Sectoral Bargaining and the Wage Structure

European labor markets are characterized by industry-wide wage agreements. This has two major implications for wage inequality: First, unions and employers may coordinate wage setting between industries and regions for normative and macroeconomic ends (i.e. wage coordination as in Wallerstein, 1990, Hall and Soskice, 2001). Second, firms may offset wage centralization through a premium (“wage cushion”) paid in addition to contractual minimum wages (i.e. wage centralization as in Calmfors and Driffill, 1988, Card and Cardoso, 2022).
We study this relationship in Germany, where inequality rose substantially from the 1980s to the late 2000s (Dustmann et al., 2009). A major puzzle of this dynamic is that the increase in inequality since the 1990s is almost entirely concentrated in the labor force covered by sectoral bargaining (Dustmann et al., 2014). While several hypotheses address this puzzle – which either claim less coordination or less centralization – the lack of contract data prevented their investigation so far.
We create a new data set of over 400 major sectoral collective bargaining agreements (CBA) (1950 to 2025) to differentiate these channels. In 2018, these contracts cover over 90% of all employees subject to sectoral CBA. Our monthly panel includes information on negotiated working hours and minimum wage rates for more than 4,000 job titles.
To describe the relationship between sectoral bargaining and wage inequality, we decompose the hourly log wage into union-negotiated wage floors and wage cushions, w=f+d. We argue that f is informative of wage coordination, as it is the wage component directly influenced by collective bargaining. We further decompose the variance of contractual wages into within-CBA, within-industry, and between-industry components to differentiate dimensions of coordination over time.
We find that variance in contractual wages has been declining since the mid-1950s. This decline is driven primarily by reduced within-CBA variation and holds for both West and East Germany (since 1990) as well as for blue- and white-collar job titles. Between-industry and within-industry differences account for a smaller share of the overall variance and have also declined, albeit more gradually.
This finding suggests a “tug-of-war” between increasing wage coordination on the macro-level and decentralization of wages through firms on the micro-level. In the absence of substantial compositional changes – which we rule out – these forces lead to the observed net increase in wage inequality.