Chapter 16: Union Impact on Wage and Nonwage Outcomes
The Union Wage Impact: What is the average effect of unionization on a worker's
wage?
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the impact of unions on wages has received more attention from economists than any
other aspect of union behaviour
most of the empirical research has been directed at measuring the union-nonunion
wage differential, the (percentage) difference in wages between union and otherwise
comparable nonunion workers
the first problem that one confronts is that the average wage of nonunion members
may not be the same as the average wage that would prevail in the complete absence
of unions from the labour market
unions affect not only the wages of union members but also the wages of others and a
general equilibrium model must be used to analyze the union-nonunion wage
differential
o in our analysis of union wage and employment determination in the previous
chapter, we assumed that the union wage alternative (the nonunion wage)
was exogenously given
Figure 16.1a illustrates the effect of unions on wages and employment in a two-sector
labour market
the two sectors A and B can be thought of as two different industries
employing the same type of labour, which is assumed to be homogeneous
o competition in the labour market will equalize the wage rate at Wo in both
sectors
now assume that a union organizes the workers in sector A and is able to raise the
wage rate to Wu; assuming that the firm determines employment according to the
demand for labour curve, employment in sector A declines from Eo to E1
o by raising the wage rate from Wo to Wu, (Eo – E1) former employees in sector
A lose their jobs and must find work in sector B
in the non-union sector B, the (Eo – E1) displaced workers from sector A shift the
labour supply curve to the right (from SB to S'B) and the excess supply of labour in
sector B bids the wage rate down from Wo to WN in Figure 16.1a
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the new equilibrium employment level in sector B increases from Eo to E1; but
given an upward-sloping labour supply curve, not all of the displaced workers
from sector A are employed in sector B (some displaced workers drop out of
the labour force because the new equilibrium wage WN in sector B is below
their reservation wage)
unionization has created an equilibrium wage differential of Wu – WN between union
and nonunion workers; this union-nonunion wage differential (Wu – WN) is larger than
the difference between the union wage Wu and the competitive wage Wo in a nonunion
economy
the size of the wage differential and decrease in total employment depends on the
elasticity of the labour demand curve in each sector, the ability of the union to raise
wages in sector A, and the elasticity of labour supply
o for example, if the labour supply curve is perfectly inelastic (vertical), there
will be no loss in employment but there will be a substantial wage differential
between union and nonunion workers
it may be the case that some nonunion employers raise wages in order to reduce the
threat of their employees choosing to become unionized
Figure 16.1b illustrates a three sector model in which the nonunion sector is divided
into a threatened and unthreatened nonunion sector
o to avoid unionization, the threatened nonunion sector pays wages which are
competitive with wages paid in the union sector, displacing additional workers
into the unthreatened nonunion sector
o in the unthreatened nonunion sector, the additional excess supply of labour
causes the nonunion wage to be bid down even further
o in this three sector model, the union-nonunion wage differential is complicated
by the fact that nonunion wages are an average of the high wage paid by the
threatened nonunion sector and the very low wage paid by the unthreatened
nonunion sector; the average nonunion wage in the three sector model in
Figure 16.1b could be higher or lower than the nonunion wage in the two
sector model presented in Figure 16.1a, depending on the employment
weights in the threatened and unthreatened nonunion sectors
if the firm and union negotiate an 'efficient' contract which lies to the right of the
labour demand curve, the employment displacement effects will be smaller and there
will be less downward pressure on wages in the nonunion sector
o as illustrated in Figure 16.1c, there is no employment displacement effect if
the efficient contract curve is vertical and the union-nonunion wage differential
is identical to the difference between the union wage and the wage in an
economy without unions
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relaxing the assumption that labour is homogenous, an increase in union wages will
increase (decrease) the demand for nonunion labour if the two groups are substitutes
(complements) in the production process, and therefore increase (reduce) the wages
of nonunion workers
in summary, unions are generally able to raise the wage for union members, but the
effect on wages in the nonunion sector is ambiguous, depending on the amount of
displaced labour from the union sector; it is possible that unions may result in higher
wages for nonunion workers if nonunion labour is a substitute for union labour or if
nonunion employers feel threatened by unions
Some Problems in Measuring the Union Wage Impact
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methodological problems associated with measuring the union impact include:
difficulties of controlling for other factors that influence wages, such as skill differences
o employers have an incentive to alter employee qualifications and job
requirements in response to a higher union wage; if one doesn't control for
differences in the characteristics of workers and job assignments, these
omitted variables may bias the union-nonunion wage differential in an upward
direction (part of the wage differential may reflect better quality workers and
more onerous job assignments)
a selection bias that may occur if workers sort themselves (or are sorted by
employers) into the union or nonunion sector on the basis of unobserved factors
reverse causality if high wages induce unionization
o some firms may be high-wage firms (because of efficiency wage
considerations), and workers in these high-wage firms may want a union to
improve working conditions — unions may emerge in response to efficiency
wage premiums
Empirical Evidence on Union Wage Impact
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there is a wealth of empirical evidence which demonstrates that unions have been able
to achieve higher wages (and fringe benefits) for their members
o for recent annual data on wage increases in collective agreements, click on:
http://www.statcan.ca/english/Pgdb/labor14.htm
Table 16.1 summarizes 25 Canadian empirical studies on the average union wage
impact; the average wage differential between union and nonunion workers who are
otherwise comparable in terms of observed characteristics appears to be
approximately 15% (in the 10% to 25% range)
the union impact has fallen in more recent years and now may be more in the
neighbourhood of 10%; recent research suggests that the gap may have
dissipated in response to increased competitive market forces
the union-nonunion wage differential varies across firms, industries, occupations,
workers with different characteristics, and over time with aggregate economic
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conditions; although there are exceptions, these empirical studies on the impact of
unions tend to find:
o the union impact is larger at low skill levels and smaller at high skill levels, as
