Unionization and the pattern of nonunion wage supplements.

• Author: Heywood, John S.

1. Introduction

   Negotiated standard wage policies reduce dispersion in the log earnings of union members when compared to those of otherwise equal nonunion members |5; 6~. As large as these dispersion differences are, they may underestimate the true influence of union wage policy. Kahn and Curme |14~ have suggested that high degrees of unionization actually result in reduced nonunion wage dispersion. This follows from a particular model of the union threat effect in which nonunion employers tilt induced wage increases toward low-wage workers. Such tilting makes sense because lower paid workers are assumed to be more likely to support unions, ceteris paribus. This assumption fails to emphasize that low wage workers may be the least likely to be retained by a newly unionized employer and that this also influences their ultimate decision to support unionization. In the face of union avoidance strategies that routinely imply the possibility of job loss, low wage employees may recognize that the employer faces greater costs of bringing them up to a standard union wage and thus their chances for retention are lower.(1) Including this realization results in ambiguous predictions about the influence of unionization on nonunion dispersion.

   Not only should the ambiguity of the proper theoretical prediction be highlighted, but it should be recognized that the relevant prediction from theoretical models has not yet been tested. Previous tests are inappropriate because the threat induced wage increases could be tilted toward low-wage workers without a necessary reduction in the typical measures of wage dispersion. Similarly, those measures of wage dispersion may actually decline without a general tilt of wages toward low-wage workers. This possibility exists because of the sensitivity of the usual variance measures to outliers and because of aggregation and endogeneity problems affecting previous methodologies.

   This paper uses 1983 and 1988 Current Population Survey (CPS) data to directly estimate the impact of unionization on the earnings of low- and high-wage nonunion workers. After controlling for traditional human capital, locational, and occupational variables, unionization increases the log-earnings of low-wage nonunion workers significantly more than those of high-wage nonunion workers. This result is found with the very data Belman and Heywood |2~ used to demonstrate that inionization may not reduce nonunion wage dispersion suggesting the importance of separating the pattern of threat-induced wage increases from specific measures of wage dispersion.

   A variety of alternative specifications initially confirm the consistency of this empirical result. Yet, once managers, and then professionals, are removed from the sample, the results vanish. The ultimate conclusion is that evidence on the pattern of nonunion wage supplements is extremely sensitive to the sample composition. The workers least likely to be receiving supplements for institutional reasons (managers) are also disproportionately in the upper half of the nonunion wage distribution. Removing these workers from the sample shows that wage supplements are not tilted toward either side of the distribution and reinforces the theoretical insight that threat effects need not disproportionately increase the earnings of low wage workers.

2. Threat Effects and Nonunion Wages

   Economists have previously identified a variety of specific and contradictory influences of unionization on nonunion earnings. If increased union wages cause displaced union workers to increase the supply of nonunion labor, the equilibrium nonunion wage will fall. Alternatively, if the turnover of unionized positions is high enough, the nonunion wage might actually increase as nonunion workers quit to stand in a queue waiting for a union job. Perhaps the most controversial predicted consequence of unionization dates from Rosen |21~ and is that the threat of becoming unionized will appear so costly to nonunion employers that they will increase wages. Such wage increases are conceived as minimizing expected labor costs by reducing the probability of unionization.

   Past empirical evidence provides support for a positive correlation between the extent of unionization and nonunion wages. Podgursky |20~, Moore, Newman and Cunningham |17~ and Hirsh and Neufeld |11~ each confirm that nonunion workers in more unionized markets earn higher wages.(2) Such evidence has been taken to indicate that the threat effect, perhaps combined with the queuing effect, dominates any tendency for previously unionized workers to crowd the nonunion labor market.(3)

   The tendency of unions to narrow wage dispersion for its own members argues that an optimizing nonunion firm may respond to a union threat by not giving equal wage increases to each of its employees. Within occupations, union standard rate policies raise the wages of low-wage union workers more than those of high-wage workers when compared to typical nonunion pay systems |6~. Similarly, typical union across-the-board raises and cost of living adjustments also have a tendency to increase earnings of low-wage workers more than would be expected in a nonunion workplace. The consequence is that otherwise equal low-wage workers receive the largest wage premium from union membership. As a result, low-wage nonunion workers are often thought to be the most likely to desire unionization. In response, a cost minimizing firm might tilt any wage increases toward these low-wage workers in order to reduce the probability of becoming unionized in the cheapest possible fashion.

   Such reasoning is laid out in a formal model by Kahn and Curme |14~ but exhibits a serious limitation. The limitation stems from the insight that the probability of retaining a union job may vary positively with the level of nonunion earnings. That is, while low paid nonunion workers would be most likely to want a union job, they are also the least likely to be given one. This fact has been confined by union queue and selection equations and makes good sense |1~. Those workers whose current wage is well below the union wage are those whom the unionized employer will not select because of the costly gap between their marginal productivity and the union wage. Thus, nearly every characteristic which correlates positively with being in the union queue, correlates negatively with being selected from it. The consequence is that it is sensible to think about two probabilities, the probability of a worker voting for unionization if continued employment is certain, and the probability of retaining employment once unionized. If unemployment has positive costs, the rational nonunion employee will ultimately base support for the union on the product of these two...