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The purpose of this study is to investigate to what extent the existence of high labor adjustment costs has some influence on the process of wage negotiation. In particular, it aims to analyse if the risk of being laid off has any impact on insiders' bargaining power and, consequently, on their wage claims.

A collective bargaining model that closely follows those developed by Nickell et al. and Bentolila and Dolado is adopted and a longitudinal panel of large Portuguese firms from all sectors over the 1993‐199 period is used.

The results reveal that firms where insider workers appear to have more bargaining power tend to pay higher wages. In particular, we found that the threat of dismissal tends to weaken insiders' bargaining power and, consequently, to depress wages.

In future research an attempt should be made to measure directly the labor turnover costs.

This paper presents robust empirical evidence using micro‐data for individual firms that support one of the predictions of the insider‐outsider theory that wages will be higher in sectors (firms) with high labor turnover costs.