Chapter 7: Monitoring the effects of minimum wages

7.7 Joint effects of minimum wages and collective bargaining

The effects of minimum wages, and their magnitude, depends on how they interact with other policies and labour market institutions. One such interactions is between minimum wages and collective bargaining. Indeed, the effects of minimum wages are different in countries with a strong tradition of collective bargaining than in countries where wages are set unilaterally by enterprises in negotiation with individuals.   

What is collective bargaining?

Collective bargaining refers to the negotiation of wages and working conditions between workers organizations and employers and/or their organizations. Negotiations as part of collective bargaining take place bilaterally, with government only intervening to create the necessary framework and promote its development.

Collective bargaining can take place at various levels. Under enterprise-level bargaining, each employer bargains independently; under sectoral multi-employer bargaining, employers come together in associations with a mandate to bargain.

The latter type of bargaining is sometimes seen as more inclusive, giving employers and workers more bargaining power and saving on bargaining costs and removing the potentially conflictual topic of pay negotiations from the workplace. This multi-employer type negotiation also establishes a common rule for competition among enterprises that are parties to the agreement. However, it can restrict the independence of individual firms, and may not take into account the heterogeneity of firms within a particular sector. Moreover, many agreements increasingly allow for tailor making of terms at the enterprise level (dual level bargaining) and provide for conditional derogations depending on firm size.

Extension of collective agreements1 to all enterprises, in accordance with national law and practice, can also be used to ensure fair competition by providing a level playing field and extending coverage to all workers.

Empirical evidence

In many countries, minimum wages and collective bargaining co-exists and complement each other. In principle, minimum wages should be targeted at the lowest-paid employees, while collective bargaining can set wage floors but should also promote wage increases for workers who also earn more than the minimum, in line with productivity growth. However, if the minimum wage is too high or the minimum wage system too complex (with too many rates, including for workers with very different levels of qualifications or occupations), there is a risk that minimum wages will “crowd out” collective bargaining – that is, encroach on the domain of collective bargaining and not leave enough space for the latter to develop.

When collective bargaining is weak, there is a risk that many workers’ wages will be clustered around the minimum wage, dragging down median or mean wages.

Box 1
The combined effects of minimum wages and collective bargaining

In France, the minimum wage influences the base rate in collective agreements, which in turn also influences all collectively agreed wages above the floor. Because most collective agreements are extended to entire industries, spillover effects are “institutionalized” across the economy, and are therefore relatively strong and far-reaching. For example, studies suggest that the spillover effect is fully felt on wages up to 10 per cent above the minimum wage and extends to a wage level twice the minimum wage, equivalent to a wage above the 50th percentile.

In the United States, by contrast, weaker trade unions and lower collective bargaining coverage explain the weaker spillover effect. Studies in the United Kingdom find an even weaker spillover effect that is almost insignificant. In fact, for workers paid a little above the minimum, some studies even report a negative wage effect, suggesting that some employers have shifted the cost of minimum wage up-ratings on to other low-wage workers by proactively reducing differentials.

Source: adapted from Grimshaw, Bosch and Rubery (2014). “Minimum wages and collective bargaining: What types of pay bargaining can foster positive pay equity outcomes?” British Journal of Industrial Relations, Vol. 52, Issue. 3, pp. 470-498.

1 An extension procedure is a legal process used in many countries which allows the government to extend the coverage of a sectoral agreement to all workers in the sector irrespective of whether an enterprise has signed the agreement.