RDP 2019-02: Is Declining Union Membership Contributing to Low Wages Growth? 3. Has There Been a Decline in Union Involvement in Wage Setting?

There are currently three methods of setting wages in Australia: awards, collective/enterprise agreements, and individual arrangements. It is possible for unions to influence the wage outcomes of employees covered by any of these methods, albeit to different degrees. The most direct channel of union influence is via collective bargaining. As Figure 2 illustrates, the share of workers covered by collective agreements has remained steady at around 40 per cent since 2000, with most of these agreements registered under the federal system.^[14]

Collective agreements may be negotiated with or without union involvement.^[15] Under current legislation, unions are the default bargaining representatives of their members in enterprise-level wage negotiations provided that at least one of their members would be covered by the agreement (Stewart 2015, p 148). For most practical purposes, this means a union can get a seat at the bargaining table even if few employees to be covered by the agreement are a member of the union. A corollary is that an agreement negotiated with union involvement will cover both members and non-members alike, since a union cannot legally compel employees to become members.^[16]

These features of collective bargaining in Australia have made it possible for the share of employees covered by union-negotiated agreements to remain little changed since the mid 1990s despite a large decline in the union membership rate. Within federally registered agreements, those agreements negotiated with union involvement make up around two-thirds of agreements (left panel of Figure 3). Union involvement is even higher, at around 90 per cent, by number of employees covered, since union involvement is more common in agreements negotiated with large firms than small firms (right panel of Figure 3). Most importantly, the share of employees on enterprise agreements covered by a union-negotiated agreement remains at around the same level as in the late 1990s.^[17] Together with the unchanged share of workers covered by collective agreements (Figure 2), this implies that declining union membership has not translated into reduced union involvement in wage setting at the workplace level.^[18] If anything, the share of the workforce on a union-negotiated agreement has risen in recent years. This is one of our key findings.

These developments appear relatively unique to Australia. The magnitude of Australia's decline in the union membership rate is large relative to other countries in the Organisation for Economic Co-operation and Development (OECD). Notwithstanding this, Australia has experienced one of the smallest declines in collective bargaining coverage (along with the unchanged share of employees covered by union-negotiated collective agreements) among OECD countries (Figure 4). These developments provide further motivation to consider the Australian case in detail, even though union membership has also declined in many other countries facing similarly low wages growth.

That the share of the Australian workforce covered by a union-negotiated agreement has remained little changed at the same time as the union membership rate has declined suggests that an increasing share of employees in Australia find it optimal to ‘free ride’ on the union membership of other employees at the firm.^[19] An increase in free riding is also evident in individual-level data from the HILDA Survey, which suggests that only 41 per cent of employees on collective agreements were members of a union in 2017, down from around 47 per cent in 2009 (Figure 5).^[20]

Although the focus of our paper is collective agreements, collective bargaining is not the only means through which unions can influence wages. Unions can also influence award wages, albeit indirectly. Each year, unions propose a particular award wage outcome in their submissions to the Fair Work Commission's award wage decision. These Fair Work Commission decisions affect the wages of all employees on modern awards, again regardless of union membership status (17 per cent of employees on awards were union members in 2017 according to the HILDA Survey).^[21] The influence of unions on these decisions is difficult to quantify, and is beyond the scope of this paper. Finally, in contrast to collective bargaining and awards, unions have minimal involvement in bargaining over individual agreements: less than 5 per cent of employees on individual agreements are members of a union. The impact of unions on these workers is limited mainly to indirect spillover effects, if any. Given the focus of our paper is on collective bargaining, any general conclusions we draw about aggregate wages growth will be valid to the extent that any effect of changes in union membership on the wages in awards and individual agreements has remained constant over time.

Footnotes

See Chapter 2 of Stewart (2015) for a discussion of employment laws in the state and federal systems. [14]

In many other countries, such as the United States, collective agreements are synonymous with union involvement in wage bargaining. This is not the case in Australia. [15]

See the Fair Work Ombudsman at <https://www.fairwork.gov.au/employee-entitlements/industrial-action-and-union-membership/union-membership>. [16]

The largest shifts in Figure 3 have coincided with changes in the workplace relations system, since this can affect unions' scope to bargain. For instance, the share of agreements negotiated with union involvement declined under the ‘Work Choices’ period (2006–09) but has subsequently returned to its previous levels under the Fair Work Act 2009. [17]

Our finding that the share of the workforce covered by a union-negotiated agreement has not declined in recent years assumes that the union/non-union split is similar between current agreements (those in Figure 3) and expired collective agreements that continue to operate, between federally and state-registered enterprise agreements, and between registered and unregistered agreements. We need to make this assumption because our agreement-level data do not capture state-certified or unregistered agreements, and do not allow us to precisely observe whether an agreement remains operational or not past its nominal expiry date. [18]

Peetz and Yu (2017) draw a similar conclusion after observing that collective bargaining coverage has declined by far less than union membership over the past decade. See Booth (1985) and Booth and Chatterji (1995) for examples of the free-rider problem and union membership. [19]

Since HILDA does not distinguish whether individuals are covered by ‘union’ or ‘non-union’ enterprise agreements, the denominator used in Figure 5 is all enterprise agreements. Including non-union agreements in the denominator means that the union member share may understate the extent of free riding. However, this is unlikely to be an issue given that the vast majority of employees on enterprise agreements are covered by a union agreement. Using unpublished data from the Australian Bureau of Statistics, Peetz and Preston (2009) also found evidence of widespread free riding on union agreements. [20]

These union member shares among employees on awards and those on individual agreements (discussed below) were calculated from the HILDA Survey without the 2011 top-up sample for consistency with Figure 5. Including the top-up sample, 16 per cent of employees on awards, and 6 per cent of those on individual agreements, are union members. [21]