30,000 Minimum Wages: The Economic Effects of Collective Bargaining Extensions

Several countries extend collective bargaining agreements to entire sectors, therefore binding non-subscriber workers and employers. This procedure may address coordination issues but may also impose sector-specific minimum wages and work conditions that are not appropriate for some workers and firms, especially if the union or employer association subscribers are not representative. In this paper, we analyse the impact of such extensions along several margins drawing on firm-level monthly data for Portugal, a country where extensions have been widespread until recently. We find that both formal employment and wage bills in the relevant sector fall, on average, by 2 per cent - and by 25 per cent more across small firms - over the four months after an extension is issued. These results are driven by reduced hirings and increased firm closures. On the other hand, informal employment, not subject to labour law or extensions, tends to increase. The findings are robust to several checks, including a falsification exercise based on extensions that were announced but not implemented.