The Board of Regents of the University of Wisconsin System Nominal and Real Union Wage Differentials and the Effects of Industry and SMSA Density: 1973-83 Author(s): Barry T. Hirsch and John L. Neufeld Reviewed work(s): Source: The Journal of Human Resources, Vol. 22, No. 1 (Winter, 1987), pp. 138-148 Published by: University of Wisconsin Press Stable URL: http://www.jstor.org/stable/145872 . Accessed: 19/04/2012 18:30 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. University of Wisconsin Press and The Board of Regents of the University of Wisconsin System are collaborating with JSTOR to digitize, preserve and extend access to The Journal of Human Resources. http://www.jstor.org Nominal and Real Union Wage Differentials and the Effects of Industry and SMSA Density: 1973-83 I. Introduction Estimation of union-nonunion relative wage differentials has for some time received considerable attention from labor economists. Lewis (1986) has recently surveyed about 200 empirical studies providing empirical analysis of data through 1979. In this paper, we provide estimates of nominal and real union-nonunion wage differentials for the period 1973-83, based on separate samples of male production workers in manufacturing, production workers in nonmanufacturing, and nonproduction workers economy wide. The purpose of this study is threefold. First, systematic comparison of nominal versus real wage differentials allows us to evaluate Lewis's conclusion, based on a limited number of studies, that there is no significant difference between these measures. Second, we are able to provide estimates of the union-nonunion differential over an eleven year period, including several sample years since Lewis ended his survey. Finally, we provide estimates of the effects of both industry and SMSA density on the union differential and the wages of union and nonunion workers. II. Estimation and Data In order to obtain estimates of the union-nonunion wage differential, micro log wage functions are specified for union and nonunion workers. Letting i index individual workers, k a worker's 3-digit industry, m a worker's SMSA, and superscripts u and n union and nonunion status, respectively, the following equations are estimated by OLS: (1) ln(w)' = Ox"+ SEIP"X + UPik + 8UPim+ e' (2) ln(w)i = an + SX? + ^"P + 8p +e where w is the wage, X is a vector of earnings-related individual characterisThe authorsacknowledgethe helpfulcommentsof two anonymousreferees. [SubmittedAugust 1985;acceptedJuly 1986] THE JOURNAL OF HUMAN RESOURCES ? XXII * 1 Communications tics, P is union density, and e" and en are error terms assumed to be uncorrelated with zero means and constant variances.' The logarithmic union-nonunion wage differential (or wage gap), d, is calculated by: (3) d = (ou - ") + ( - n)+ (U - yn)Pk + (u - )Pm. where the means of X, Pk, and Pm are all-worker means (hence, d is a weighted average of log differentials calculated using union and nonunion means). The percentage differential, D, is most easily approximated by: (4) D = [exp(d) - 1]100. More precise estimation methods are provided in Kennedy (1981) and Giles (1982). Below, all results are presented as log differentials. The primary data used in this study come from the May 1973-81 and 1983 Current Population Survey (CPS) tapes. All employed nonfarm nonschool males between the ages of 18 and 64 residing in 29 of the largest 30 SMSAs are included.2 Union density, defined here as the percentage of eligible workers who are union members, is available for three-digit Census industries and SMSAs in Kokkelenberg and Sockell (1985).3 In order to obtain real wage estimates, nominal wages (usual weekly earnings divided by usual hours worked per week) are deflated by BLS intermediate budget figures once provided annually for large SMSAs (Census Bureau).4 The vector X includes years of schooling, experience (age - schooling - 5), experience 1. As is well known, OLS is not without problems. Receiving the most attention in the literature has been the potential bias resulting because of the simultaneous determination of union status and wages and, relatedly, selectivity bias resulting from unobserved differences between union and nonunion workers with identical measured characteristics. Lewis (1986) provides an analysis of methods intended to address these problems (e.g., inclusion of a selectivity variable in the wage equations and the use of fixed-effects models with panel data). Because alternative methods also introduce potentially serious problems, OLS is used here. This helps avoid entangling the effects of cost-of-living or union density adjustments with those from use of alternative estimation procedures. 