This paper aims at answering the question: How does a typically 'European' bargaining
system - with collective bargaining, extension mechanisms and national minimum wage -
coexist with low unemployment rate and high wage flexibility? A unique data set on workers,
firms and collective bargaining contracts in the Portuguese economy is used to analyze the
determinants of both the bargained wage and the wage drift. Results indicate that wage drift
stretches the returns to every worker and firm attribute, whereas it shrinks the returns to
union bargaining power. Therefore, firm-specific arrangements, in the form of wage drift,
partly offset collective bargaining, granting firms a high degree of freedom when setting
wages. Union bargaining power raises the overall wage level, but lowers the returns on
worker attributes, an outcome of the egalitarian policy pursued.