RDP 2019-02: Is Declining Union Membership Contributing to Low Wages Growth? 2. What Can Previous Research Tell Us?

The literature on the link between union membership and wages is vast. This research generally finds that employees who are members of a union tend to earn more than those who are not.^[4] However, to our knowledge the existing research has not directly examined the question of whether declining union membership has contributed to the slow wages growth in advanced economies in recent years; this is one of our paper's main contributions.^[5] The closest related studies are those that examine the impact of unions on wage flexibility, the labour share of income, and inequality. The findings of these studies are mixed. Lower union membership has been found to be associated with lower downward nominal and real wage rigidity (Dickens et al 2007; Holden and Wulfsberg 2008), suggesting that declining unionisation may have reduced barriers to implementing smaller wage increases. On the other hand, Elsby, Hobijn and Şahin (2013) find that the decline in unionisation rates does not explain much of the decline in the labour share of income in the United States. Moreover, despite large changes in union density, the differential in wage levels between union and non-union workers has remained essentially unchanged over much of the last century in the United States (Farber et al 2018).^[6]

Even if a stable wage level gap exists between union and non-union workers, as suggested by the literature, it does not necessarily follow that declining unionisation rates would contribute to slower wages growth. This could be for several reasons.

First, any observed wage differentials may reflect underlying differences between union and nonunion workers rather than any causal effect of unions on wages.^[7] If, say, union members are more productive than otherwise similar non-union members, the observed correlation between union membership and wages may overstate the causal effect of unions.^[8] One approach to dealing with non-random selection has been to compare the wage rates for the same individual who switches between jobs, one of which is unionised and the other which is not (for instance, Lemieux (1998)). Other studies exploit discontinuities in unions' ability to bargain to identify a causal effect. A prominent example is DiNardo and Lee (2004), who use a regression discontinuity design around the threshold at which a unionisation vote is barely lost or won to conclude that unionisation has little effect on wages, business survival, employment, output and productivity in the United States.

The second important insight from the literature is that the size of this wage level premium depends crucially on the unit of observation of the data used to estimate it. Most studies examine employee-level survey data, rather than firm-level data as we do in this paper. This can have implications for the results since union membership is not necessarily the same as union coverage in wage setting – a point that we will return to later. In countries where union membership is considerably different from union coverage, estimates of the premium can differ substantially depending on whether employee-, firm- or industry-level data is used (Koevoets 2007; Fitzenberger, Kohn and Lembcke 2013).^[9]

A third issue, which is addressed less frequently in the literature, is how quickly union wage effects emerge after workers at a firm first unionise. Most studies produce point-in-time estimates for a given cross-section of firms or employees. It is unclear from these studies whether the observed differences in wage levels between union and non-union members have emerged gradually over time through a slow accumulation of differences in annual wages growth rates, or whether they result from a ‘first contract effect’ – as Freeman and Kleiner (1990) argue – in which the immediate adjustment to wages on initial unionisation may differ from ongoing effects. This distinction is important for our research question, as we are ultimately interested in how changing union activity might cause the path of wages growth to evolve. Several papers distinguish between immediate and lagged impacts of unionisation on wage levels. Freeman and Kleiner (1990) and DiNardo and Lee (2004), for instance, attempt to reconcile estimates of the wage level gap between union and non-union employees at a given point in time (which tend to be large) with estimates of the immediate effect of union entry on wages (which tend to be small). These authors argue that such differences may reflect that point-in-time estimates of the union wage premium capture a combination of short- and long-run effects of union entry on wages (given that some firms have become unionised workplaces more recently than other firms), while studies on union entry identify only the effects from recent entry.^[10] This distinction matters if union involvement has a persistent effect on wages growth over time, as we will argue in this paper.

Our study also distinguishes between long- and short-run wage effects as we believe this has important implications for the link between unions and aggregate wages growth. Our approach to doing this is more direct than in other studies in that our outcome variable of interest is the growth rate of wages rather than the level. That is, we examine how wage increases that workers receive each year differ by whether a union was involved in the negotiations. We also study whether this ‘union wage growth premium’ changes over time after a union first becomes involved, by making use of data on sequential wage negotiations for the same group of workers over several decades.

Studies for Australia have focused on the wage level premium and faced similar limitations and challenges to the overseas research discussed above. No Australian study to date has directly examined the link between unions and aggregate wages growth, nor distinguished between the short- and longer-term effects of union involvement in negotiations on wage outcomes. Most studies of the union wage premium for Australia use survey data on individual workers to compare wages of union members with wages of non-members. Most studies before the 1990s found evidence for a union wage premium, despite Australia at the time having a highly centralised system of wage setting in which a large number of workers were covered by the same awards regardless of their union membership. The estimates in these studies ranged from around 5 to 15 per cent (e.g. Christie (1992), Kornfeld (1993); see Miller and Mulvey (1993) for a comprehensive survey of early major studies). By contrast, Miller and Mulvey (1996) find the union wage effect to be negligible once firm size is accounted for.

A limited number of studies have re-examined this differential since Australia's industrial relations system shifted towards enterprise-level bargaining in the early 1990s, along with the ban on compulsory unionism. These studies again tend to use survey data on employees and rely on variation in union membership status. Most use individual-level panel data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey to find a small to negative union wage premium.^[11] Cai and Liu (2008) find a union wage effect for men but not women, and a larger effect at the lower end of the wage distribution. Studies have also found that estimates of the union wage premium for Australia are smaller once the potential endogeneity of union membership is taken into account. For instance, after accounting for workers' unobserved heterogeneity, Cai and Waddoups (2011) find that the union wage premium falls from close to 9 per cent to 5 per cent for men and from 4 per cent to 2 per cent for women, while Nahm, Dobbie and MacMillan (2017) find that union wage effects may be negative in Australia using a model with endogenous union membership.

