Working Paper: NBER ID: w28695
Authors: David Card; Ana Rute Cardoso
Abstract: Sectoral contracts in many European countries set wage floors for different occupation groups. In addition, employers often pay a wage premium (or wage cushion) to individual workers. We use administrative data from Portugal, linked to collective bargaining agreements, to study the interactions between wage floors and wage cushions and quantify the impact of sectoral wage floors. Although wages exhibit a “spike” at the wage floor, a typical worker receives a 20% premium over the floor, with larger cushions for older and better-educated workers and at higher-productivity firms. Cushions also allow wages to covary with firm-specific productivity, even within sectoral agreements. Contract negotiations tend to raise all wage floors proportionally, with increases that reflect average productivity growth among covered firms. As floors rise, however, cushions are compressed, leading to an average passthrough rate of only about 50%. We find no evidence of employment responses to floor increases. Finally, we use a series of counterfactual simulations to show that real wage reductions during the recent financial crisis arose through reductions in real wage floors, reductions in real cushions, and a re-allocation of workers to lower wage floors. Offsetting these effects was a rapid rise in education of new cohorts, which in the absence of other factors would have led to rising real wages.
Keywords: Wage Floors; Wage Cushions; Collective Bargaining; Portugal
JEL Codes: J31; J41; J51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sectoral wage floors (J31) | employment outcomes (J68) |
| wage floor adjustments (J38) | productivity growth (O49) |
| education levels of new cohorts (I21) | rising real wages (J39) |
| wage floor adjustments (J38) | actual wages (J31) |
| real wage reductions during financial crisis (F66) | reductions in real wage floors (J38) |
| real wage reductions during financial crisis (F66) | wage cushions (J31) |
| real wage reductions during financial crisis (F66) | reallocation of workers to lower wage floors (J69) |
| sectoral wage floors (J31) | actual wages (J31) |