RDP 2019-02: Is Declining Union Membership Contributing to Low Wages Growth? 5. Are There Spillover Effects onto Wage Outcomes in Other Enterprise Agreements?

Up to this point, we have considered only the direct effect of unions' bargaining on wages and not any broader spillover effects on the wages of other workers. There are a range of general equilibrium effects that may be relevant. For example, higher wages growth in firms that negotiated their enterprise agreements with union involvement could lead to less job creation in those firms relative to other firms. This could lead to an increase in relative labour supply to the ‘non-union’ firms and thus further dampen wages growth in those firms. It is also possible that unions have a ‘threat effect’ on wages, whereby non-union firms voluntarily decide to pay higher wages to reduce the threat of unions mobilising at the firm (Farber 2005; Bryson 2007; Rosenfeld, Denice and Laird 2016). These general equilibrium effects could raise or lower the level of aggregate wages in the economy (Farber 2001).

This section of our paper examines a narrower class of general equilibrium effects: whether union presence has spillover effects on the wages of enterprise agreements negotiated without union involvement. We test for this union ‘threat effect’ by considering whether wages growth is higher with the degree of union presence in a firm's industry. The threat of union entry, in the form of a union being present at the next round of wage negotiations, is likely to be higher in industries where unions already have a strong presence (e.g. manufacturing) compared to industries where unions have less presence (e.g. hospitality). Similarly, the threat level should increase for a firm as union presence in its industry increases. Among non-union firms, those subject to a higher threat level would be expected to offer higher wages growth to dissuade union entry. The union wage growth premium may also decrease with higher union presence, since firms in highly unionised industries would already be offering higher wage increases.

5.1 Spillover Effects Model

To test for spillover effects on the wages of agreements negotiated without union involvement we estimate the following model (based on Equation (1)):

where Presence_{j,t − 1} is the share (out of 1) of employees on enterprise agreements in industry j at quarter t − 1 that are covered by an agreement negotiated with union involvement.^[48] A positive coefficient (τ₂) on the main Presence variable would suggest the existence of a threat effect. A negative coefficient (τ₃) on the interaction term would imply that the union wage growth premium decreases with union presence. That is, a threat effect should manifest in a positive estimate of τ₂ and potentially a negative estimate of τ₃.

5.2 Spillover Effects Results

The results are shown in Table 7. The coefficient on union presence (τ₂) is positive and statistically significant. It implies that among firms without a union-negotiated agreement, a firm would be willing to offer an additional 3.2 basis points in annualised wage increases for every one standard deviation (approximately 10 percentage points) increase in union involvement in the firm's industry. The negative coefficient on the interaction term (τ₃) implies that the union wage growth premium shrinks by 6.7 basis points for every 10 percentage point increase in union presence in an industry. Both of these findings indicate a spillover effect of union presence onto the wage outcomes of agreements negotiated without union involvement. Given the average levels of union presence from the right panel of Figure 3, these estimates also appear to be consistent with our baseline estimate of an overall union wage growth premium of around ⅓ percentage point.^[49]

These spillover effects only have implications for aggregate wages growth insofar as they have changed over time. We can examine the stability of union threat effects by interacting the three key variables in Equation (3) (Union, Presence and Union × Presence) with dummies for each of the four legislative regimes spanning our sample. The estimates and their 95 per cent confidence intervals are shown in Figure 16.^[50] The results suggest that there has been some increase in spillover effects on the wages of enterprise agreements negotiated without union involvement over time: the coefficient on Presence has become more positive, and the coefficient on Union × Presence has become more negative. However, the difference in the estimates between the Work Choices and the Fair Work Act 2009 periods are not statistically significant at the 10 per cent level, nor are they economically significant. Moreover, the largely unchanged level of union coverage shown in Figure 3 suggests that the threat of union entry has not changed much in aggregate. As such, spillover effects to non-union agreements are unlikely to have contributed materially to the decline in aggregate wages growth.

Footnotes

We lag this variable by one quarter to avoid endogeneity. [48]

For example, a firm in an industry where union presence is 80 per cent would offer a 30 basis point union wage growth premium (0.84 – 0.67 × 0.8), while a firm in an industry with 90 per cent union presence would offer a 24 basis point premium (0.84 – 0.67 × 0.9). [49]

We omit estimates for the Industrial Relations Act 1988 period because the standard errors are too large to draw any meaningful conclusions for that period. [50]