The Effect of Firm-and Industry-Level Contracts on Wages -- Evidence from Longitudinal Linked Employer-Employee Data

Using a large linked employer-employee data set, this paper presents new evidence on the collective bargaining wage effect in western and eastern Germany. The novel feature of our analysis is that we use a longitudinal data set. Thus, in contrast to previous studies, we seek to assess the extent to which differences in wages between workers in covered and uncovered firms really represent an effect of collective bargaining coverage, rather than a consequence of the non-random selection of workers and firms into the different regimes. The fact that we observe employers to change their contract status over time provides us with the opportunity to identify the impact on individual wages by measuring the relative wage gains or losses of workers employed in firms that change their contract status. The results from a Pooled OLS specification indicate that differences in firm characteristics account for the largest proportion of omitted variable bias. Systematic sorting of observably better firms into the regimes appears to be more relevant for industry contracts in western Germany and for firm-level contracts in eastern Germany. The estimates from a fully interacted specification appear to support the hypothesis that unions compress some of the returns to observable worker attributes. However, the results from a fixed-effects specification show that a large part of this flattening of the wage structure arises from a selectivity bias, as workers with low levels of observable skills are positively and workers with higher levels of skills are negatively selected into covered firms. Taken together, the fixed-effects specifications suggest the following conclusions. First, differences in observables and unobservables appear to explain the full firmlevel contract wage premium in western Germany and the full premium associated with industry-level contracts in eastern Germany. Second, there remains a small, but statistically significant wage premium of about 2 per cent for industry-level contracts in western Germany and a similar premium for firm-level contracts in eastern Germany. Finally, results from a trend-adjusted difference-in-difference approach indicate that the industry-level wage premium in western Germany might be downward biased and the firm-level premium in eastern Germany might still be upward biased, once systematic differences in pre-transition wage growth are accounted for. The result that selection into industry-level contracts appears to be somewhat more relevant in eastern Germany might be explained by the fact that the decision of joining or leaving an employers' association here is to a considerably larger extent left to the firm's discretion than in western Germany. In western Germany, membership in an employers' association is likely to be more exogenous, since it presumably reflects to a larger extent the result of a historically grown industrial relations structure. Abstract Using a large linked employer-employee data set, this paper presents new evidence on the wage premium under collective bargaining contracts in western and eastern Germany. The novel feature of our analysis is that we use a longitudinal data set. In contrast to previous studies, we seek to assess the extent to which differences in wages between workers in covered and uncovered firms arise from the non-random selection of workers and firms into the different regimes. By measuring the relative wage gains or losses of workers employed in firms that change contract status, we obtain estimates that depart considerably from previous results relying on cross-sectional data. Industrylevel contracts in western Germany and firm-level contracts in eastern Germany are associated with a small, but statistically significant average wage premium of about 2 per cent. Finally, results from a trend-adjusted differencein-difference approach indicate that the industry-level wage premium in western Germany might be downward biased and the firm-level premium in eastern Germany might still be upward biased, once differences in pre-transition wage growth are accounted for