Using the IAB Establishment Panel, which is representative for western Germany, the authors find that establishment-level wages reacted to variations in the regional unemployment rate. The elasticity of wages with respect to unemployment, they estimate, was about −0.1. This responsiveness of the wage to regional variation is close to estimates found by other researchers (using individual rather than establishment data) for other countries, and contradicts the view that Germany's labor market, largely due to the nature of collective bargaining in that country, is relatively inflexible. Possible explanations for this finding are that the negotiated wage is treated like a minimum wage, with firms deviating from it in order to increase work effort; bargaining between firms and individual workers or between firms and works councils produces wage differences; or collective agreements do not restrict firms to the extent that is often assumed.
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