Institutionalized bargaining power and the level and distribution of wages: Collective wage agreements and union membership in West and East Germany

Abstract

This paper investigates how workers’ institutionalized bargaining power, which extends in Germany beyond union membership to collective wage agreements, relates to the level and distribution of wages differently in East and West Germany. We conduct DFL and RIF decompositions as well as fixed-effect regression analysis on SOEP data from 2014 to 2023. We find that lower wage inequality is linked to collective wage agreements, while union membership is associated with lowering wage inequality mainly at the bottom end of the distribution in West Germany. In East Germany, in contrast, the positive correlation of collective wage agreements applies only to the bottom part of the distribution. Furthermore, both collective wage agreements and union membership statistically and economically go along with higher wage levels at the national level. This association is stronger for East than for West Germany. We interpret these results through a lens of persistent institutional path dependencies within Germany, the formally unified national framework of collective bargaining notwithstanding.