Decentralization of collective agreements and rising wage inequality in Israel

This paper presents a systematic analysis of the decentralization of the Israeli system of collective bargaining and its contribution to the rise in earnings inequality. We quantitatively analyze all collective agreements that were signed between 1957 and 2003, and present the scale, scope, and timing of five dimensions of decentralization. The findings suggest that decentralization started in the mid-1970s when national agreements were less likely to be extended to nonunion employees; it was intensified in 1975-1980 when nationwide industrial agreements were supplanted by occupational and local agreements. Decentralization became fully consolidated by 1987 when peak-level agreements covering the entire private sector were no longer signed. We then present evidence (including time-series analyses that control for union density and macroeconomic indicators) that the process of decentralization, especially the decline in the use of extension orders and the proliferation of local agreements, explains a significant part of the sharp rise in earnings inequality in Israel during 1970-2003.