Unemployment and the coverage extension of collective wage agreements

This paper examines how the extension of collective wage bargaining agreements to non-unionized firms affects unemployment. Testing a large number of econometric specifications on data from 15 OECD countries observed between 1965 and 2007, we find a positive, significant and robust interaction between the tax wedge and the degree of coverage extension of collective wage bargaining agreements. More specifically, our results suggest that the tax wedge has a larger positive effect on unemployment than any other labour market policy in countries with wide extension of collective wage agreements’ coverage such as France or Spain. Conversely, in countries where coverage extension is close to zero as in Nordic countries, unemployment is essentially insensitive to changes in the tax wedge.