Wage Differentials between Union
and Nonunion Sectors
Patterns, Current Population Survey, 2002
Union premium averages 21%
Pattern by
Pattern by
Pattern by
Hispanics)
Pattern by
age (rising gap—seniority)
gender (gap bigger for women)
race (gap bigger for Blacks,
skill (gap biggest at low skill)
Wage Differentials between Union
and Nonunion Sectors
Forms of Payment
Standard rate (straight time) Pay
Overtime Premia
•Daily overtime included in 93% of agreements
•6th or 7th day premia included in 26% of agreements
•Holiday pay
•Pyramiding (compensation for more than one overtime
premium at once) prohibited in 69% of contracts
•Most agreements specify how overtime is to be distributed
among workers. Mandatory overtime negotiated.
Wage Differentials between Union
and Nonunion Sectors
Forms of Payment
Piece Rate Pay: Pay for output
•Only used where output is easy to measure and verify
•Where rate can be agreed upon
•Treats workers differently: unions may be uncomfortable
•Example Safelite moves from straight time to piece rate
Average pay rises
Average output (windshields installed per worker per day) rises
Quantity vs Quality

Standard hour plans
•Expected time for a project set. Paid for the job at
presumed time. If worker produces at a faster pace, receive
a bonus
Sears got in trouble for performing unnecessary procedures.
Quality vs Quantity again

Wage Differentials between Union
and Nonunion Sectors
Forms of Payment
Multiple year plans: Raises prorated over
time.
•Value rises if front-loaded
•Value falls if back loaded
•Signing Bonuses (pay phased out)
COLA (cost-of-living adjustments)
•Tie pay increases to the CPI, typical quarterly
adjustments
•48% of agreements in 1979
•18% of agreements in 2002
•Alternative: wage reopener to reassess only
wages if economic circumstances dictate (7% in
2002)
Wage Differentials between Union
and Nonunion Sectors
Forms of Payment
Profit sharing
•10% of plans
•ESOPs (Employee Stock Ownership Plans)
•Unions are cautious about these, firms favor
Scanlon Plans, Gain Sharing
•Union and management evaluate ideas designed
to lower costs, raise productivity
•Proceeds split (75% labor-25% firm typical)

Similar to 75/25 split between labor and other factors
Wage Differentials between Union
and Nonunion Sectors
Forms of Payment
Two-tier wage systems: separate treatment of
current, newly hired workers (27% of
contracts in 2002)
•Used most commonly in declining or threatened
firms to preserve compensation for senior workers
Low-tier workers view firm low on equity
Low-tier workers view union unfavorably
Often phased out over time as senior workers retire,
economic circumstances improve

Wage Differentials between Union
and Nonunion Sectors
Forms of Payment
Roll-Up: Many benefits are tied to levels
of base pay through percentages
•Taxes (Social Security, Unemployment
Insurance, Worker’s Compensation)
•Pensions
•Overtime Premia
•Life Insurance
•Paid Vacations, …
Wage Differentials between Union
and Nonunion Sectors
Forms of Payment
Legal restrictions common across all
firms may lower gap somewhat
•FLSA (minimum wage, overtime)
•ERISA (vesting, pension insurance)
•COBRA Consolidated Omnibus Budget Reconciliation Act)

Portability of medical insurance
•WARN
Compensating Differentials between
Union and Nonunion Sectors
Other Forms of Compensation
Pensions (98% of contracts)
•Defined Benefit Plan (73%)
Guarantees amount paid out, typically as a function of
years of service as well as earnings

•Defined Contribution Plan (27%)

Guarantees amount paid in
•Cash Balance Plan (10%)

Similar to defined benefit plan except
•Reporting includes interest earned as well as the set
contribution. Minimum benefit is still guaranteed.
•Benefit can be received in a lump sum
•Benefit not tied to years of service
Compensating Differentials between
Union and Nonunion Sectors
Other Forms of Compensation
Health Insurance (99% of contracts)
•Hospitalization (97%)
•Prescription drugs (96%)
•Physician visits (96%)
•Mental health (93%)
•Dental (90%)
•Vision (73%)
•Preferred Provider: Specified services for a guaranteed
number of patients. Must select physician from group or pay
extra. (74%)
•Health Maintenance Organization: Access to specified
services at specified institution(s) under direction of a named
primary care physician. Specialist services from the group or
not covered. (62%)
•Fee for Service: Traditional (48%)
Compensating Differentials between
Union and Nonunion Sectors
Other Forms of Compensation
Paid Holidays (99%)
•May specify rate for employees who work holidays
•95% 7+ days, median is 11
Paid Vacations (92%)
•2-6 weeks
•Plans dictated by regularity of work, production
process
Graduated: weeks rise with seniority. Most common. Big
plants.
Uniform: set weeks for all. Manufacturing.
Ratio-to-work: Set by intensity of work in previous
quarter, year. Transportation
Funded: Employer contributes to a pool. Employees
draw from the pool during slack work. Construction

