Do works councils and collective agreements narrow immigrant–native wage gaps for disadvantaged immigrant groups? Novel evidence from German-linked employer–employee data

Abstract Recently, workers’ bargaining power has been declining worldwide, and immigrant-native wage inequalities have been widening. In this context, cross-sectional studies show narrower immigrant–native wage gaps in firms with works councils or collective agreements. Yet, it remains unclear whether this correlation is causal. Leveraging German longitudinal linked employer–employee data covering 542 firms and 878,403 employee observations, we investigate whether collective agreements and works councils narrow within-firm immigrant–native wage gaps especially for disadvantaged immigrant groups, that is, immigrants from non-Western countries. Using firm-fixed effects with double-demeaned interaction effects, we find no evidence that works councils narrow immigrant–native wage gaps. However, collective agreements narrow immigrant–native wage gaps for immigrants from non-Western countries by 62.0 per cent but do not affect immigrants from Western countries. Overall, our results indicate that immigrant–native wage inequalities for disadvantaged immigrant groups in Germany would not have widened by 23.6 per cent if collective agreements remained as prevalent as in 1996.