A major limitation of these studies for Australia is their reliance on an individual's union membership status rather than union involvement in how that individual's wages are set. In Australia, many non-union members are affected by union involvement in collective bargaining to the extent that they are covered by a union-negotiated enterprise agreement. The studies discussed above effectively ignore that the bargaining unit is at the enterprise level, and that union membership of individuals may not have any effect on negotiations except to the extent that union involvement becomes more likely as the unionised share of a firm's workforce increases. Focusing on union membership, as the Australian literature overwhelmingly does, instead of the relevant bargaining unit can therefore give a misleading impression about the contribution of unionisation to aggregate wages growth in Australia. It can, for instance, lead to an attenuation bias in the estimated size of the union wage effect and to incorrect conclusions about the share of the workforce receiving a wage premium.

An exception is Wooden (2001), who argues that union wage effects in Australia likely stem from differences across workplaces rather than from the workers within them, especially when enterprise-level bargaining is pervasive. Using cross-sectional matched employer–employee data, he finds very small within-workplace union wage effects but a considerable effect (15–17 per cent) across different workplaces.^[12] This estimate is much larger than those from studies relying on union membership status. Our paper also takes firms (or more precisely, families of collective agreements) as the relevant unit of observation for studying the effect of unions on wage outcomes.

No Australian study to date has made use of actual union involvement in wage negotiations. Wooden (2001), for instance, proxies for union involvement by using firm-level unionisation rates and a measure of whether the union with most members at each firm is active. Moreover, none of the studies control for unobserved firm-level heterogeneity. This is crucial for an unbiased estimate in situations where inter-firm variation is the main source of variation in identifying the union wage premium.

A union wage differential estimated using a representative panel of firm-level agreements with information about union involvement in negotiations is able overcome these issues; this is one of the main contributions of our paper. Using a census of federally registered enterprise agreements, we are able to construct a panel of sequentially negotiated agreements at the firm level where the same set of employees are covered in each linked agreement, along with information on wages growth outcomes and a direct indicator of union involvement for each agreement.^[13]

The second contribution of our paper is to provide the first estimate of the share of Australia's workforce that is covered by an enterprise agreement negotiated with union involvement, and to consider whether this has changed over time.

Finally, our paper estimates the union wage growth premium – and how it has changed over time – for Australia using our enterprise-level dataset. This approach conveniently allows us to consider more directly whether unions are contributing to the low wages growth of recent years. Our main approach to estimating this premium is to track wages growth outcomes of firms over time as they transition from having union involvement in bargaining to having no union involvement, or vice versa. We are also able to use a series of legislative changes to provide useful exogenous variation for causal identification. Our results provide some insight into how seemingly negligible immediate effects from union entry could, over time, become the much larger union wage (level) premium seen elsewhere in the literature.

Footnotes

See Farber et al (2018) for a brief review. [4]

Papers that have drawn such a link tend to have a narrative focus and rely on the correlation between union density and low wages growth (e.g. Mishel (2012); Shambaugh et al (2017, p 6); Bell and Blanchflower (2018, p 13); see Isaac (2018) for an Australian example). [5]

Some studies have found a slight decline in the US union wage gap in recent decades (Blanchflower and Bryson 2004; Hirsch 2010). [6]

Other factors that could account for the correlation between union membership and wages include the low mobility between union and non-union jobs, and mismeasurement of union status (Freeman 1984; Card 1996; Hirsch 2004). [7]

There are similar omitted variable bias problems in firm-level studies: for example, unions may be more likely to organise at profitable firms that are more likely to grow and pay higher wages. [8]

Even where there is a close link between union membership and union coverage, as in the United States, firm-level data may still be more appropriate for estimating the direct effects of a workplace becoming unionised (e.g. Freeman and Kleiner 1990). For instance, employee-level studies may find different union wage premiums than firm-level studies if the wage effects of a worker moving from the non-union to the union sector differs from any additional amount that a firm must offer its workforce when it becomes unionised, if there is unobserved firm-level heterogeneity, or if union status is measured more accurately for firms than for individuals (Freeman 1984; Freeman and Kleiner 1990; Card 1996; LaLonde, Marschke and Troske 1996; DiNardo and Lee 2004). Some studies using employee-level data attempt to limit the bias by including only those covered by union contracts in their sample (e.g. Budd and Na 2000; Booth and Bryan 2004). Conclusions from such studies are necessarily limited to the wage difference between union members and ‘free riders’ who nonetheless receive some of the union's services, and cannot tell us the wage difference caused by unions. [9]

The distinctions between immediate and longer-run union effects have also been found in non-wage outcomes. Lee and Mas (2012) is one such example. Using a regression discontinuity design on US data, the authors find almost no immediate impact from union entry on a firm's equity value, and that the full effect takes 15–18 months to appear. [10]

Unlike these studies, Waddoups (2005) uses repeated cross-sectional data between 1993 and 2001 to conclude that declining union density and industrial relations reforms had widened the union wage differential in highly unionised industries. [11]

The absence of a wage premium from union membership once workplace-level differences are accounted for is consistent with evidence from the United Kingdom (Booth and Bryan 2004; Koevoets 2007). [12]

Since any within-firm union membership premium is small (Wooden 2001), and since the relevant bargaining unit is the firm, the lack of employee data should not present any major issues for our estimates. [13]