RDP 2019-02: Is Declining Union Membership Contributing to Low Wages Growth? Appendix A : Definitional Changes under the Fair Work Act 2009

The classification of union and non-union enterprise agreements in the WAD changed following the introduction of the Fair Work Act 2009. Prior to the Fair Work Act 2009, the ‘union’ indicator variable in the WAD measured whether or not a union was involved in bargaining. Under the Fair Work Act 2009 it instead measured whether a union is covered by the agreement. Being covered enhances the union's rights to enforce the terms of the agreement (Bray and Stewart 2013).

Under the Fair Work Act 2009 unions need to apply to the Fair Work Commission to be covered by an agreement; that is, it is at a union's discretion as to whether to apply to be covered when they have been involved in the negotiations. A union may therefore choose to be covered only when the wage outcome is favourable, potentially biasing our estimate of the union wage growth premium upwards during the post-2009 sample period. Conversely, our estimates will be biased downwards if unions are more likely to apply for coverage in cases where employee bargaining power (and hence wages growth) is low, in order to ensure the firm upholds the terms of the agreement.

This definitional change does not appear to be driving our finding that the union wage growth premium has been little changed over time. Indeed, the difference-in-differences estimates in column (1) of Table 6 are unaffected by the recent definitional changes to union involvement. In the difference-in-differences model, the effect of unions on wages growth is inferred based on whether an agreement was greenfields or not, and hence any endogeneity in unions' decisions to apply for coverage would not affect these results. That these estimates also show no evidence of a decline in the effect of unions on wages growth in recent years gives us confidence that our baseline estimates from Sections 4.3 and 4.4 are not biased materially by these definitional changes.