Who's got the power? Wage determination and its resilience in the Great Recession

Whereas wage inequality has risen markedly in most OECD countries in recent decades, it has fallen in several Southern European economies. To shed light on this phenomenon, we embed sectoral bargaining, which is common in Southern European economies, in a dynamic search and matching model. We estimate the model using comprehensive employer-employee data from Portugal for the last two decades and its data on collective bargaining agreements in different sectors, which allows us to assess the evolution of rent sharing. We find that since the mid-2000s, worker bargaining power has grown slightly at the bottom of the skill distribution while shrinking at the middle and top, contributing to the compression of the wage distribution. These changes, which persisted even during the Great Recession, increased the importance of sectoral bargaining in wage determination, weakened the relationship between wages and firm productivity, and reduced the assortative matching of workers to firms.