the New-Zealander economy had been growing over the last three decades, wages were lagging well behind increases in labour productivity when the Fair Pay Agreements were introduced in 2022. Wage inequality was a particular concern at the time, as reflected by a low median wage and wage increases of the richest salaries twice as those of the middle‑income earners. Another, related challenge, was the weakening of the New-Zealander labour relations system: in 2022, less than 20% of workers were members of a trade union − down from 60% in the mid‑80s. In some sectors, this allowed some businesses to compete for contracts by reducing wages or employment conditions and exposed some sectors to a race to the bottom.
To address these challenges, the government implemented some forms of sectoral bargaining: in December 2022, new bargaining arrangements known as the Fair Pay Agreements (FPAs) came into force. They reintroduced some sectoral bargaining after the reforms in the 1990s which resulted in firm-level collective bargaining and individual contracts replacing the awards as the main instruments of wage regulation. The FPAs were intended to strengthen workers’ bargaining power to ensure that wages and conditions reflect the needs of each sector and to reduce the wage competition (avoid a race to the bottom to deliver on competitiveness), to encourage firms in each sector to compete on innovation, productivity and quality and to co‑ordinate investment in skills training − prevent free riding employers who would not offer training to their employees but steel them from others who do1.
Even if the FPAs have been repealed following a change of Government at the end of 2023,2 the FPAs system can provide instructive insights for Chile on designing multi-level (sectoral) bargaining.
5.1.1. What are FPAs and how do they work?
The Fair Pay Agreements bring together employers and unions within a sector to bargain for minimum standards of employment for all workers or industry. They collectively set minimum terms and conditions relating to pay,3 benefits, working hours and skills training for all workers across sectors and occupations, while leaving detail (and flexibility) to enterprise bargaining. They allowed firms to manage day to day issues they faced, while giving workers security that they had a floor below which their terms and conditions could not be pushed. By establishing a floor underneath pay and conditions, competition based on low labour costs would be disincentivised.
Fair Pay Agreements are a kind of contract which specifies minimum employment terms for all employees in a certain industry or occupations. Typically, the employee and employer would bargain and come to an agreement for their specific industries. Unions that are eligible will represent that industry, even if certain employees are not unions members. Therefore, if an employee is covered by a Fair Pay Agreement, the union will bargain on their behalf regardless of whether they are part of the union.
The novelty is that eligible employers can have an employer/industry organisation negotiate on their behalf and bargain with a union or employees. Employer/industry organisation similarly act for the employer or specific industry, even if the employer is not a member. The idea is to provide a level playing field to support notably workers in the most vulnerable industries, in preventing that employers disadvantage their employees through individual bargaining and agreement.
A number of steps had to be taken before bargaining can start: unions initiating the Fair Pay Agreements process would need to meet one of the two requirements: a representation test which required the trade union seeking to initiate a Fair Pay Agreement to show that it had the support of at least 10% or 1 000 workers to whom it would apply; or the initiating trade union could request a public interest test and show that the workers to whom the Fair Pay Agreement would apply had few opportunities for wage increases or limited bargaining power (Figure 12). The initiating union(s) must decide which work they want covered. Parties can later agree to change the coverage. FPAs can be an occupational FPA or an industry FPA. If there is an overlap in coverage between two FPAs, the second one only applies if the workers would be better off overall. In this first phase, it is important that workers who will be covered by an FPA know about it. Employers, unions, business representatives and government will each have a role in notification to reach as many concerned parties as possible.
If one bargaining side (i.e. unions or employers’ representatives) is or becomes underrepresented, a default bargaining party may step into bargaining. In terms of content, all FPAs must include certain topics like minimum rate of pay, standard working hours, overtime and penalty rates. Some other topics must be discussed but don’t have to be agreed, like redundancy arrangements, leave and health and safety requirements. Other employment terms can be included if the bargaining sides agree. The agreement must also include who it covers, what work is being covered and the duration of the agreement. Importantly, an FPA can allow for exemptions for business if they are in significant financial hardship. An FPA can an also deviations: set regional differences, and other differential terms if they comply with the Human Rights Act and minimum employment entitlements; but also set a preferential pay for union members up to a maximum value.
If bargaining parties encounter difficulties, mediation help to resolve them. The Employment Relations Authority (ERA) set the FPAs terms by determination. The finalisation of an FPA includes important steps to ensure that the resulting agreements are supported and have the force of the law: i) vetting: the ERA vets an agreed FPA to ensure the terms are lawful, before it goes to a vote; ii) ratification: if bargaining parties reach an agreement, their proposed FPA will need support from a simple majority of both workers and employer voters to be ratified. Employers have one vote per employee in coverage, with slightly higher vote weighting for employers with fewer than 20 employees in coverage. If a first ratification vote fails, parties go back to bargaining. If a second vote fails, the FPAs goes to the ERA for determination; iii) enactment and enforcement: once finalised, the government makes secondary legislation to bring the FPA into force. Workers covered by the FPA can enforce their rights through the standard employment dispute resolution. In addition, the Labour inspectorate can also enforce certain terms of the FPA.
