How collective bargaining shapes poverty: New evidence for developed countries

Abstract

Although many studies point to the significant influence of collective bargaining (CB) institutions on earnings inequalities, evidence on how these institutions shape poverty rates across developed economies remains surprisingly scarce. This paper explicitly addresses the relationship between CB systems and working‐age poverty rates before and after taxes and transfers in 24 developed countries over the period 1990–2015. Our results show that countries with a more centralized CB system, a more extended bargaining coverage rate and/or a higher trade union density display significantly lower poverty rates. However, these results only hold in a post‐tax benefit scenario. Controlling for country and time fixed effects and a wide range of covariates, our estimates indeed suggest that the poverty‐reducing effect of CB institutions stems from the political strength of trade unions in promoting public social spending rather than from any direct effect on earnings inequalities. Sensitivity tests for endogeneity and overlapping samples support this conclusion.