In contrast with most developed economies, wage inequality has fallen in Portugal and Southern Europe. In a recent article, Hugo Vilares (MARKINO) and Hugo Reis (Banco de Portugal) examine the role of sectoral bargaining in explaining the difference.
They develop a dynamic search-and-matching model with collective bargaining and estimate it using employer-employee-linked data for Portugal (Quadros de Pessoal) and data on collective bargaining agreements from 1995 to 2016.
They find that bargaining power has shrunk for middle and high-wage earners. Relatedly, they find that wages have become ever less linked to firm productivity or profitability. This shows that market competition has lost relevance in wage determination. Instead, sectoral bargaining and the wielding of firms’ monopsonistic market power have gained ground. For Hugo, market organisation is crucial in explaining wage compression and falling inequality. As he puts it, ‘it is institutions, not technology’. He also claims that ‘unions are basically taxing higher earners to distribute to lower earners’.
Decoupling wages and firm productivity, especially in a context of wage compression, has consequences for the quality of the match between workers and firms. The authors find that the likelihood of better workers matching with better firms has decreased in Portugal. This is opposite to what is observed in other economies. This phenomenon's output and efficiency effects are still being researched. However, Hugo is concerned. He notes that productivity growth is at risk as the return for upskilling is reduced, and worker and firm incentives become misaligned.
Besides his research, Hugo is currently studying the impact of public policies, such as alterations to the transport network or changes in redundancy payments, on wage determination and inequality.