Wage Differentials between Union
and Nonunion Sectors
Theory: Two –Sector Model
(Same model for differences in benefits or
compensation)
Consider two sectors of an industry:
U: Union
N: Nonunion
What would the wage be in the two sectors if
labor were freely mobile?
Wage Differentials between Union
and Nonunion Sectors
Theory: Two –Sector Model
Consider two sectors of an industry:
U: Union
N: Nonunion
Suppose that workers are equally productive in both
sectors
In the absence of restrictions on mobility, wages
would be equal across the two sectors
Wage Differentials between Union and
Nonunion Sectors
Theory: Two –Sector Model: What happens to labor in
the Union Sector? The Nonunion Sector?
Union
Wage
WU
Wage
Nonunion
WN
Demand
Demand
NU’
NU
Employment
NN
Employment
Wage Differentials between Union
and Nonunion Sectors
Theory: Two –Sector Model
Spillover Effect: Displaced labor in the union
sector spills over to the nonunion sector
Wage Differentials between Union and
Nonunion Sectors
Theory: Two –Sector Model
Spillover Effect
Union
Wage
WU
Wage
Nonunion
WN
Demand
Demand
NU’
NU
Employment
NN
Employment
Wage Differentials between Union
and Nonunion Sectors
Theory: Two –Sector Model
Threat Effect: Firms in the nonunion sector
raise wages to induce their own workers to
resist incentives to unionize
Wage Differentials between Union and
Nonunion Sectors
Theory: Two –Sector Model
Threat Effect
Union
Wage
WU
Wage
Nonunion
WN
Demand
Demand
NU’
NU
Employment
NN
Employment
Wage Differentials between Union
and Nonunion Sectors
Theory: Two –Sector Model
Wait Unemployment Effect: Displaced labor in
the union sector stays in the Union Sector to
wait for jobs to open
Alternative: Share job loss across NU, each
works NU / NU’
Wage Differentials between Union and
Nonunion Sectors
Theory: Two –Sector Model
Wait Unemployment
Union
Wage
WU
Wage
Nonunion
? WN
Demand
Demand
NU’
NU
Employment
NN
?
Employment
Empirical Tests of Wage Differentials between
Union and Nonunion Sectors
Wage
= Price * Marginal Product
= Short-run demand curve
Marginal Product
= f(Skill, firm attributes)
= f(Xi)
Empirical Tests of Wage Differentials between
Union and Nonunion Sectors
Percent differential in the wage approximated by
WU – WN = Observed difference
At least some of the wage differential will reflect differences in
productivity between the U and N sectors (sorting)
Suppose that union wages are well explained by the equation
WU = a0 + a1* XU
WN = b0 + b1* XN
Predicted Wage for a nonunion worker if s/he were in a union is
WN = a0 + a1* XN
Empirical Tests of Wage Differentials between
Union and Nonunion Sectors
Percent differential in the wage approximated
by
WU – WN = Observed difference
WU - WN = Explained difference
WN
-
WN = Unexplained difference
Wage Differentials between Union and
Nonunion Sectors
Theory: Two –Sector Model:Explained and
Unexplained Differences in Wages
Union
Wage
WU
Wage
Nonunion
WU
WN
WN
Demand
Demand
NU’
NU
Employment
NN
Employment
Card, David. “The Effect of Unions on Wage Inequality in the U.S.
Labor Market.” Industrial and Labor Relations Review 54 (January
2001): 296-315.
Card: Table 2:
 Unadjusted union wage gap rising for men and
women
 Adjusted union wage gap stable (men) or falling
(women)
 Adjusted (explained) gap smaller than
Unadjusted (unexplained) gap =>some of union
wage effect is sorting on productivity
 Wage inequality lower for men and women in the
union sector (both overall and residual)
 Wage inequality rising in both the union and
nonunion sectors
Bratsberg, Bernt and James F. Ragan Jr. “Changes in the Union Wage
Premium by Industry.” Industrial and Labor Relations Review 56
(October 2002): 65-83.


