Improving Pay and Productivity with Sector Collective Bargaining

Abstract

Across the world, many workers have experienced prolonged wage stagnation and insecure working conditions. At the same time, employers face challenges with staff shortages and low productivity. Sectoral and multi employer bargaining that covers broad segments of the workforce can help to solve these challenges and can bring positive outcomes to workers, firms and wider society. This King’s Business School Research Impact Paper examines different types of institutions to support high collective bargaining coverage. It reviews systems with high union density and employer density, different types of state intervention that extend the agreements to all workers within a sector and instruments that allow unions to establish multi employer agreements to safeguard against outsourcing.

Full text

IMPROVING PAY AND
PRODUCTIVITY WITH SECTOR
COLLECTIVE BARGAINING
A Review of the International Evidence
King’s Business School Research Impact Papers, No. 2
Chiara Benassi, King’s Business School
Chris F Wright, University of Sydney Business School

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Damian Grimshaw (Associate Dean, Research Impact)
Ko De Ruyter (Vice Dean, Research)
Stephen Bach (Dean)
www.kcl.ac.uk/business

IMPROVING PAY AND PRODUCTIVITY
WITH SECTOR COLLECTIVE BARGAINING
A Review of the International Evidence
Across the world, many workers have experienced
prolonged wage stagnation and insecure working
conditions. At the same time, employers face challenges
with staff shortages and low productivity. Sectoral and
multi-employer bargaining that covers broad segments of
the workforce can help to solve these challenges and can
bring positive outcomes to workers, firms and wider
society. This King’s Business School Research Impact
Paper examines different types of institutions to support
high collective bargaining coverage. It reviews systems with
high union density and employer density, different types of
state intervention that extend the agreements to all workers
within a sector and instruments that allow unions to
establish multi-employer agreements to safeguard against
outsourcing. Examples are drawn from Nordic countries,
Continental European countries, Southern European
countries and Anglo-American countries. It presents ideas
to support a new policy agenda being developed in
countries and regions including the UK, the European
Union, Australia, New Zealand and Chile aimed at
developing fairer wage-fixing mechanisms to combat low
pay, worker poverty, long hours, insecurity and other
features of poor-quality jobs.
3
King’s Business School Research Impact Papers, No. 2
Chiara Benassi, King’s Business School
Chris F Wright, University of Sydney Business
School
Authors Abstract
Date of publication: November 2023
i

