Collective bargaining and the increase of wage inequality in Germany

A number of studies show, that wage inequality has risen over the last two decades in most OECD countries. Though quite a number of studies investigate the factors which are responsible for the increase of wage inequality, it is still debated what the main driving forces behind these changes are. While the thesis of a "skilled biased technological chance" points to the increasing demand for higher qualifications, the theory of social closure underlines the impact of social conflicts and their institutional consequences on wage inequality. This present paper investigates the effect of collective bargaining, being an important mode of institutionalized social closure in Germany, on the increase of wage inequality. Theoretically, changing patterns of collective bargaining should have a larger impact on the lower ranges of the wage distribution, while increasing returns to education are more important at the upper ranges. Moreover, it is assumed that the effects of collective bargaining vs. educational returns at different ranges of the wage distribution will vary between industries. The study uses data (1995-2006) of the German survey of wage-structure (Verdienststrukturerhebung), containing data about involvement in collective bargaining at the individual level, and applies various regression and decomposition methods to the data. First results show that indeed the effects of collective bargaining grow at the lower end of the wage distribution. However, the increasing effects of collective bargaining are undermined by the decreasing coverage of collective bargaining in Germany.