2. There was no public use 1982 survey. Sample sizes are reduced after 1978 because all rotations were not asked their usual weekly earnings. CPS coding of the SMSAs is based on 1970 Census population counts. Miami is excluded due to insufficient cost-of-living data. 3. Kokkelenberg and Sockell (1985) provide union data based on the 1973-81 May CPS (the CPS union question did change during this period; see Footnote 6). Density data for SMSAs are provided yearly while for industries, data are presented as three-year moving averages. Hence our 1973 and 1974 regressions include industry density for 1973-75, regressions for 1980 on include the 1979-81 industry density measures, and the 1983 regressions include the 1981 SMSA density measure. Measurement error associated with this imperfect matching is probably minor given the year-to-year stability in relative interindustry and interarea unionization. 4. Such figures are no longer provided by BLS. Our 1983 budget figures were generated by inflating prior year budget figures by SMSA-specific consumer price indices (U.S. Bureau of the Census). 139 140 The Journalof Human Resources squared, and dummies for race, marital status, veteran status, region, samples). 1-digitoccupation,and 1-digitindustry(in the nonmanufacturing III. Nominal versus Real Wage Differentials by Year As noted by Lewis(1986, 105), the use of nominalratherthan real wage rates might lead to an upwardbias in wage gap estimatessince unionworkersare more likelyto residein highercost-of-livingareas.Based on unpublishedresultsextractedfrom four studies, however, Lewis tentativelyconcludesthat adjustmentsfor cost of livinghave little effect on wage differentialestimates.We firstexaminethe potentialfor bias in unionwage differentialestimatesby comparingdifferencesbetween nominaland real wage rates for union and nonunionworkersover the 1973-83 period. As hypothesizedby Lewis, we find a potentialfor bias. Adjustingfor cost-oflivingdifferencesreducesunionwagesby an average1.15percentrelativeto nonunionwages. Table 1 presentsestimates of union-nonunionlog wage differentialsby yearfor the threesubsamplesof maleworkers.As foundin previousstudies, the union wage effect for productionworkersis smallerin manufacturing than in nonmanufacturing,while estimatedunionwage effects for nonproduction workersare close to zero (see Antos 1983). The average (unweighted)differencebetween the nominaland real differential over the 1973-83 period, d(nom) - d(real), is presentedin the next to last row of Table 1. Among productionworkersin manufacturing (the most frequentlystudiedgroupin the empiricalliterature),nominaland real differentialsare virtuallyidentical, the averagedifferencebeing less than a tenth of a percent. However, amongproductionworkersoutside of manufacturing,estimates of nominaldifferentialsare about 1 percentage point higherthan estimatesof real differentials.While a 1 percentagepoint bias is not trivial,it is less thanthe bias attributedto the exclusionof fringe benefits (Freeman 1981), work conditions (Duncan and Stafford 1980), union dues (Raisian 1983), selectivity,and other factors(for a survey, see Lewis 1986). Among nonproductionworkers, no evidence is found of a union-nonunionwage differential;hence, values of d(nom) - d(real) for this grouphaveless meaning.The bottomline of Table 1 presentsd(nom) d(real) calculatedfrom regressionsexcludingthe regionalvariables,which to some extent proxycost-of-livingdifferences.Even with the exclusionof these controlvariables,differencesbetween nominaland real union wage gaps are small on average (complete results are availableon request). On the basisof the resultspresentedin Table 1, it appearsfairto conclude that no significantportionof the union-nonuniondifferentialconstitutesa Communications compensating differential for higher living costs. It likewise follows that no significant bias has been introduced in previous studies by ignoring cost-ofliving differences. For most research efforts in this area, the benefits from considering cost-of-living differences are likely to be less than the costs of limiting one's sample to large SMSAs (plus the costs from introducing additional measurement error associated with the cost-of-living indices).5 Indeed, it should be noted that union wage gaps estimated for workers in SMSAs are lower than corresponding economy-wide wage gaps (Lewis 1986, 134-36). Our results also provide evidence on changes over time in the unionnonunion wage differential, using a common methodology, specification, and data source.6 The far right columns of Table 1 report the full-sample weighted averages of the nominal and real differentials. Similar to results reported by Lewis (1986, 179, 186), we find relatively stable wage effects from 1973 through 1975. However, we find a more marked upward shift than reported in Lewis for the 1976-78 period. As in the three studies cited by Lewis, we find a sharp drop in