The Effect of Firm-Level Contracts on the Structure of Wages: Evidence from Matched Employer-Employee Data

In Spain, as in several other European countries, sectoral bargaining agreements are automatically extended to cover all firms in an industry. Employers and employees can also negotiate firm-specific contracts. We use a large matched employer-employee data set to study the effects of firm-level contracting on the structure of wages. Employees covered by firm-specific contracts earn about 10 percent more than those covered by sectoral contracts. The estimated premium is about the same for men in different skill groups, but higher for more highly skilled women, suggesting that firm-level contracts raise wage inequality for women. At the establishment level, we compare average wages under firm-level and sectoral bargaining, controlling for the propensity to negotiate a firm-specific contract. Consistent with the worker-level models, we find that firm-specific contracting raises average wages, with a pattern of effects that tends to increase inequality relative to sectoral bargaining for women. Although we cannot decisively test between alternative explanations for the firm-level contracting premium, workers with firm-specific contracts have significantly longer job tenure, suggesting that the premium is at least partially a non-competitive phenomenon.