Unions, Wage Gaps, and Wage Dispersion: New Evidence from the Americas

• DOI: http://doi.org/10.1111/irel.12044
• Author: Barry T. Hirsch,Fernando Rios‐Avila
• Date: 01 January 2014
• Published date: 01 January 2014

Unions, Wage Gaps, and Wage Dispersion: New

Evidence from the Americas*

FERNANDO RIOS-AVILA and BARRY T. HIRSCH

Using a common methodology, the effects of unions on wage levels and wage

dispersion are estimated for two neighboring countries, Bolivia and Chile, and for

the United States. The analysis shows that unions have broadly similar effects on

the wage distribution within these three economies. The findings suggest that the

political economy of unions, coupled with market constraints on labor costs, pro-

duce commonality in union wage effects that transcend other economic and insti-

tutional differences.

Introduction

THERE IS A LARGE EMPIRICAL LITERATURE ESTIMATING THE EFFECTS OF LABOR

unions on wages in developed countries. Two clear-cut results emerging from

this literature are that (1) unions increase wages for their members relative to

similar nonunion workers and (2) wage dispersion is reduced in union work-

places (Lewis 1986). Most of this literature has focused on the United States

or other developed countries possessing stable institutions, similar production

technologies, and roughly similar levels of physical and human capital. Less

clear in the literature is how unions affect wages outside the Western world

and in less developed economies. Results seen for the United States need not

apply to countries in which unions operate under different institutional frame-

works and with different levels of economic development.

This paper provides novel evidence on the impact of unions on wage gaps

and inequality for Bolivia and Chile, two neighboring countries in Latin Amer-

ica that are at different stages of economic development. Both countries have

had historically strong union organizations deeply involved in the political

development of their countries (Alexander and Parker 2005; Ulloa 2003) and

The authors’saffiliations are, respectively, The Levy Economics Institute of Bard College, Annandale-on-

Hudson, NY. Email: friosavi@levy.org; Department of Economics, Andrew Young School of Policy Studies,

Georgia State University, Atlanta, GA, and IZA (Bonn). Email: bhirsch@gsu.edu.

JEL: J31, J51.

INDUSTRIAL RELATIONS, Vol. 53, No. 1 (January 2014). ©2013 Regents of the University of California

Published by Wiley Periodicals, Inc., 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington

Road, Oxford, OX4 2DQ, UK.

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have similar union density (13 to 14 percent) in their formal labor markets.

At the same time, these countries have clear-cut differences in their legal

frameworks, the size of the informal sector, and the overall level of develop-

ment and inequality, with Chile being more developed than Bolivia.

To analyze the effect of unions on the wage distributions of these countries,

we use recent household data and apply the decomposition methodology intro-

duced in Firpo, Fortin, and Lemieux (2007) to measure and decompose union–

nonunion wage differences into those due to the wage structure (coefficients)

and to measured endowments. Union wage gaps are identified at the mean and

throughout the distribution (quantiles), while union effects on inequality are

identified using measures of variance and interquantile gaps. For comparison,

estimates are provided for the United States using identical methods and simi-

lar household data.

The results show that unions have broadly similar impacts on the wage dis-

tributions in Bolivia and Chile, which in turn are similar to those found in the

larger literature for developed countries. Specifically, we find average union

wage gaps between 0.12 and 0.14 log points. In both countries, the estimated

gaps are similar throughout much of the distribution before falling off in the

right tail. Despite differences between the countries in the degree of wage

inequality and (unadjusted) union–nonunion differences, estimates of union

effects on wage variance (and other measures) across the countries are very

similar. Compared with the United States, we find identical qualitative patterns

of union wage effects in Bolivia and Chile, but with somewhat lower union

wage gaps than in the United States.

In what follows, we provide a brief overview of theory and prior litera-

ture, followed by a description of the history and legal framework for unions

in Bolivia and Chile. We then describe data sources and our methodological

strategy, followed by presentation and analysis of results. Reasons for the

similarity in results across the three countries are discussed in a concluding

section.

How Do Unions Affect Wages?

Labor unions are employee associations whose primary purpose is to

improve their members’well-being. In most countries, labor law provides

them with rights to organize and, if successful, with protected and exclusive

bargaining rights to negotiate and establish collective contracts with their

employers. In doing so, unions affect the level and distribution of wages and

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ERNANDO RIOS-AVILA AND BARRY T. HIRSCH