the 1979 estimated gap. Our post-1979 results show considerable year-to-year variability, with somewhat higher production-worker gap estimates for 1980 and 1983 than in 1979 and 1981. It appears fair to conclude that the upward trend occurring in the union differential in the late seventies may have been less marked than that estimated by some (e.g., Johnson 1984, Linneman and Wachter 1986), and it was not maintained in the early eighties. IV. Union Density and the Wages of Union and Nonunion Workers Lewis (1986) has argued forcefully that much of the empirical literature measuring union relative wage effects entangles to some degree the effects of individual union status and of union density. In order to separate these effects, variables measuring union density in workers' threedigit industry group and SMSA are included in Equations (1) and (2). Because inclusion of density variables in wage equations has only recently 5. We have no reason to believe that these results, based on large SMSAs, cannot be generalized. 6. The union variable does change in definition over the period. The 1973-75 surveys asked, "Does ... belong to a labor union?" The 1976-78 surveys added to the end, ". . . or employee association." The 1979-81 surveys added, ". .. or employee association similar to a union." The 1983 survey asked, "Is . . . covered by a union or employee association contract?" These changes in definition qualify any inferences we make regarding intertemporal changes in the union wage gap. 141 Table 1 Nominal and Real Union-Nonunion Log Wage Differentials: 1973-83 Production Workers Year 1973 1974 1975 Manufacturing nominal real 0.0770 0.0775 663] [1107; 0.0970 0.0978 [1055; 625] 0.0784 0.0746 [992; 638] 0.1026 1976 0.1038 1977 [870; 626] 0.1229 0.1220 [956; 660] Nonmanufacturing nominal real Nonproduction Workers nominal real 0.1881 0.1819 [1336; 1391] -0.0192 -0.0258 0.2262 0.2350 [1214; 1228] 0.1993 0.1917 [1177; 1325] 0.2333 0.2419 [1128; 1267] 0.2950 0.2826 [1257; 1451] -0.0337 -0.0427 [599; 2797] 0.0060 -0.0045 [599; 2994] 0.0003 -0.0062 [573; 2774] 0.0064 -0.0001 [618; 2876] [662; 2806] 1978 1979 1980 1981 1983 1973-83a 0.1330 0.1339 [819; 557] 0.0835 0.0837 [540; 358] 0.1037 0.0999 [250; 220] 0.0549 0.0590 [236; 233] 0.1133 0.1152 [281; 243] - 0.0005 0.2697 0.2577 [1137; 1333] 0.1907 0.1835 [677; 787] 0.2237 0.2142 [371; 485] 0.1457 0.1304 [325; 483] 0.2045 0.1946 [300; 381] 0.0097 d(nom) - d(real) 1973-83b d(nom) - d(real) 0.0005 0.0074 0.0008 -0.000 [581; 2771] -0.0515 -0.057 [408; 1654] -0.0238 -0.031 [206; 961] 0.0097 0.00 [192; 949] -0.0225 -0.024 [342; 11471 0.0065 0.0106 Note: Samplesizes for union and nonunionworkers,respectively,are in brackets. a. Unweightedaveragefor 1973-83, calculatedfrom values in the table. b. Unweightedaveragefor 1973-83, calculatedfrom differentialsestimatedwith regressions excludingregionaldu Table 2 Industry and SMSA Union Density Coefficients from Union and Nonunion Real Wage Equa EquationDensity Variable 1973 1974 1975 Production workers: manufacturing 0.2032 0.2657 0.1117 Union- Pk(IND) (3.78) (4.78) (1.69) 0.0579 0.1662 0.3183 Union- Pm(SMSA) (1.32) (0.32) (0.94) 0.3574 0.1677 0.3112 Nonunion - Pk(IND) (3.23) (2.96) (1.56) -0.0997 -0.3133 -0.0603 Nonunion - Pm(SMSA) (-0.19) (-0.35) (-1.04) Production workers: nonmanufacturing 0.3523 0.4338 0.3587 Union- Pk(IND) (7.15) (8.44) (6.35) 1976 1977 1978 1979 0.2419 (4.42) 0.4578 (2.49) 0.2569 (2.35) 0.1989 (0.65) 0.3204 (5.88) 0.5785 (3.46) 0.1870 (2.12) 0.3681 (1.55) 0.3908 (5.92) 0.2240 (1.10) 0.2519 (2.57) 0.0310 (0.10) 0.2500 0.3966 (3.31) (3.45) 0.2957 0.1098 (1.33) (0.32) 0.4056 0.0817 (3.20) (0.49) 0.0580 -0.3739 (0.17) (-0.79) 0.4482 (7.69) 0.3863 (7.35) 0.4732 (8.34) 0.3292 (4.18) 1980 0.3249 (3.72) Union - Pm(SMSA) Nonunion- Pk(IND) Nonunion - Po(SMSA) Nonproduction workers Union - Pk(IND) UnionPo- (SMSA) Nonunion - Pk(IND) Nonunion - Po(SMSA) 0.1435 -0.3503 -0.1115 0.0813 -0.2130 -0.1911 0.1450 0.2550 (-1.27) (0.46) (0.68) (-2.04) (-0.53) (-0.99) (0.53) (0.80) 0.7152 0.6651 0.5924 0.5668 0.5845 0.6192 0.5366 0.4234 (7.63) (7.14) (6.44) (7.10) (7.49) (4.50) (7.24) (3.57) -0.0205 0.4298 0.0559 -0.2334 -0.1323 -0.0680 -0.5160 -0.0737 (-2.31) (-0.09) (-0.64) (2.03) (0.31) (-1.05) (-0.23) (-0.23) 0.0873 (1.22) -0.2493 (-0.97) 0.3907 (7.72) 0.0895 (0.55) Note: t-statistics in parentheses. 