Pay Clauses in Public Procurement: The Wage Impact of Collective Bargaining Compliance Laws in Germany

TL;DR

This study examines how collective bargaining compliance laws in Germany influence wages, finding significant wage increases in East Germany's public transport sector following law implementation, highlighting policy's role in wage setting.

Contribution

It provides the first empirical evidence on the wage effects of collective bargaining compliance laws using administrative data and variation in law implementation across German states.

Findings

Wage increases of 2.9% to 4.6% in East Germany within five years

Law implementation correlates with higher wages in the public transport sector

Effects are observed only in East Germany, not West Germany

Abstract

Using administrative data from Germany, this study provides first evidence on the wage effects of collective bargaining compliance laws. These laws require establishments receiving public contracts to pay wages set by a representative collective agreement, even if they are not formally bound by one. Leveraging variation in the timing of law implementation across federal states, and focusing on the public transport sector -- where regulation is uniform and demand is driven solely by state-level needs -- I estimate dynamic treatment effects using event-study designs. The results indicate that within five years of the law's implementation, wage increases were on average 2.9\% to 4.6\% higher in federal states with such a law compared to those without one -- but only in East Germany. These findings highlight the potential for securing collectively agreed wages in times of declining collective bargaining coverage.