1. INTRODUCTION
Sectoral collective bargaining can be a useful
instrument of macro-economic management
and deliver positive outcomes for workers and
the wider society. Three collective actors are
typically involved in collective bargaining:
unions, the state and employers. All of them
have a potential interest in supporting sectoral
collective bargaining, including the
employers’ side. Encompassing collective
bargaining is associated with lower inequality
within and across sectors. Thus, it not only
ensures fairer redistribution of income but is
potentially also positive for boosting
consumption and therefore, ultimately,
growth. Indeed, encompassing collective
bargaining structures were recently found to
be associated with lower unemployment rates
as well as higher employment rates; this
suggests that sectoral collective bargaining, if
effectively coordinated, can potentially
enhance economic performance.
Furthermore, collective bargaining has direct
positive effects for firms too because it reduces
transaction costs and conflicts at firm level
through providing a formal structure for labor–
management cooperation. By providing
workers’ with a voice channel, collective
bargaining can also reduce hiring and training
costs associated with turnover and allow
workers to participate in workplace process
improvements, which may stimulate increased
efficiency. Indeed, in countries with strong
unions and stable collective bargaining
structures, unions have been found to be less
oppositional to technological change and more
prone to collaborate around employment
restructuring, contributing to overall
efficiency. Finally, encompassing collective
agreements set ‘productive constraints’ on
firms because they prevent them from
competing over labour costs, which may
contribute to poaching and staff shortages,
and encourage employers to invest in R&D
and technology and to cooperate with worker
representatives on workplace innovation, thus
boosting productivity.
Yet, there are great cross-country differences
in the extent to which collective bargaining
structures are encompassing, with implications
for the ability of collective bargaining to affect
redistribution and other (macro)economic
outcomes. Figure 1a below shows the
variation of collective bargaining coverage
across countries; while the US has a collective
bargaining coverage rate of 11.7%, countries
like Belgium, Austria, France and Italy have a
coverage above 95%.
The mechanisms through which high
collective bargaining coverage is sustained
vary across countries. The comparison of
Figure 1a and Figure 1b, on the following
page, reveals that high bargaining coverage
reflects high union density in the
Scandinavian countries and in Belgium, where
a majority of workers are union members.
However, high collective bargaining coverage
in Southern European countries and in
Austria cannot be explained through
unionisation, which is around 30% in Italy
and just above 10% in France. This brief
report will present an overview of the different
structures of sectoral collective bargaining and
of the mechanisms supporting encompassing
agreements. Furthermore, it will illustrate the
recent attempts made by the government in
Australia and in New Zealand to strengthen
sectoral and multi-employer collective
bargaining.
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OECD (2023): link to Trade Union Dataset (05.07.23)
Note: Figures for Australia include coverage of ‘awards’ which are collective minimum
standards adjusted through a tribunal review process, not through collective bargaining.
OECD (2023): link to Trade Union Dataset (05.07.23)
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2. THE NORDIC COUNTRIES: HIGH UNION DENSITY AND HIGH
BARGAINING COVERAGE IN DENMARK AND SWEDEN
Strong collective bargaining is a defining
feature of the Nordic countries. The vast
majority of workers in Denmark, Sweden,
Norway and Finland have their wages and
working conditions regulated by collective
agreements. The role of governments in
mandating minimum standards is limited, with
employer associations and unions setting these
standards jointly through the bargaining
process. The social partners have strong
membership coverage and extensive powers to
initiate strikes and lockouts. While these
powers are used relatively sparingly, industrial
strength encourages employers and unions to
cooperate during bargaining and to develop
agreements that benefit both parties. Strong
delegate structures ensure workers are
effectively represented and given voice and
that employers abide by the terms of
bargained agreements.
The collective bargaining systems of the
Nordic countries are highly ‘coordinated’,
which means bargaining at the enterprise level
is linked explicitly to sectoral and nation-wide
objectives. In Denmark, for example, there
are three types of bargaining: enterprise
agreements, negotiated by union delegates
and management; sectoral bargaining
agreements, between the sector-level unions
and employer associations; and national
agreements, between the national union and
employer confederations. National and
sectoral agreements provide ‘frameworks’ that
can be varied at the enterprise level. The peak
confederations are responsible for ensuring
wage outcomes across sectors and enterprises
are broadly consistent. For example,
manufacturing is the main key export sector in
the Danish economy. This gives it an
important status in the bargaining system. The
manufacturing sectoral agreement sets pay
rates that other sectors must follow in their
own agreements. The minimum pay rates in
sectoral agreements can be varied by
enterprise agreements but usually only if they
correspond with productivity improvements at
the workplace. Coordinating or aligning wages
across agreements in this way helps to ensure
that wages increases can be paid for.
In Sweden, sectoral agreements provide the
parameters within which union and
management representatives must negotiate in
developing enterprise agreements. There is
often scope for local flexibility regarding pay
to be negotiated within the general principles
reached through sectoral agreements. A
constructive approach to bargaining by unions
and employers has enabled improvements in
job quality, flexibility and competitiveness
with relatively minimal conflict.
The Nordic systems highlight the importance
of coordination in the bargaining process,
which is sustained by peak union and
employer bodies working closely with their
affiliates. By establishing and maintaining
coordinated structures that ensure broad
alignment in bargaining outcomes across and
between sectors, the Nordic countries
highlight how the potential benefits of
collective bargaining discussed in the
introduction to the report are realised in
practice. Coordinated bargaining in these
countries encourages collective employer
commitments to training to help improve skills
development and utilisation and to prevent
firms from poaching skilled workers from one
another. It also enables standardised wage
outcomes that effectively take wages out of