Bratsberg and Ragan: What is the magnitude of
the union wage gap, controlling for differences in
productive attributes:
WN
-
WN = Unexplained difference
= Adjusted Union Effect
Estimates reported in Appendix and Time Path
shown in Figure 1
Bratsberg, Bernt and James F. Ragan Jr. “Changes in the Union Wage
Premium by Industry.” Industrial and Labor Relations Review 56
(October 2002): 65-83.

Bratsberg and Ragan:
Appendix: Union Wage Premium by Industry,
adjusted for differences in education, experience,
gender, minority status, marital status, SMSA,
area of country, part-time status, occupational
status.
Overall, premium varies from 13% to 22%
(Consistent with Card)
Estimated adjusted premia vary from 2% (textiles,
instruments) to 31% (construction), all positive
Bratsberg, Bernt and James F. Ragan Jr. “Changes in the Union Wage
Premium by Industry.” Industrial and Labor Relations Review 56
(October 2002): 65-83.
Appendix: Union Wage Premium by Industry, adjusted for
differences in factors.
Some downward trend in premium, not dramatic (consistent with
Card)
Trend effect by industry:
16 falling, 9 significant
16 rising, 9 significant
Is there are pattern to which industries are falling wage premia?
Figure 1
Falling: Construction, Mining, Wholesale, Retail, Finance
Start with high premium
Rising:Communications, Durable Goods
Start at low premium
Reversion to the mean?
Figure 2: Variance of union premia across industries
Bratsberg, Bernt and James F. Ragan Jr. “Changes in the Union Wage
Premium by Industry.” Industrial and Labor Relations Review 56
(October 2002): 65-83.

What Factors affect union wage premia
over time, across industries?
• Business cycles: Union contracts insulate
wages from short-term fluctuations



Unemployment rate: should raise premium
Inflation: should lower premium
COLA: adds cyclical sensitivity back in
• Deregulation: adds competitors that should
lower bargaining power (Laws of Derived
Demand)
• Import penetration: Union insulates wages at
least temporarily
• Tests reported in Table 2
Bratsberg, Bernt and James F. Ragan Jr. “Changes in the Union Wage
Premium by Industry.” Industrial and Labor Relations Review 56
(October 2002): 65-83.

Conclusions:
• Union wage premia in all industries
• Premia becoming more similar across
industries over time
• Union wages less responsive to business cycles
unless tied to inflation through COLAs
• Decentralization has mixed effects on wage
premia (generally lowers wages for both union
and nonunion however)
• Union wages more insulated from import
competition
Belman, Dale L. and Kristen A. Monaco. “The Effects of Deregulation,
De-Unionization, Technology and Human Capital on the Work and
Work Lives of Truck Drivers.” Industrial and Labor Relations Review 54
(January 2001): 502-524.
Deregulation has mixed effects on the union wage
premium because it lowers wages for both union
and nonunion workers.
Similarly, import competition may lower wage for
both union and nonunion workers, but it lowers
wages more for nonunion workers
Belman and Monaco document how deregulation
has affected union and nonunion wages in
trucking
Belman, Dale L. and Kristen A. Monaco. “The Effects of Deregulation,
De-Unionization, Technology and Human Capital on the Work and
Work Lives of Truck Drivers.” Industrial and Labor Relations Review 54
(January 2001): 502-524.
Between 1935 and 1979
•
•
•
•
Entry in trucking routes restricted
Rates set bureaucratically
Back-hauls banned
Some types of freight banned
Created monopoly rents, some of which went to
union workers
These restrictions eliminated with deregulation

Deregulation of trucking began in 1979.
• Real wages fell by 21% between 1973-1995
• Unionization density in firms whose main business was
trucking fell from 55% to 25%
Belman, Dale L. and Kristen A. Monaco. “The Effects of Deregulation,
De-Unionization, Technology and Human Capital on the Work and
Work Lives of Truck Drivers.” Industrial and Labor Relations Review 54
(January 2001): 502-524.
Table 2: Data on individual trucker earnings between 19731991
Union members earn 28% more, adjusted for skill
Holding individual productivity measures fixed, impact of
deregulation estimated
Impact on
Nonunion
Union
For-hire
-0.163
-0.079
Private carriage
-0.125
-0.087
Impacts based on sum of coefficients from table 2
=>Deregulation lowered wages for all, but lowered wages less for
union members
Belman, Dale L. and Kristen A. Monaco. “The Effects of Deregulation,
De-Unionization, Technology and Human Capital on the Work and
Work Lives of Truck Drivers.” Industrial and Labor Relations Review 54
(January 2001): 502-524.
Another change in this market:
• Communications and location technologies
• Routing technologies
• Computer technologies
Technologies should raise worker productivity—




adjust routes to changes in weather, traffic, road
construction
More efficient back hauls
More efficient partial loads
Communication without stopping
Table 3 shows the use of various technologies by
drivers in 1997
Belman, Dale L. and Kristen A. Monaco. “The Effects of Deregulation,
De-Unionization, Technology and Human Capital on the Work and
Work Lives of Truck Drivers.” Industrial and Labor Relations Review 54
(January 2001): 502-524.
Belman and Monaco document how these
technologies have affected wages
• Earnings