Source: Ministry of Business, Innovation and Employment.
5.1.2. Key design choices
As said above, the FPAs system only worked for a temporary period. Even if the FPAs have been repealed following a change of Government at the end of 2023,4 the system can provide instructive insights to learn on designing multi-level (sectoral) bargaining. Key design choices include(d):
Providing financial and training support: the government contributed NZD 50 000 to each bargaining side, with additional funds if the side had low rates of membership of a union or industry group, to help with FPA costs. Bargaining sides were also offered to be supported by training and a government -provided support person.
Allowing unions to negotiate FPAs terms for non-union members (extensions) and granting unions access to workplaces, to ensure broad-coverage and address employees on relevant issues. This was key given the low unionisation rates across sectors.
Establishing a credible threat to incentivise employers to find a collective voice. The New Zealand’s ERA, a tribunal, was given power to step in to set FPA terms if no representation could be found for employers, or if agreements failed after two ratification attempts (Figure 12). This acted as an incentive for employers to participate in bargaining (carrot and stick).
Setting enforcement and sanctions mechanisms: each FPA in New-Zealand became secondary legislation, making breaches legal violations. Employees could enforce their rights through dispute resolution mechanisms and the New Zealand Labour inspectorate was empowered to enforce specific FPA terms.
Collective bargaining in France take predominantly place at sectoral level. The bargaining system is characterised by an apparent “paradox”, as combining one of the lowest trade unions density across the OECD countries (at about 10% in 2023) with one of the highest bargaining coverage rate (close to 100%).
This high coverage rate is due to the widespread use of nearly automatic extensions (i.e. just an administrative formal process to extend the coverage of collective agreements beyond the members of the signatory unions and employer organisations to all workers and firms in a sector by the French Ministry of labour). Extensions level the playing field across firms in a sector and ensure a fair competition. Extensions can also reduce the transaction costs linked to lengthy and detailed negotiations, which can be particularly relevant for small firms that lack the resources (or do not have workers representation) to engage in firm-level bargaining. In some cases, extensions are also issued to support the sustainability of some forms of “public goods” such as sectoral training and mobility schemes that are funded via collective agreements (De Ridder and Euwals, 2016[22]; Hayter and Visser, 2018[23]). Finally, extensions also contribute to spread best practices in terms of personnel management, training, health and safety, technology usage, insurance, retirement packages, or performance‑related incentives. However, extensions can become a tool of unfair competition, for instance when extensions are used by “insider” firms to drive competitors out of the market (Haucap, Pauly and Wey, 2001[24]; Magruder, 2012[25]; Martins, 2014[26]). More in general, extensions may also have a negative impact when the terms set in the agreement do not account for the economic situation of a majority of firms in the sector: for instance, when the employer association is representative only of large and relatively more productive firms (and hence willing to pay higher wages), it may agree on wage floors and other components that are not sustainable for smaller and less productive firms.
In order to partly alleviate these concerns, extensions may be issued when the “collective agreement already covers a number of the employers and workers concerned which is, in the opinion of the competent authority, sufficiently representative”, as stated in the ILO Recommendation on collective agreements (No. 91). In several OECD countries administrative extensions are subject to threshold representativeness criteria: collective agreements can only be extended if they are signed by employer organisations representing a minimal share of workers (most often the majority).5 However, while these criteria may be important, a more important concern is to ensure that signing employer organisations do not only represent a few selected firms. Introducing representativeness criteria in countries where they do not exist is not straightforward. In that context, having reliable and up-to-date statistics on trade unions’ and employer organisations’ membership is in all cases a necessary condition to have meaningful representativeness criteria.
Another option to limit the potential negative effects of extension is to submit them to a test of public interest, by which extensions could be denied if the social and economic circumstances do not warrant extending the terms beyond the signatory parties or, on the opposite, issued to safeguard the public interest (for instance to stabilise the collective bargaining system or avoid free‑riding in common funds such as for training). As argued in OECD (2017[27]), while the exact definition can vary, it is important that the criteria of public interest are announced well in advance by the government so that social partners can take them into account during the negotiation.
