The Union Premium

Countless academics have sought to measure the tangible benefits of being a union member. The difference between union and non-union wages, often referred to as the “union premium”, can be calculated in many different ways. It’s a profoundly complex field… here’s a classic example of the poop one has to wade through in search of enlightenment:

If heteroscedasticity is present and affects the coefficient estimates, the quantile regression estimation suggests that the rate of change of the unobservables is different at different quantiles for males but it is not the case for females.

Rightyho, then.

Strangely, international data on the union premium has never, to our knowledge, been assembled in an easily-accessible form. The most that we found was a list of 19 countries. No doubt there are good reasons for this, probably involving heteroscedasticity. Anyway, let’s start with a sample of five countries and then consider some of the issues.

United Kingdom17.1%2004View
United States20%2003View

(Note: these figures are not necessarily comparable, as different methodologies and definitions may have been used).

Before we go any further, let’s stop and ask if a high union premium necessarily a good thing for workers? At first this seems like an odd question to ask, but as the Canadian Labour Congress has pointed out:

The union wage premium has been found to be lowest in countries where union density is high, and highest where union density is low. Thus it is much higher in the US than in Sweden. This is surprising on the surface, but it reflects the fact that non-union employers will be more likely to be forced to match union wages where unions are very strong… The goal is to improve the working conditions of all workers rather than raising the wages of a union elite. A very high union wage premium and low union density is likely to promote strong employer resistance to unions, as in the US. On the other hand, widespread unionization, as in Sweden, is likely to promote much less strong employer opposition, at least once high density has been established. That is because, in highly unionized environments, wages are effectively ‘taken out of competition’… Employers must then compete with each other on the basis of non-wage costs, productivity and quality.Economic and Social Impacts of Trade Unions,” Canadian Labour Congress. [italics added]

Employers would do well to reflect on this. Does it really make sense to pay workers extra so that they won’t unionize, on the basis that the company can then compete on wage costs?? Reducing the union premium in this way is common practice in many developed countries. But whatever savings are made are seldom compared against the costs of employee alienation, angry organising campaigns, anti-union consultants, ongoing legal costs, and the commercial risk of a public relations melt down.

That said, the majority of countries do allow businesses to compete on wages. Such competition leads to an endless pressure on wages, and of course workers have no choice but to resist. And by and large this resistance pays off well.

“Unions in other countries, such as Australia, Austria, Brazil, Canada, Chile, Cyprus, Denmark, Japan, New Zealand, Norway, Portugal and Spain, are also able to raise wages by significant amounts.”Changes over time in union relative wage effects in the UK and the US Revisited, December 2002, by David Blanchflower and Alex Bryson.

(In Germany) “…works councils are associated with higher earnings. The wage premium is around 11 percent (and is higher under collective bargaining).”Work Councils and the Anatomy of Wages,” Discussion Paper 06-086, ZEW.

(In South Africa) “…We estimate union premia on the order of 20 percent for African workers and 10 percent for white workers.”World Bank Group.

(In the U.S.) “The standard estimate of the average union premium (union vs. non-union wage gap) of 15% might be incorrect due to two forms of measurement that create an error bias in the data… These procedural errors lead to a downward bias, indicating that the average union premium could be as high as 24%”.Reconsidering Wage Effects: Surveying New Evidence on an Old Topic, Journal of Labor Research, Spring 2004, by Barry T. Hirsch

An interesting result of this battle is that a unionised workforce also tends to reshape the economic landscape as they struggle over wages.

“An almost universal finding is that union/non-union wage differentials are larger for lower-skilled than for higher-skilled workers.” arrows

(In the U.S.) “When one compares workers whose experience, education, region, industry, occupation and marital status are comparable, those covered by a union agreement (are also):
— 28.2% more likely to have employer-provided health insurance
— 53.9% more likely to have pension coverage
— 14.3% more paid time off.
The union wage premium varies by race, ethnicity and gender, but is large for every group:
— Whites – 13.1%
— Blacks – 20.3%
— Hispanics – 21.9%
— Asians – 16.7%
…Unions also lessen inequality because they are more successful at raising the wages of those in the bottom 60% of the wage pool.Lawrence Mishel, President of the Economic Policy Institute Committee on Senate Health, Education, Labor and Pensions, 2007.

By now you’ll be getting the picture… this is bloody complicated stuff. Unions are good for working people, as a whole, but the financial benefits do not simply bounce back to those who pay the fees.

Various studies have shown that unions tend to make pay fairer (i.e., across society), rather than just higher (i.e., for members only). But do fee-paying members at least get their money back? Unfortunately contemporary data for this just isn’t available. In fact the move towards private employment contracts and fluid working arrangements means that we may never again see comparative international figures. The best we can do for you is to break our own rule, and to delve back into the 1990s.

Australia12%1994, 8, 9
Austria15%1994, 5, 8, 9
Italy0%1994 & 8
Japan26%1994-6, 8, 9
Netherlands0%1994 & 5
New Zealand10%1994-9
Spain7%1995, 7-9
United Kingdom10%1993-2002
United States17%1973-2002

“The Effect of Trade Unions on Wages” by Alex Bryson, Reflets et Perspectives de la Vie Economique, 2007.

When looking at the figures for Italy, the Netherlands and Sweden, don’t assume that unions aren’t doing their jobs. As Bryson points out: “this is primarily due to the fact that unions are also able to control wage outcomes in the non-union sector”. The same holds true, to a lesser extent, for France and Germany.

Although our figures are dated, it looks pretty clear that being a union member pays off. In fact when one compares union fees against wage/salary gains, there would be very few investments in the world which pay such handsome dividends. And yet this financial incentive is clearly insufficient. Why are there so few members in the US, where the rewards are so high? And why would a worker in Italy, the Netherlands or Sweden join a union? They’ll almost certainly gain the benefits anyway, even if they don’t belong. And in Italy, in particular, there is an extremely low level of social resentment against such “free-riders”.

There seems to be no simple link between union density and the union wage premium. None at all.

Yes, union membership pays a high dividend to members. But it also generates benefits for others, some of whom are not members. It seems that the cost-benefit ratio of unionism cannot be calculated in any normal way. Investing in values. Solidarity. Social justice. This is the kind of maths that modern economists simply can’t figure. It’s a pity, because there seems to be an awful lot of it going around.

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