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XI. THE FUTURE OF UNIONS IN MODERN BRITAIN
Union Relative Wage Effects in the United States and
the United Kingdom
David G. Blanchflower
Dartmouth College and National Bureau of Economic Research
Alex Bryson
London School of Economics
Abstract
This paper presents evidence of both countercyclical
and secular decline in the union membership wage premium in the United States
and the United Kingdom over the last couple of decades. The premium has
fallen for most groups of workers, the main exception being public sector
workers in the United States. By the beginning of the 21st century, the
premium remained substantial in the United States, but there was no premium
for many workers in the United Kingdom. Industry, state, and occupation-level
analyses for the United States identify upward as well as downward movement
in the premium characterized by regression to the mean.
Declining union density in the United States and the United
Kingdom has prompted some commentators to wonder whether unions matter
anymore. In particular, there has been speculation that the intensification
of competition since the 1980s, coupled with a diminution of union bargaining
strength, has prevented unions from obtaining the sort of wage premium
they have achieved in the past. It is evident that unions are not as central
to the economy as they used to be, but union decline is not apparent everywhere:
many employers continue to contend with strong unions, raising important
questions about union effects in those sectors.
In his definitive empirical work, H. Gregg Lewis (1986) found that the
overall impact of unions in the U.S. economy was approximately 15 percent
and showed relatively little variation across years--varying between 12
percent and 19 percent between 1967 and 1979. Subsequent work confirmed
constancy of the differential until the 1990s. For example, Hirsch and
his co-authors have produced a series of papers estimating changes in
the differential over time and concluded there has been some decline in
the premium in recent years (Hirsch and Macpherson 2002).
Countercyclical movement in the union wage premium may occur when unions
can protect their members from the downward wage pressures when workers
in general face unfavorable market conditions (Freeman and Medoff 1984).
The length of union contracts relative to nonunion ones might also mean
union wages are less responsive to the cycle. Empirical evidence suggests
pro-cyclical movement in union wages in the 1970s (Grant 2001). Looking
at a longer-time frame through 1999, Bratsberg and Ragan (2002) find clear
evidence of a countercyclical union wage premium. Cost-of-living-adjustment
(COLA) clauses in union contracts that increase union wages in response
to increases in the consumer price level should reduce countercyclical
movement in the premium.
In the United Kingdom there is a growing belief that the union wage premium
may be falling. This fact would be consistent with evidence pointing to
diminishing union influence over pay setting. Evidence indicates a narrowing
in the scope of bargaining (Brown et al. 1998); union pay settlements
at the end of the 1990s were no greater than nonunion settlements (Forth
and Millward 2000) and--even where managers say employees have their pay
set through workplace-level or organization-level collective bargaining--union
representatives and officials are either not involved or are only consulted
in a minority of cases (Millward et al. 2001). And yet unions continue
to narrow pay differentials across gender, ethnicity, health, and occupation
(Metcalf et al. 2001), perhaps suggesting that those unions that have
survived are the stronger and, as such, better able to command a wage
premium (thus raising the "batting average" of unions).
The consensus in the earlier literature is that the mean union wage gap
was approximately 10 percent, the gap remaining roughly constant between
1970 and 1995 (Blanchflower 1999). However, while the union effect was
persisting, the premium declined for some workers (Blanchflower 1999).
The picture emerging from research through to 1998 and 1999 is suggestive
of a more widespread decline in the premium. For instance, Machin (2001)
finds a wage gain for people moving into union jobs in the early 1990s,
but this had disappeared by the late 1990s.
Trends in the Union Wage Premium in the United States
Table 1 presents estimates of the wage gap using separate
log hourly earnings equations for each of the years from 1973 to 1981
using the National Bureau of Economic Research's (NBER) May Earnings Supplements
to the Current Population Survey (CPS) and for the years since then using
data from the NBER's Matched Outgoing Rotation Group (MORG) files of the
CPS.