Satellites raise earnings
Dispatchers (old technology) lower earnings
• Mileage rates (earnings per mile)

Old technologies tend to lower rates per mile;
because
• Miles

Satellite technologies raise miles (reduce wasted time
off road; raise hours without raising penalties)
Card, David. “The Effect of Unions on Wage Inequality in the U.S.
Labor Market.” Industrial and Labor Relations Review 54 (January
2001): 296-315.
Wage inequality lower for men and women
in the union sector (both overall and
residual)
But…Wage inequality rising in both the union
and nonunion sectors

Have changes in union density led to
rising wage inequality?
• Male union density fell from 31% to 19% from
1973 and 1993
• Female union density fell from 14% to 13%
Card, David. “The Effect of Unions on Wage Inequality in the U.S.
Labor Market.” Industrial and Labor Relations Review 54 (January
2001): 296-315.
Figures 1 and 2: Changes in union density
by gender, skill, and public versus private
sector employment
• Public sector


Male and female density rising
Biggest increases at upper tail of skill distribution
• Private sector


Male and female density falling
Biggest decreases at middle or lower end of skill
distribution
• Potential impact of density changes on
inequality different for public, private sectors
Card, David. “The Effect of Unions on Wage Inequality in the U.S.
Labor Market.” Industrial and Labor Relations Review 54 (January
2001): 296-315.
Figures 3 and 4: Changes in pattern of
union premia by gender, skill, and public
versus private sector employment
• Wage premia largest for the least skilled for
both men and women
• Decline in wage premia faster for men as skill
increases, (negative for men at highest skills)
• Pattern identical


between public and private sectors
Between 1973 and 1993
Card, David. “The Effect of Unions on Wage Inequality in the U.S.
Labor Market.” Industrial and Labor Relations Review 54 (January
2001): 296-315.
Table 8: Estimate of impact of union density
changes on wage inequality by gender,
public vs private sectors
• Public sector union density rises for men and
women

Lowers inequality by 1 percentage point for women
and men
• Private sector union density falls for men and
women



No impact on inequality among women
1 percentage point increase in inequality among men
Decline in union density has had only a
small effect on earnings inequality in the
united States
Buchmueller, Thomas C. John Dinardo and Robert G. Valletta. “Union
Effects on Health Insurance Provision and Coverage in the United
States.” Industrial and Labor Relations Review 55 (July 2002): 610-627.
Percent covered by employer-provided
Health Insurance fell from 71% in
1983 to 64.5% in 1997
Unions raise probability of getting
benefits
How much of the decrease in benefits
is due to decline in union density?
Buchmueller, Thomas C. John Dinardo and Robert G. Valletta. “Union
Effects on Health Insurance Provision and Coverage in the United
States.” Industrial and Labor Relations Review 55 (July 2002): 610-627.
Do differences in union and nonunion
health insurance benefits reflect
differences in firm, worker attributes
or are they a consequence of union
bargaining power?
Explained vs unexplained differences
in health insurance
Buchmueller, Thomas C. John Dinardo and Robert G. Valletta. “Union
Effects on Health Insurance Provision and Coverage in the United
States.” Industrial and Labor Relations Review 55 (July 2002): 610-627.
Table 3: Changes in union effect on health
insurance (percent of workers)
Observed
Adjusted
1997
21.5
17.5
1983
27.4
21.1
=> Some of union benefits premium is sorting on
productivity
=> Union effect on benefits falling somewhat
Union also raises probability of eligibility (shorter
wait to get benefit, gap falling); union raises
probability of take-up (higher quality benefits,
gap rising)
Buchmueller, Thomas C. John Dinardo and Robert G. Valletta. “Union
Effects on Health Insurance Provision and Coverage in the United
States.” Industrial and Labor Relations Review 55 (July 2002): 610-627.
Differences in establishment size
Table 5: Union impact on health insurance
benefits is biggest in small firms (impact
in % of establishments)