Along these lines, and to modulate the “automatic” nature of extensions in France, the 2017 labour market reform (the “Macron Ordinances”) introduced the possibility to block otherwise semi‑automatic extensions out of public interest considerations, notably the risk of negative effects on competition. Furthermore, a committee of independent experts was set up to evaluate the economic and social consequences of all extensions that could advise refusals to extensions. While representativeness criteria (and, if used, public interest clauses) aim to reflect as much as possible the situation of a wide set of firms, they cannot account for their full diversity. Few countries, therefore, also allow for exemptions from extensions.6 Another option to better reflect the heterogeneity of firms and avoid the “one‑size‑fit-all” limit of extensions is to allow a differentiation within agreements as is done in the Dutch metal industry where, in practice, two agreements are signed, and extended, one for firms with 35 and more employees and one for firms with less than 35 employees. The French 2017 reform also conditioned the extension of a sectoral collective agreement to a differentiation of its content between large and small companies.
The Swedish collective bargaining system provides a good illustration of the so-called “organised decentralisation” systems discussed before. In these bargaining systems, sectoral agreements define the broad conditions but leave large scope for bargaining at the firm level and detail provisions.7 This sound articulation between sectoral and firm level bargaining is one of the key elements of these bargaining systems which as shown by the macro and microeconomic evidence reported above − are those leading to the best outcomes in terms of resilience, employment, productivity and wage performance.
While the Swedish model is embedded in its cultural and institutional national framework, and cannot be transferred as such to Chile, it displays nonetheless important insights for a well-functioning multi-level bargaining system.
First, the existence of strong and representative social partners: in Sweden, about 65% of employees were unions members in 2023, one of the highest shares across the OECD area (Figure 2) and 82% of workers were employed in a firm that was member of an employer organisation – the so-called employer organisation density (Figure 3). Furthermore, collective bargaining coverage remains high, at about 88% in 2023 (Figure 4).
Second, the quality of labour relations and the co‑operation in labour relations which are key elements for ensuring wage co‑ordination as assessed by senior executives by the World Economic Forum is good, and well above the OECD average (Figure 6). This reflects both a high level of trust in and between the social partners and the availability of objective and shared information on the labour situation.
Third, and related to less to the previous point, the existence of institutions, such as the Swedish mediation office to enforce agreements and solve disagreements. Such bodies which are primarily aimed at mediating labour disputes and, in some countries, also promote an efficient wage formation process, constitute a key pillar of the Nordic countries bargaining model8 where social partners highly need to reach compromises to avoid the intervention of the State and keep their independence.
Mediation offices, some of which have been in existence for more than 100 years, are specialised governmental bodies with the task of intervening in the event of conflict to prevent deadlock and encourage the search for solutions acceptable to all parties. They act as neutral facilitators, helping disputing parties to reach mutually acceptable solutions without resorting to strikes or other industrial action.
Moreover, mediation offices can also promote an efficient wage formation process in ensuring co‑ordination: enforcing maximum wage targets is not straightforward, especially if some non-tradable sectors can afford more than the agreed “cost mark”. Ibsen (2016[28]) highlights the role of mediation bodies for the functioning of pattern bargaining in Sweden, where the mediation process works through persuasion and naming and shaming.
← 1. Extract of the bill discussion: “…Our 30‑year experiment with a low – labour-cost model has not worked. Many workers have suffered, but, equally, our rates of labour productivity have been amongst the worst in the world under that regime: lower than the OECD average, and lower than many countries that have a level of sector-based co‑ordination for worker terms and conditions. A model based on wage‑based competition is focused on the wrong things. FPAs will incentivise competition based on the right things. The quality of goods and services offered, investment in skills and training, R & D innovation – these are the things that will drive productivity and prosperity for our country....”
← 2. At the time six sectors including bus drivers, security, commercial cleaners, early childhood education workers and grocery supermarkets were initiating bargaining under the new FPAs.
← 3. This meant, for example, that nobody in the sector/industry could be paid less than the rate negotiated and agreed by unions and employers in that sector/industry (like a minimum floor for a specific industry).
← 4. The right-wing coalition elected in October 2023 repealed the Fair Pay Agreements on the grounds that they were a strait jacket for business.
← 5. A few countries also request that signing unions represent a majority if workers.
← 6. In the Netherlands clearly pre‑defined criteria for exemptions are even a condition for extension. Moreover, firms can request an ad hoc exemption from the ministry if they can justify dispensation.
← 7. Organised decentralisation can take several forms. In a first model, sectoral agreements provide a general framework but leave room for lower-level agreements to tailor the terms of employment. In this model, sectoral agreements can either set minimum agreements, default agreements, corridor agreements (i.e. boundaries between which the terms of employment in company-level agreements can be set) or a mix of them. In a second model, sectoral agreements set the standard terms but allow for exceptions 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 sectoral agreement (see OECD (2019[1]) for more details).
← 8. Mediation offices exist in all five Nordic countries which are often held up as a model of stability, characterised by constructive dialogue and co‑operation between employers and trade unions.