The time series properties of the whole economy and private sector series
are essentially the same. The wage gap averages 17-18 percent over the
period, and is similar in size in the private sector as it is in the economy
as a whole. What is notable is the high differential in the early to mid-1980s
and a slight decline thereafter, which gathers pace after 1995, with the
series picking up again as the economy started to turn down in 2000.
Estimating union wage gaps for subgroups of private sector employees since
the mid-1970s we find no group of workers in the private sector sample
has experienced a substantial increase in their union premium. Also, with
the exception of the manual/nonmanual gap, those with the highest premiums
in the 1970s saw the biggest falls, so there has been some convergence
in the wage gaps. Nevertheless, the wage premium is 10 percent or more
for most. The situation is different for public sector workers. Between
the two periods 1983 to 1988 and 1996 to 2001, the public sector premium
rose from 13.3 percent to 14.5 percent. Over the same period the private
sector premium fell from 21.5 percent to 17 percent.
Industries
We used our data to estimate separate results for forty-four
two-digit industries for 1983 to 1988 and 1996 to 2001. In contrast to
the analysis by worker characteristics, which reveal near universal decline
in the premium--at least in the private sector--we found that the wage
gap rose in seventeen industries and declined in twenty-seven. The decline
in the wage gap for the whole economy is due to the fact that the industries
experiencing a decline in their wage gap make up a higher percentage of
all employees than those experiencing a widening gap.
To explore these changes in the private-sector industry union-wage premium
over time, we ran panel fixed effects estimates (Blanchflower and Bryson,
forthcoming) estimating the impact of the lagged premium, lagged unemployment,
and a time trend on the level of the industry-level wage premium. In the
unweighted analyses, the lagged premium is positively and significantly
associated with the level of the premium the following year indicating
regression to the mean. Unemployment and the time trend are not significant.
However, once the regression is weighted by the number of observations
in the industry in the first-stage regression lagged unemployment is positive
and significant, indicating countercyclical movement in the premium, and
there is a negative time trend indicating secular decline in the premium.
More detailed analysis of industry-level influences on the premium confirm
Bratsberg and Ragan's (2002) earlier findings that the unemployment rate,
deregulation in communications, and import penetration in both durables
and nondurables have positive impacts on the premium. However, in contrast
to their findings, our preferred model specifications indicate no significant
impact of COLAs, inflation, or other industry deregulations.
States
A similar procedure was adopted to estimate state-level premia
over time for the fifty states plus Washington, D.C. Between the periods
1983 to 1988 and 1996 to 2001, the mean state union wage gap fell from
23.4 percent to 17.2 percent. The premium fell in all but five states.
Controlling for state fixed effects with fifty state dummies, we find
that with an unweighted regression the lagged premium is positive and
significant, as it was at industry level. Again, as in the case of industry-level
analysis, the effect is apparent when weighting the regression. The positive,
significant effect of lagged state-level unemployment confirms the countercyclical
nature of the premium--the effect is apparent whether the regression is
weighted or not. There is also evidence of a secular decline in the state-level
premium, but only where the regression is unweighted.
Occupations
Similar analyses at occupation level show clear evidence of
regression to the mean, with the lagged premium positive and significant,
as well as evidence of a secular decline in the premium. A significant
countercyclical effect is evident when the regression is weighted, but
not in the unweighted regression.
Trends in the Union Wage Premium in the United Kingdom
Table 2 presents the union membership wage premium over the
period 1985 to 2002. Column 1 estimates the premium for the United Kingdom
since 1993 using the Labour Force Survey (LFS), while column 2 estimates
the premium for Britain since 1985 using the British Social Attitudes
Surveys (BSAS). Both series are based on standard specifications for each
separate year. In identifying the union effect over time, we make what
we think is the reasonable assumption that any bias in our estimates arising
through unobserved heterogeneity is constant over time.
The LFS estimates tend to be above the BSAS estimates, but in both series
there has been a decline in the log hourly union wage premium since 1994
(with the BSAS estimate for 1997 as an outlier). Although the premium
remains roughly 10 percent in the 2000 LFS, it falls to a statistically
insignificant 5 percent in BSAS 2000, and falls even further in 2001.