Virtually all large firms offer benefits
If union density had remained constant (especially in
small firms) percentage covered by employerprovided health insurance would be 1.6 percentage
point higher (25% of decline in employer provided
benefits)
Adjusted gap is 2.9%
Buchmueller, Thomas C. John Dinardo and Robert G. Valletta. “Union
Effects on Health Insurance Provision and Coverage in the United
States.” Industrial and Labor Relations Review 55 (July 2002): 610-627.
Union Impact on benefit quality
Table 6: Union impact on firm share of
health insurance premium payment
Single coverage: Adjusted difference
is 9%
Family coverage: Adjusted differences
is 10%
Buchmueller, Thomas C. John Dinardo and Robert G. Valletta. “Union
Effects on Health Insurance Provision and Coverage in the United
States.” Industrial and Labor Relations Review 55 (July 2002): 610-627.
Union Impact on health insurance benefits for retirees
Table 8:Proportion of establishments providing health
insurance benefits that also provide benefits to retirees, by
union status and establishment size
Union gap rising due mainly to decrease in nonunion sector
(4.5% in 1988, 14.5% in 1993) (Table 6: CPS data, adjusted, %
of employees)
Gap exists at all firm sizes, biggest at small firms
Loss of union density may affect future retiree health benefits
Allen, Steven G and Robert L. Clark. “Unions, Pension
Wealth, and Age-Compensation Profiles.” Industrial and
Labor Relations Review 39 (July 1986): 502-517.
Union Impact on pension benefits
Table 1:Other things equal
Unions raise benefits at retirement by
6%, holding prior earnings fixed
Unions lower age at retirement by
about 1 year
Allen, Steven G and Robert L. Clark. “Unions, Pension
Wealth, and Age-Compensation Profiles.” Industrial and
Labor Relations Review 39 (July 1986): 502-517.
Union Impact on pension benefit increase
after retirement
Table 3:
Union pensions grow at a faster rate than
nonunion pensions
Union effect on pension rises as years of
retirement increases (17% for older
retirees vs. 5% for youngest retirees)
McHugh, Cutcher-Gershenfeld and Polzin. “Employee Stock
Ownership Plans: Whose interests do they Serve?” IRRA 49th
Annual Proceedings. (1997):23-32.
ESOP: Employee Stock Ownership
Plans
Unions are skeptical
• Potential for firm abuse
• Potential union replacement by creating
community of interest with
management
Unions have set guidelines for ESOPs:
Table 1
McHugh, Cutcher-Gershenfeld and Polzin. “Employee Stock
Ownership Plans: Whose interests do they Serve?” IRRA 49th
Annual Proceedings. (1997):23-32.
ESOP: Employee Stock Ownership Plans
Table 4: How do ESOPs differ in unionized
firms?
Greater labor influence in decisions



Share of stock owned by ESOP is bigger
More employee participation on Board, design of
ESOP
Allocation of stock more likely based on hours (equal
treatment)
Freeman, Richard and Morris Kleiner. “Do Unions Make
Enterprises Insolvent?” Industrial and Labor Relations Review
52 (July 1999): 510-527.
If Unions raise wages, benefits, do
they make firms insolvent?
Samuel Gompers “The worst crime
against working people is a company
which fails to operate at a profit”
Freeman, Richard and Morris Kleiner. “Do Unions Make
Enterprises Insolvent?” Industrial and Labor Relations Review
52 (July 1999): 510-527.
If Unions raise wages, benefits, do they make firms
insolvent?
Context
• Unions raise wages, benefits
• Unions raise productivity on average
• Gain in wages outweighs gain in productivity



Virtually all studies find that unions lower rate of return on
assets
Lower growth rate of firm
Lower stock price
• Possible that what unions do is extract rents (excess
profits) from firms, do not lower profit below market
rate of return, do not threaten firm survival


Unions concentrate on larger firms
Firms in concentrated industries
Freeman, Richard and Morris Kleiner. “Do Unions Make
Enterprises Insolvent?” Industrial and Labor Relations Review
52 (July 1999): 510-527.
If Unions raise wages, benefits, do they
make firms insolvent?
Subset of Compustat data (319 firms) with
union information added, 1983-1990
Union measures:
• Dummy variable if any workers covered by
union contract
• Percent of workers covered by union contract
Table 3: Union impact on profitability
• Union presence associated with 3-9 percentage point
lower net income on assets (latter is a bit high vs other
estimates)
• Adverse effect is larger when union density is lower!!
Freeman, Richard and Morris Kleiner. “Do Unions Make
Enterprises Insolvent?” Industrial and Labor Relations Review
52 (July 1999): 510-527.
If Unions raise wages, benefits, do
they make firms insolvent?
Table 2: NO!!!
Probability of insolvency lower for
unionized firms
Selection effect? Unions target only
profitable firms