competition, thus preventing firms from
engaging in a ‘race to the bottom’, and
encouraging them to compete on quality.
Coordinated sectoral bargaining in the Nordic
countries helps to achieve sustainable wage
increases by linking wage increases to inflation
and productivity, which contributes to strong
employment growth, and enables a greater
degree of wage compression between higher
and lower income workers.
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3. CONTINENTAL EUROPE: STABILITY AND EROSION OF SECTORAL
COLLECTIVE BARGAINING IN AUSTRIA AND GERMANY
Continental European countries are typically
characterised by sector-level collective
bargaining and by relatively strong
coordination between different levels of
bargaining. Sectoral collective bargaining
takes place between employer associations
representing firms in a given sector and trade
unions, which organise workers vertically
within that sector. Firm-level agreements,
which used to be subordinate to sector-level
agreements, can now amend the standards set
at sectoral level under specific circumstances;
e.g. if the company is experiencing serious
economic problems.
Germany used to be the paramount example
of a country able to combine strong
manufacturing export performance with
encompassing industry-level collective
bargaining, which ensured egalitarian
outcomes among the workforce. In addition to
the coordinated bargaining structure
described above, the German system was also
characterised by pattern bargaining. This
involved the union in the metal sector
bargaining wage increases below the sectoral
productivity but around the average national
productivity so the other unions could match
their bargaining outcomes and negotiate
collective agreements aimed at creating a
common wage floor across all sectors.
Additional productivity gains were then made
up for through company-level agreements; the
latter typically include(d) additional benefits
such as pension, holidays and leave and set
rules for the variable reward system, which
was exclusively a collective reward system
based on the performance of the company and
establishment. Despite the overall strong
industrial relations, collective agreements in
some sectors, especially in low-end services,
would have had limited coverage due to low
union and employers’ density. Yet, they could
benefit of the extension by law: The Ministry
of Labour, after the approval of the Collective
Bargaining Committee, could extend
collective agreements to the whole sector if
the extension was requested by one bargaining
party and if the agreement covered at least
50% of workers in the respective bargaining
area.
However, since the 1990s the system has
undergone a series of significant changes.
Union membership declined but also
employers, especially SMEs, started leaving
their employer associations so the collective
agreements applied to a decreasing number of
employers. But collective bargaining coverage
did not only drop – from around 80% in 1995
to around 54% in 2018 – it was also
progressively decentralised as company-level
agreements were allowed to amend sectoral
standards in order to ‘preserve’ Germany’s
competitiveness. As employers made
increasing use of outsourcing, industry-level
agreements became unable to cover workers in
a sector as many groups of ‘peripheral
workers’ were moved onto more precarious
jobs in subcontractors, which at least
nominally belonged to different, less unionised
sectors. Under these circumstances, the
extension mechanism became less effective, as
50% coverage was not easy to achieve; to
reflect that, the provision has been recently
changed so that the agreement needs to be of
“predominant importance” (so the 50%
coverage is not necessary anymore) and in the
public interest.
Unlike the German system, the Austrian
collective bargaining system is stable. While
union density declined and opening clauses
derogating sectoral standards were allowed,
collective bargaining coverage is still around
98%. Similarly to Germany, sectoral
employer associations and sectoral unions
negotiate the collective agreements, which
then get extended to all employers in the
sector because the membership of the
employer associations is mandatory. This
obligation imposed on employers acts
therefore like a functional equivalent of
automatic legal extension mechanisms in
Southern Europe (see below).
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4. SOUTHERN EUROPE: HIGH COLLECTIVE BARGAINING COVERAGE
THROUGH LEGAL EXTENSION IN ITALY
The sectoral level is the predominant
collective bargaining level in most Southern
European countries. While the labour
movement is fragmented mostly along
ideological lines, trade unions organise
workers vertically within a given sector and
the main unions try to coordinate with each
other when bargaining with the sectoral
employer associations. The Southern
European cluster of countries is typically
characterised by high collective bargaining
coverage thanks to existing legal provisions
extending collective agreements to all workers
in the sector. This section will focus on the
example of Italy.
Collective bargaining in Italy takes place
between the sectoral employer association
and, usually, the three sectoral unions
affiliated to each of the three main union
confederations. The sectoral collective
bargaining system is centrally coordinated.
Firm-level agreements can derogate sectoral
standards as well as statutory standards under
exceptional circumstances including necessity
of employment restructuring and
competitiveness improvements and need to be
signed by the representative unions. In
practice, however, these derogations rarely
take place, most likely because it is still
uncertain that derogation from sectoral salary
levels would be legal (see below).
The collective bargaining system is
encompassing with a coverage rate of around
100% even though the union density is
between 20 and 30% and the density of
employer association between 50 and 60%.
The high coverage is achieved through the
legal provision in Article 36 of the Italian
constitution, that states that all workers have
right to fair remuneration. ‘Fair remuneration’
is interpreted by labour courts as the salary set
by the collective agreement. Therefore,
companies are, although indirectly, legally
required to apply the collective agreements
otherwise they might be liable in court.
This legal provision represents a functional
equivalent of formal extension procedures like
in other Southern European countries such as
France, where one of the social partners
applies for the extension and the Ministry of
Labour decides whether the collective
agreement should be extended in the public
interest.
The Italian collective bargaining system has
been under the threat of decentralisation
especially after the Global Financial Crisis,
when the government was required to
implement structural reforms to (allegedly)
increase national competitiveness. Yet, the
sectoral collective bargaining system was
defended not only by the unions but also by
the employer organisations. This was partly
