Do industry-level contracts suppress firm wage differentials?

This article studies the role of collective bargaining coverage for the relationship between wages and firmspecific performance. The empirical evidence based upon German linked employer-employee data provides support for the hypothesis that industry-level contracts suppress firm wage differentials that arise from firm-specific profitability conditions. Addressing the role of the frequency of shocks to firm performance, the evidence further suggests that the insensitivity of wages to firm-specific productivity fluctuations is mainly driven by the insulation of wages from transitory shocks. For permanent shocks, however, the evidence points to somewhat more flexible wages as-at least at large employers-wages are found to significantly respond to permanent productivity fluctuations. As to the role of firm heterogeneity in a given industry, the empirical results also show that under industry-level bargaining workers in more heterogeneous sectors receive lower wages than workers in more homogeneous sectors. This may be interpreted as evidence that centralised unions internalise negative implications of a compressed industry wage structure for below average performing firms.