Collective bargaining and spillovers in local labor markets

How does collective bargaining affect the broader wage structure? How are such spillovers transmitted? I present a model where firms with wage-setting power that are not covered by collective bargaining agreements, but are close to collective bargaining firms, are incentivized to increase their wages alongside these wage agreements. My model suggests an empirically rich measure of closely connected firms, the flow of workers between them. I test my hypotheses across a decade of wage agreements matched with worker-level data in South Africa. I show that bilateral worker flows reflect a wide range of firm characteristics, capturing firm links which are poorly predicted by industry and location. Observed wages in collective bargaining firms follow sharp increases in prescribed wages, and indeed firms more closely connected by worker flows to covered firms differentially increase wages more. My implied cross-wage elasticity is higher than comparable estimates in the literature because I am able to pin down the labor market segments empirically relevant to wage spillovers. A microdata simulation suggests that spillovers double the intensive and extensive margin effects of collective bargaining agreements on the full wage distribution