because of the dominance of small firms in
employer organisations, which can avoid
industrial conflict and cost competition
through the application of sectoral
agreements. Furthermore, employer
organisations themselves have an interest in
the maintenance of sectoral bargaining and its
extension to whole sectors by the state
because otherwise they would lose their
legitimate role as negotiator and political
actor. Similar cross-class coalitions against the
decentralisation of collective bargaining
formed also in Portugal and Spain.
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5. ANGLO-AMERICAN COUNTRIES: REBUILDING SECTORAL
BARGAINING IN AUSTRALIA AND NEW ZEALAND
Like the United Kingdom, in recent decades
there has been limited institutional support for
collective bargaining in ‘Anglo-American’
countries, such as Australia, Canada, Ireland,
New Zealand and the United States.
Within this group of countries, however, there
has been significant variation in their
bargaining and wage-setting arrangements.
Australia and New Zealand, for example,
developed systems of compulsory conciliation
and arbitration that, for much of the 20th
century, regulated wages on a collective basis.
This involved unions and employers entering
disputes resolved by state tribunals that issued
‘awards’ prescribing the wages and working
conditions for all workers and employers in a
given industry or occupation. Until the 1990s,
the vast majority of workers in both countries
had their wages set by an award.
The award systems of Australia and New
Zealand were eroded by neoliberal reforms
implemented at the turn of the 21st century,
which had the effect of weakening unions
significantly. Enterprise-level collective
bargaining and individual contracts thereafter
became the main mechanisms through which
wages were set. While reforms in the early
2000s provided scope for multi-employer
bargaining, the restrictiveness of these laws
meant that very few multi-employer
agreements were established in both countries.
Workers’ collective rights – for example, for
union organisers to enter workplaces, union
delegates to represent members and union
members to take industrial action – had been
relatively extensive under the previous
arbitration systems. However, the neoliberal
reforms restricted workers’ collective rights,
which limited the capacity of unions to
bargain effectively.
In Australia, a reformed system of ‘modern
awards’ continues to provide safety nets of
minimum wages and conditions for workers
not covered by enterprise agreements and set
standards that enterprise agreements cannot
undercut. However, modern awards cannot be
varied through bargaining but rather through
an administrative process overseen by the Fair
Work Commission, an independent state
tribunal.
This gives unions and employers much less
influence over the terms of awards than over
bargained agreements. Workers on average
receive much lower pay under awards than
under enterprise agreements. However, the
enterprise-focused nature of the bargaining
system makes it hard for unions to negotiate
new agreements in sectors with low coverage
rates, and relatively easy for employers to
avoid or opt-out of existing agreements, for
example through outsourcing. This has
contributed to a decline in the proportion of
workers covered by an enterprise bargaining,
to low wage growth and to rising inequality
between higher and lower income earners.
To address these problems, the Australian
government in December 2022 secured the
passage of legislation, which came into effect
in June 2023, to make it harder for employers
to avoid enterprise bargaining and to loosen
restrictions on multi-employer bargaining.
These reforms allow unions or employers to
apply for the creation of extension of multi-
employer agreements in various scenarios or
‘streams’, the most notable of which relate to
‘supported’ and ‘single interest’ bargaining.
•The supported multi-employer bargaining
stream applies to low-wage and
government-funded sectors that face
structural barriers to bargaining, for
example, the aged care, disability care, and
early childhood education sectors. This
stream allows unions to apply to the Fair
Work Commission to require that multiple
employers bargain together for an
agreement.
•The single interest bargaining stream
allows unions or employers to apply for the
creation, extension or variation of an
agreement covering multiple employers
whose operations or activities are deemed
by the Fair Work Commission to be
‘reasonably comparable’. This single
interest comparability could include, for
example, employers operating in the same
sector, the same geographical location, the
same business structure (e.g. the
franchisees, subsidiaries or subcontactors of
a firm) or,
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5. ANGLO-AMERICAN COUNTRIES: CONTINUED
depending on how the Fair Work
Commission interprets these laws, the same
supply chain or production network. Small
businesses are excluded from bargaining
under this stream, unless they consent to
being part of a multi-employer agreement.
Similar to Australia’s reforms, New Zealand
government recently introduced Fair Pay
Agreements, which came into law in
December 2022. These are multi-employer
collective agreements bargained between
employer associations and unions that set
minimum terms and conditions relating to
pay, benefits, working hours, and training and
development for all workers in given sectors
and occupations. The stated aims of Fair Pay
Agreements are to increase worker bargaining
power to ensure pay and conditions reflect the
needs of each sector, and to establish sector-
wide coordination to encourage businesses to
invest in skills and innovation and to compete
on quality enhancement rather than cost
reduction. Unions must apply to the
Ministry of Business, Innovation and
Employment to initiate either a sectoral or an
occupation-based agreement and satisfy one
of two tests for the agreement to be
established.
•A ‘representation test’ requires the
initiating union to demonstrate a minimum
threshold of support among workers who
would be covered by the Fair Pay
Agreement.
•A ‘public interest test’ requires the
initiating union to demonstrate that
workers who would be covered by the Fair
Pay Agreement are low paid and have
either limited bargaining power or limited
opportunity for pay progression.
If a union’s application to initiate bargaining is
approved, the process for bargaining for a Fair
Pay Agreement with eligible employer
associations commences. The Employment
Relations Authority, a state tribunal, oversees
the bargaining process and must assess and
approve Fair Pay Agreements before they
come into effect.
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These recent Australia New Zealand reforms
demonstrate that multi-employer bargaining is
possible in countries in the Anglo-American
institutional tradition, including potentially in
the United Kingdom.
KING’S BUSINESS SCHOOL | Improving Pay And Productivity With Sector Collective Bargaining

