The Rise in Orientation at Collective Bargaining Without a Formal Contract

• Date: 01 January 2019
• Published date: 01 January 2019
• Author: Mario Bossler
• DOI: http://doi.org/10.1111/irel.12226

The Rise in Orientation at Collective Bargaining

Without a Formal Contract*

MARIO BOSSLER

While firm participation in collective bargaining between unions and employers’

associations has been decreasing in Germany over the last two decades, orienta-

tion at collectively bargained wages has increased in popularity. Orientation

implies that employers claim to set wages according to collective agreements but

they are not formally bound by the respective bargaining contract, and in fact, I

observe that they pay significantly lower wages than firms that are formally cov-

ered. Dynamic nonlinear panel estimation applied to establishment-level data

shows that this orientation is a stepping stone into formal participation. However,

the decline in formal participation and the opposing rise in orientation are mostly

due to a changing establishment composition rather than to behavioral transitions.

Introduction

Collective bargaining, implying that unions and employers bargain over

wages and working conditions, comes along with some theoretical concerns as

it may impede flexible wage adjustments in the course of adverse productivity

shocks (G€

urtzgen 2009). Moreover, according to the insider–outsider theory it

may constitute an entry barrier especially for the unemployed, who are

excluded from the system. But collective bargaining is generally ascribed some

beneficial properties as it reduces transaction costs of wage bargaining, reduces

the potential for conflicts between employers and employees, and implements

minimum standards for wages and working conditions. Hence, it is of general

interest how collective bargaining coverage develops over time and to help us

JEL: C23, J52, M52.

*The author’saffiliations are Institute for Employment Research (IAB) and Labor and Socio-Economic

Research Center of the University Erlangen-Nuremberg (LASER), Nuremberg, Germany. E-mail:

mario.bossler@iab.de. The author is very grateful for helpful comments of two anonymous referees and the

editor. For constructive discussions and suggestions, he thanks Nicole G€

urtzgen and Benjamin B€

orschlein as

well as participants of the 2017 Colloquium on Personnel Economics in Zurich and the 2017 International

Workshop on Establishment Panel Analyses in Nuremberg. The usual disclaimer applies.

INDUSTRIAL RELATIONS, DOI: 10.1111/irel.12226. Vol. 58, No. 1 (January 2019). ©2018 The Regents of

the Univers ity of Califo rnia Published by Wiley Periodicals, Inc., 350 Main Street, Malden,

MA 02148, USA, and 9600 Garsington Road, Oxford, OX4 2DQ, UK.

17

understand the underlying economic mechanisms (Addison et al. 2017b; Ober-

fichtner and Schnabel 2017).

On average across OECD countries, the share of workers covered by a col-

lective bargaining agreement shrank from 45 percent in 1985 to 32.7 percent

in 2014 (Organization for Economic Cooperation and Development [OECD]

2017). The decline was most pronounced in Central and Eastern European

countries, but is also observed in the UK, Japan, Canada, and the United

States. In most Western European countries coverage rates have been fairly

stable (e.g., Italy and France), except for Germany, where it has decreased sig-

nificantly since the 1990s (Figure 1).

Figure 1 demonstrates that coverage rates are at a much higher level in

countries where multi-employer agreements are negotiated by employers’asso-

ciations with high membership rates or whenever agreements are legally

expanded to nonmember firms of the same sector or region (OECD 2017).

Interestingly, in Germany collective bargaining contracts coexist with firm-

level contracts and the orientation at collectively bargained wages without for-

mal contract (Addison et al. 2016; Oberfichtner and Schnabel 2017). The latter

is an interesting case to study, because an increasing number of plants pursue

an orientation by aligning wages to collectively bargained wage levels without

a formal contract. This form of wage referencing without legal embedment

may help firms to save transaction costs of otherwise individualized

0

20

40

60

80

100

2000 2002 2004 2006 2008 2010 2012 2014

Cove rage in % of the wage ear ners

Canada France Germany Italy

Japan United Kingdom United States OECD

FIGURE 1

COLLECTIVE BARGAINING COVERAGE ACROSS COUNTRIES

Source: Collective bargaining coverage, OECD statistics, 2000–2014.

18 / MARIO BOSSLER