BANCO DE PORTUGAL Economic Research Department BARGAINED WAGES, WAGE DRIFT AND THE DESIGN OF THE WAGE SETTING SYSTEM

This paper aims at answering the question: How does a typically European bargaining system |with collective bargaining, extension mechanisms and national minimum wage |coexist with low unemployment rate and high wage °exibility? A unique data set on workers, ̄rms and collective bargaining contracts in the Portuguese economy is used to analyze the determinants of both the bargained wage and the wage drift. Results indicate that wage drift stretches the returns to every worker and ̄rm attribute, whereas it shrinks the returns to union bargaining power. Therefore, ̄rm-speci ̄c arrangements, in the form of wage drift, partly o®set collective bargaining, granting ̄rms a high degree of freedom when setting wages. Union bargaining power raises the overall wage level, but lowers the returns on worker attributes, an outcome of the egalitarian policy pursued.