"Many governments extend the coverage of collective agreements to workers and employers that were not involved in their bargaining. These extensions may address co-ordination issues but may also distort competition by imposing sector-specific minimum wages and other work conditions that are not suitable for some firms and workers. In this article, we analyse the impact of such extensions along several economic margins. Drawing on the worker- and firm-level monthly data for Portugal, a country where extensions have been widespread, and the scattered timing of the extensions, we find that, while continuing workers experience wage increases following an extension, formal employment in the relevant sectors falls, on average, by 2 per cent. These results increase by about 25 per cent across small firms and are driven by reduced hirings. In contrast, the employment and wage bills of independent contractors, who are not subject to labour law or collective bargaining, increase by over 1 per cent following an extension.

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