Regional Wage Differentiation and Wage Bargaining Systems in the European Union

The theoretical literature has argued that a centralized wage bargaining system may result in low regional wage differentiation and high regional unemployment differentials. The empirical literature has found that centralized wage bargaining leads to lower wage inequality for different skills, industries and population groups, but the evidence on its impact on regional wage differentiation is scant. Empirical evidence in this paper for European Union regions for the period 1980-2000 suggests that countries with more coordinated wage bargaining systems have lower regional wage differentials, after controlling for regional productivity and unemployment differentials. Estimates from wage curves for Germany and Italy based on panels of regions also suggest some links between the estimated elasticities and the level of coordination in wage bargaining.