However, it recovers to a statistically significant 6.4 percent in 2002
as unemployment rises, further evidence of countercyclical movement in
the premium.
When we run LFS analyses for different types of workers, we find that,
in 1993, only one group of employees (the highly educated) had a premium
well below 10 percent. In 2000, all but three out of the seventeen types
of workers had a premium below 10 percent. Results are similar when using
BSAS data. In 1993 to 1995, only two types of workers (non-manuals and
the highly qualified) had a union premium of less than 10 percent. By
1999 to 2001, eleven types of workers had a premium of less than 10 percent.
For five types of workers (men, younger workers, those in the private
sector, non-manuals, and the highly educated) the membership premium was
no longer statistically significant.
Conclusions
The union membership wage premium
has been higher in the United States than in the United Kingdom in the last
couple of decades. In both countries the premium was untrended in the years
up to the mid-1990s, but it has fallen since then. Much of this is due to
countercyclical movement and thus, as we might expect, the premium rose
with unemployment in both countries in 2001 and 2002 after a number of years
of decline. However, we also find clear evidence in the United States of
a secular decline in the premium. Even so, in 2002, the premium in the U.S.
economy was 16.5 percent, just a little below the 17.1 percent average for
the period 1973 to 2002. In the private sector, the 2002 premium was 1 percentage
point above the average of 17.6 percent for the period. In the United Kingdom,
on the other hand, there are real questions as to whether there is a significant
union wage premium for workers at the beginning of the 21st century.
What are the implications for trade unions? The size of the premium in
the United States might suggest that the benefits of membership, net of
dues and other costs, remain sizeable. So why has density been declining
in the private sector? One possibility is that the premium comes at the
cost of union jobs--evidence for the United States and the United Kingdom
shows unionized establishments grow at a slower rate than nonunionized
establishments. Unionized companies face greater competition from nonunion
employers at a time when increasing price competitiveness means employers
are less able to pass the costs of the premium onto the consumer. Declining
union density, by increasing employers' opportunities to substitute nonunion
products for union products, fueled this process. So too did rising import
penetration: if imports are nonunion goods, regardless of U.S. union density,
they increase the opportunity for nonunion competition. These pressures
have increased the employment price of any union wage premium. A second
possibility--not inconsistent with the first--is that the costs of membership
have risen, most notably through increasing employer opposition to union
organizing (Kleiner 2002). That opposition may even be fuelled, in part,
by the size of the wage premium if employers view it as the price tag
attached to successful union organizing campaigns. Either way, it is clear
that unions' relative success in the bargaining arena is not going to
bring about a reversal in union fortunes. In the United Kingdom, the problem
is that unions are struggling to procure any premium for members. At a
time when the new cohort of employers has turned away from unions (Bryson
et al. 2004), raising the costs of employees joining unions, this dip
in the premium means a further reduction in the net benefits of membership,
making it increasingly difficult for unions to recruit new members.
Acknowledgments
We thank Bernt Bratsberg, Bernard Corry, Henry Farber, Richard
Freeman, Barry Hirsch, Andrew Oswald, Jim Ragan, and participants at the
NBER Labor Studies and at the 56th annual meeting of the Industrial Relations
Research Association in San Diego for their comments. We also thank the
Economic and Social Research Council for their financial assistance (grant
R000223958). Some of the material is adapted from our chapter "Changes
Over Time in Union Relative Wage Effects in the United Kingdom and the
USA Revisited," inThe International Handbook of Trade Unions, ed.
John Addison and Claus Schnabel, Cheltenham, UK: Edward Elgar, 2003. We
acknowledge the Department of Trade and Industry, the Economic and Social
Research Council, the Advisory, Conciliation, and Arbitration Service,
and the Policy Studies Institute as the originators of the 1998 Workplace
Employee Relations Survey data, and the Data Archive at the University
of Essex as the distributor of the WERS data. None of these organizations
or individuals bears any responsibility for the authors' analysis
and interpretations of the data.
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