Collective bargaining coverage and functional income distribution in international comparison

This is measured by the wage share. Political initiatives such as the Bundestariftreuegesetz and the EU Minimum Wage Directive aim to expand collective bargaining coverage. From a theoretical perspective, however, a strong impact seems unlikely. Higher collectively agreed wages increase the cost of labor relative to capital, which can trigger substitution effects in the long term and reduce the wage share. Moreover, excessive wages can jeopardize employment and force adjustments toward higher capital intensity and productivity.

The empirical analysis in an international comparison shows a wide range of collective bargaining coverage: it spans from nearly one hundred percent in France to less than ten percent in Estonia. Ten countries reach a level of over eighty percent, including France, Austria, Belgium, and the Scandinavian states, while Germany stands at around fifty percent. Regarding the wage gap between employees covered by collective agreements and those not covered, there is no consistent pattern. In countries with high coverage, the wage advantage of covered employees is usually small or even negative, as in Sweden or Denmark. In Germany, the unadjusted wage gap is about 27 percent, but only around five percent when adjusted, which is due to selection effects, as mainly productive companies apply collective agreements.

The international cross-sectional comparison confirms the theoretical considerations that there is no close relationship between the degree of collective bargaining coverage and the level of the wage share: countries with a high wage share, such as Croatia or Latvia, show very different coverage levels. This is also confirmed by a simple model calculation for Germany: an increase in coverage from 50 to 80 percent would raise the wage share by only about 1.1 percentage points, assuming an adjusted wage advantage of covered firms of a maximum of 5 percent. Collective bargaining coverage thus does not prove to be an effective instrument for redistribution between labor and capital.