6. SUMMARY: WHAT MATTERS FOR ENCOMPASSING SECTORAL
COLLECTIVE BARGAINING?
This report has argued that encompassing
sectoral collective bargaining provides benefits
to all three actors involved: workers and their
unions, employers and their associations, and
the state.
Yet, there are different institutions and legal
provisions underlying (high) collective
bargaining coverage. On the one hand, the
role of social partners is crucial. High union
density – as well as high employer density – in
the Nordic countries is primarily responsible
for high collective bargaining coverage. In
Southern European countries, the
coordination between social partners was key
to prevent decentralisation after the Global
Financial Crisis.
On the other hand, legal intervention by the
state plays a fundamental role where unions
do not have the same countervailing power as
in the Nordics. Mandatory membership in
employer associations in Austria and the
possibility of extension through the labour
courts in Italy explain the high bargaining
coverage rates in both countries. The recent
reforms in New Zealand and Australia point in
the same direction as respectively government
ministries and tribunals can now intervene in
the bargaining arena to support the
negotiation of multi-employer agreements.
These reforms highlight the potential for
legislative reform to strengthen sectoral or
multi-employer bargaining in systems without
a tradition of these arrangements. Countries in
other parts of the world are also moving in this
direction. The Chilean government has made
a commitment to strength sectoral bargaining
and the new European Union Minimum
Wages Directive obliges member states with
bargaining coverage rate below 80% to take
measures to increase it, which realistically can
only be achieved through sectoral bargaining.
For countries where there is an urgent need to
reverse declines in union density and
collecting bargaining coverage, legislative and
institutional reform thus provides a vital route
to boosting the power of unions to raise the
pay and conditions of working people.
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Legislation Amendment (Secure Jobs, Better Pay) Bill 2022,
Parliamentary Library Bills Digest No. 34 2022–23.
Canberra: Parliament of Australia.
Ministry of Business Innovation and Employment. 2022. The
proposed Fair Pay Agreement system.
https://www.mbie.govt.nz/dmsdocument/14294-the-
proposed-fair-pay-agreement-system-pdf
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System: A guide for participants.
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and-resources/publications/fair-pay-agreements-guide-for-
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KING’S BUSINESS SCHOOL | Improving Pay And Productivity With Sector Collective Bargaining

We undertake ground-breaking research that improves the
way people do business. And we engage with organisations
around the world to create real value for society.
Since 1989, King’s Business School has grown into a leading
management institution – and one of the largest in London.
We’ve appeared in the top 10 for business and management
studies three years in a row.
We’re a friendly, diverse community committed to the highest
quality teaching and research. People from over 80 countries
come here to study with us, and we’re proud of the varied
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Being in the heart of London, our students and academics
have unlimited opportunities for collaboration, research,
and developing their career prospects. From bold new startups
to multinational conglomerates, businesses inform our teaching
and benefit from our work.
Find out more
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