Bargained wages , wage drift and the design of the wage setting system

European collective bargaining systems have the reputation of imposing rigidity on the labor market, which leads to high unemployment, in particular when compared to the USA system. Portugal is one of the OECD economies with highest wage °exibility and lowest unemployment rate, despite having typically European labor market institutions |collective bargaining sets wages for unionized as well as non-unionized workers, extension mechanisms are widespread and a national minimum wage is enforced. This paper aims at answering the questions: What is the degree of freedom that employers have when manipulating wages in this regulated institutional framework? How can a typically European bargaining system coexist with low unemployment rate and high wage °exibility? We use a unique data with micro information on workers, ̄rms and collective bargaining contracts to analyze the determinants of both the bargained wage and the wage drift (di®erence between bargained and actual wages). Preliminary results suggest that wage drift reinforces the impact of worker and r̄m attributes on wages |it stretches the returns to every worker and ̄rm attribute |, whereas it dilutes the impact of collective agreement attributes |it shrinks the returns to union bargaining power. Therefore, r̄m-speci ̄c arrangements, in the form of wage drift, partly o®set collective bargaining, granting ̄rms a high degree of freedom when setting wages. Higher coordination among employers seems to be associated with lower bargained wages, whereas union bargaining power raises wages.