Most OECD countries have witnessed remarkable increases in wage inequality, with the main exception of the Southern European countries. This paper develops and implements a dynamic search and matching model, where sector bargaining widely prevalent in Continental Europe is explicitly introduced. We use a comprehensive longitudinal employer-employee data on Portugal for the last two decades, and its defined collective bargaining rankings of workers. We find that wage determination has synchronized a notable stability of worker bargaining power at the bottom of the skill distribution, with a perennial erosion at the middle and the top. These trends led to wages becoming more reliant on sectoral bargaining, increasing its decoupling from firm productivity. This transition contributed to a compression of the wage distribution and to a downward trend of assortative matching in the market. These findings are resilient even in the context of the Great Recession, highlighting the importance of the labour market institutions and its dynamics in shaping wage inequality outcomes.
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