Government Extension of Collective Bargaining Agreements

In many European countries, the government has the right to choose a collective bargaining agreement negotiated by a group of employers in an industry and, by decree, make it applicable to all firms in the industry. This paper considers a model of participation in the negotiations, allowing for both negotiating and non-negotiating firms to obey or disobey the provisions of the relevant agreement. The model is then tested on data from France in 1986. We find that French firms behave as if they believe the probability of having a contract extended to them is 0.936, which is significantly higher than the proportion of agreements in our sample that are actually extended (roughly 70 percent). Furthermore, they act as if they believe the probability of getting caught disobeying the provisions of a collective agreement or extension order is 0.992, while associated penalty, in addition to the previously unpaid back wages, is 40,800 francs per worker. We also simulated some possible policy changes to discover the most effective means of increasing participation in bargaining and obedience of collective agreements and extension orders. We found that increasing the perceived probability that an extension order will be issued by 1 percent causes the mean firm in our sample to be 95.5 percent more likely to join the employers association and participate in the bargaining. We also found that raising the probability of getting caught in disobedience of a collective agreement or extension order by 0.5 percent makes the mean firm 2.1 percent more likely to obey, while a 10 percent increase in the penalty only improves obedience by 0.3 percent.