unions tend to garner flat wage increases that reduce the returns to factors
related to skill levels such as education and training (consequently, the return
to an investment in human capital is smaller in the union sector than in the
nonunion sector)
 as indicated in Table 16.2, the estimated union-nonunion wage
differentials decline almost monotonically with skill level, and in the
most skilled categories nonunion wages exceed union wages
 as shown in Figure 16.2, union wages are typically found to be less
responsive to the personal characteristics of workers (such as skill,
education, and experience)
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the union impact tends to be higher in the private sector compared to the
public sector
 as shown in Table 16.2, the union-nonunion wage differentials are
significantly lower in the public sector than in the private sector for
each skill level; highly skilled union workers in the public sector earn
less than comparable nonunion public sector workers
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the union impact tends to be higher in small firms compared to large firms
 the threat effect is generally higher in larger firms, and thus larger
nonunion firms are more likely to match union wages than their
smaller counterparts
the union impact tends to be higher when a larger portion of the relevant
jurisdiction is organized
 this relationship appears to be nonlinear as once a certain proportion
of the jurisdiction is unionized further increases in the percent
unionized has little effect on the union-nonunion wage differential
the union impact tends to be higher for blue-collar compared to white-collar
workers
the union impact tends to be higher for females compared to males
 however, since women tend to be less unionized than men, fewer
women obtain the higher union wage premium and unions tend not to
affect the overall male-female wage differential (two opposing effects
tend to cancel each other out)
the union impact on nonunion wages is likely small; there is not a consensus
as to whether it is positive or negative (early studies tended to find small
negative effects on nonunion wages but more recent studies have found the
opposite)
Unions, Wage Dispersion, and the Distribution of Income
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there is much less dispersion in the wages of union members than in the wages of
nonunion workers as unions tend to reduce wage differentials attributable to
differences in knowledge, skill level, experience, age, and seniority
o as shown in Figure 16.3, the union wage distribution lies to the right and is
less dispersed than the nonunion wage distribution
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most studies find that unions tend to reduce wage inequality in the economy
o while unions create a union-nonunion wage differential that increases wage
inequality in the economy, there is much lower wage dispersion in the union
sector; the net effect of unionism is to lower wage dispersion in the economy
o the decline in better-paying blue-collar union jobs was a major contributing
factor to the increase in wage inequality in the U.S.; the greater extent of
unionization in Canada explains about 40% of the difference in wage inequality
in the two countries
Union Impact on Resource Allocation and Economic Welfare
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because unions alter wages and employment, unions affect the allocation of labour
and other resources in the economy
Figure 16.4 shows the allocative consequences of the union wage impact in a simple
two-sector general equilibrium model in which outcomes are on the labour demand
curve and the supply of labour is completely inelastic
a misallocation of labour resources occurs because higher union wages and
reduced employment in the union sector push other workers into lessproductive and more poorly paying jobs in the nonunion sector, giving rise to a
deadweight loss in output and income (there are too few workers in the union
sector and too many workers in the nonunion sector)
o in Figure 16.4 the deadweight welfare loss is equal to the triangle abc (what
consumers would be willing to pay for the loss of output in the unionized
sector) plus the triangle def (the loss associated with the fact that the output
increase in the nonunion sector is valued less than the output loss in the union
sector)
o the size of the deadweight loss depends on the elasticity of the labour demand
curve (which determines the width of the triangles), the size of the unionnonunion wage differential (which determines the height of the triangles), the
extent to which firms and unions negotiate wage-employment outcomes to the
right of the labour demand curve, and the existence of other distortions in the
economy
recent Canadian research based on a general equilibrium model which allows for other
distortions in the economy finds that the union deadweight welfare loss is relatively
small (less than 0.04% of GNP)
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Union Impact on Nonwage Outcomes
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fringe benefits: the union impact on fringe benefits is greater than the impact on
wages, and the magnitude of fringe benefits is greater in the union sector than in the
nonunion sector
o workers may prefer fringe benefits over wages as a form of compensation
because fringe benefits are often not taxable (or taxes are deferred)
given their political nature, unions often represent the wishes of the median
voter, who tends to older and more interested in fringe benefits such as
pensions
working conditions: union workplaces tend to be governed much more by rules, such
as the scheduling of work hours, and procedures, such as how grievances are handled,
than nonunion workplaces which exhibit more worker and management flexibility
turnover and mobility: the quit rate is significantly lower among union workers than
comparable nonunion workers as union workers are reluctant to leave higher-paying
union jobs and dissatisfied union workers can improve working conditions through
collective bargaining
productivity: unions can have both positive and negative effects on productivity
o economic theory predicts that union firms will respond to increased union
wages by utilizing more capital and less labour per unit of output, by
attempting to hire more productive workers, and by trying to increase job
assignments and the pace of work, all of which raises labour productivity
o a common belief is that unions reduce productivity by inducing work
stoppages, by negotiating restrictive work rules, and by preventing the
employer from introducing technological innovations
o however, unions may also have a positive effect on productivity by reducing
turnover and quits, improving morale and cooperation among workers,
improving communications between labour and management, and by
"shocking" management into more efficient practices
o evidence on the average economy-wide union impact on productivity is
inconclusive; empirical studies have found evidence of both positive and
negative net union impacts, suggesting that in some circumstances the
productivity-enhancing effects dominate while in other instances the opposite
occurs
profitability and investment: profitability is generally lower in unionized firms (any
positive productivity effect is more than offset by the higher wages and benefits
unions obtain for their members) and there tends to be less new investment put into
unionized plants
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