RDP 2019-02: Is Declining Union Membership Contributing to Low Wages Growth? 1. Introduction

The union membership rate in Australia has declined steadily since the middle of the 20th century.^[1] As at 2018, around 15 per cent of wage earners were members of a union (Figure 1). Some have suggested that declining union membership has led to a fall in the bargaining power of workers, which in turn has contributed to low wages growth over recent years (for instance, Isaac (2018) and Leigh (2018)).^[2] This argument is typically based on academic research that finds an hourly wage premium associated with trade union membership, even after taking account of differences in workers' skills, industry and location.

While focusing on the union membership rate makes sense in countries where there is a tight link between union membership and union involvement in wage bargaining (such as the United States), it makes less sense in Australia.^[3] This is because a growing share of Australian employees choose not to be union members but continue to be covered by a union-negotiated enterprise agreement. Focusing on union membership – as much of the literature does – can therefore give a misleading impression about the contribution of unionisation to aggregate wages growth in Australia. We argue that a more appropriate measure of union influence on wages is the number of workers covered by a union-negotiated enterprise agreement, regardless of membership status. Similarly, the causal impact of unions on wage outcomes should be measured through their involvement at the enterprise agreement level instead of through individuals' union membership status.

To our knowledge, this is the first paper for Australia to estimate a union premium that both accounts for union involvement at the agreement level and unobserved firm heterogeneity. It is also the first time that administrative micro data on collective workplace agreements with union status information have been used to produce estimates of union wage effects for Australia.

We present three key findings based on a census of federally registered enterprise agreements between 1991 and 2017. First, despite declining union membership rates, the share of the workforce covered by enterprise agreements negotiated with union involvement has not changed materially over time. Second, the size of the private sector ‘union wage growth premium’ (the additional wages growth employees receive by having a union involved in wage negotiations with the firm) has remained stable at around ⅓ percentage point per year, despite changes to the industrial relations framework over our sample period. This premium is estimated using changes in union involvement in collective bargaining for the same firm over time. Our estimate is robust to a range of methodological choices and an alternative identification strategy using an exogenous change to union involvement. Third, we find little evidence that the spillover effects of union involvement onto wages in other enterprise agreements have changed in recent years.

Based on these results, we conclude that trends in unionisation rates are unlikely to have contributed materially to the decline in wages growth in recent years. It is important to note that this conclusion is limited to only the most direct channel in which unions influence wages in Australia – taking part in enterprise-level bargaining – and does not account for other aspects of influence. For instance, declining membership may have affected unions' ability to influence other wage outcomes in the economy, or diverted limited resources away from non-wage matters. These are avenues for further research.

Footnotes

The union membership rate peaked in 1948 (Bowden 2011). See Productivity Commission (2015, pp 105–106) for a brief discussion of the factors driving the more recent decline in the membership rate. [1]

See Haldane (2017) for a discussion of the case in the United Kingdom. [2]

Union membership is a good proxy for union coverage in the United States since once organised, most employees in a firm tend to join the union (Bryson 2007). [3]