The impact of institutions on economic performance in general, and on wage setting in the labor market in particular, is currently under debate (OECD 2006). In times of increasingly heterogeneous economic conditions the catchword is eurosclerosis, stating that institutional rigidities restrain labor market performance and the dynamics of economic development. A major focus in this context is on the impact of trade unions; see, e.g., the handbook of Addison and Schnabel (2003).
The main channel for unions to influence the wage structure is through collective bargaining. In Germany, this influence goes beyond mere negotiation of wage premia for union members since collective agreements on individual membership premia are forbidden by constitutional law. Given the high rate of collective bargaining coverage in the German labor market, union-bargained wages apply to the better part of all employees and unions influence the wage structure of members as well as of non-members. The design of the German wage-setting system thus offers the possibility to explicitly distinguish between the effects of union density and collective bargaining coverage. We argue that net union density as a proxy for union power governs the union’s threat point in the collective bargaining process and therefore determines the bargaining outcome. Collective bargaining coverage, on the other hand, captures the actual application of bargained agreements. So density and coverage offer a pre-bargaining and a post-bargaining indicator for unions’ influence in the labor market.