Rising Wage Inequality, the Decline of Collective Bargaining, and the Gender Wage Gap

Wage inequality has been increasing in many industrialized countries over the past decades. Parallel to this trend, coverage by collective wage bargaining has declined strongly in many economies (OECD, 2004). The gender wage gap has also declined in most of these countries. However, these three developments have rarely been investigated jointly in a systematic way. This paper therefore investigates the link between the recent increase in wage inequality between 2001 and 2006, the decline in collective wage bargaining, and the development of the gender wage gap using linked-employer-employee data for West Germany. Applying a sequential decomposition approach, we analyze the importance of firm-specific and personal-specific variables as well as of collective bargaining for changes in wage inequality. We address the following questions: What are the gender differences in the increase in wage inequality? What is the impact of the decline of union coverage on the evolution of the wage distribution? Has wage inequality increased within bargaining regimes? What is the impact of firm-level variables and personal characteristics on wage inequality? This is the first study to use the two cross-sections of the large German Structure of Earnings Survey in 2001 and 2006 for an analysis of the increase in wage inequality. In a quantile regression framework, we analyze wage changes by gender and the gender wage gap over the entire wage distribution. Building upon Machado and Mata (2005) and Melly (2005), we propose a sequential decomposition, which takes account of the observed joint sample distribution of the covariates. The German institutional background is as follows: Traditionally, wages are determined by collective bargaining between unions and employers associations at the industry level (sectoral collective contract or "Flächentarifvertrag"). Bargaining at the firm or plant level ("Firmentarifvertrag" or Betriebsvereinbarung") exists as well but covers a much smaller share of employees and firms. The recent decline in collective bargaining coverage is in line with international trends. Our results show that wage inequality is rising strongly both for males and females, driven not only by wage increases at the top of the distribution, but even more so by real wage losses below the median. At the same time, we find a sharp decline in coverage by collective bargaining. Both coverage by sectoral-level bargaining and coverage by firm-level bargaining is falling over time. Our sequential decomposition results show that all workplace related effects (firm effects and bargaining effects) contribute to the strong rise in wage inequality. We find evidence that the reduction in bargaining coverage contributes in a sizeable way to rising wage inequality and that the bargaining outcomes allow for higher wage flexibility. Nevertheless, these effects are dominated by the firm coefficients effect, which is almost exclusively driven by the sector coefficients effect, meaning that between- and within-industry wage differences drive the observed rise in wage inequality. The drop in collective bargaining coverage takes place almost exclusively within sectors. In addition, personal coefficients contribute to some degree to the increase in wage inequality, again reinforcing the dominance of labor demand effects.....

Antonczyk, Dirk, Bernd Fitzenberger and Katrin Sommerfeld (2010), Rising Wage Inequality, the Decline of Collective Bargaining, and the Gender Wage Gap, ZEW Discussion Paper No. 10-014, Mannheim.