0.1270 0.1876 (1.48) (2.17) 0.0196 -0.0787 (0.06) (-0.26) 0.3104 0.3466 (6.36) (6.84) 0.1793 0.1532 (1.09) (0.94) 0.2259 (2.35) 0.0142 (0.04) 0.3256 (6.27) 0.3419 (2.10) 0.2089 0.0954 0.2304 0.0011 (2.50) (1.21) (2.38) (0.01) 0.1470 -0.3340 -0.6410 0.0283 (-1.86) (0.54) (-1.18) (0.05) 0.2383 0.3126 0.1812 0.3287 (5.01) (6.28) (2.90) (4.24) 0.2701 0.1221 0.1029 -0.3458 (1.86) (0.74) (0.50) (-1.33) 146 The Journal of Human Resources become widespread, a brief discussion of results seems warranted (we are unaware of other studies including both industry and SMSA density). Table 2 presents the coefficients y and 6 on the density variables Pk and P, respectively, from the union and nonunion wage equations. Industry union density, Pk, is found to positively and significantly affect both union and nonunion wages (for comparison with other studies, see Freeman and Medoff 1981, Antos 1983, Moore, Newman, and Cunningham 1985, and the survey by Lewis 1986). The positive effect of increased density on union wages is typically interpreted as resulting from a decreased labor demand elasticity. The positive effect of density on nonunion wages is thought to result primarily from a dominant threat effect in which nonunion employers must increase wages as industry density increases in order to remain nonunion. Or alternatively, nonunion firms can pay higher wages and be at less of a competitive disadvantage the greater is industry-wide coverage (see Freeman and Medoff 1981 and Moore, Newman, and Cunningham 1985 for related discussions). In contrast to industry density, labor market (SMSA) union density has little clear-cut impact on union or nonunion wages (see Holzer 1982 for more detailed evidence on SMSA density). The greater significance of Pk than Pm on union wages is consistent with the argument that industry coverage, but not labor market coverage, impacts on the elasticity of labor demand. The minor net impact of Pm on nonunion wages suggests that threat effects from SMSA density, to the extent they exist, are offset by spillover (or surplus labor) effects that place downward pressure on nonunion wages. While labor spillover effects are likely to be captured by measures of SMSA density (assuming imperfect interarea mobility), they seem less likely to be associated with industry density. Comparison of the density coefficients from the union and nonunion equations in Table 2 also permit inferences as to their effect on the size of the wage differential. The finding that yu > yn implies the union wage gap increases with industry density, while 6u > an implies the gap increases with SMSA density. Surprisingly we do not find the wage gap increasing with industry density, as theory and limited past evidence would predict (Freeman and Medoff 1981). However, we are reluctant to draw strong inferences based on the relative magnitudes of the density coefficients, since it seems likely they are proxying for other omitted variables (Lewis 1986, 153).7 Coefficient estimates on SMSA density do suggest, however, that labor market density has no significant impact on the magnitude of the union wage gap. 7. Indeed, Moore, Newman, and Cunningham (1985) find that the nonunion industry density coefficient is sharply reduced for a sample of manufacturing workers when a firm size variable is included. Communications V. Summary This paper has provided a detailed analysis of nominal and real union-nonunion relative wage effects during the 1973-83 period. For all years, differences between the nominal and real union wage effects are small. No difference is found for production workers in manufacturing, while approximately a one percentage point difference is found for production workers outside of manufacturing. Based on these results, it is concluded that for most research endeavors in this area, the costs of considering cost-of-living differences (e.g., restricting the sample) outweigh the benefits. Evidence has also been provided on the union wage gap over the 1973-83 period and the effects of both industry and SMSA density on union and nonunion wages. Union-nonunion wage differentials appear to have widened during the 1976-78 period, but returned to earlier levels after 1978. Industry density was found to increase significantly both union and nonunion wages, whereas labor market density appears to have little significant impact on union or nonunion wages. Barry T. Hirsch North Carolina at Greensboro University of John L. Neufeld University of North Carolina at Greensboro References Antos, Joseph R. 1983. "Union Effects on White-CollarCompensation." Industrialand Labor RelationsReview36:461-79. Duncan, Greg J., and FrankP. Stafford.1980. "Do Union MembersReceive CompensatingWage Differentials?"AmericanEconomicReview70:355-71. Freeman,RichardB. 1981. "The Effect of Unionismon Fringe Benefits." Industrialand Labor RelationsReview34:489-509. Freeman, RichardB., and James L. Medoff. 1981. "The Impactof the Percent Organizedon Union and NonunionWages." Reviewof Economicsand Statistics62:561-72. . 1984. WhatDo UnionsDo? New York: Basic Books, 1984. Giles, David E. A. 1982. "The Interpretationof DummyVariablesin SemilogarithmicEquations:UnbiasedEstimation."EconomicsLetters 10:77-79. Holzer, HarryJ. 1982. "Unions and the LaborMarketStatusof White and MinorityYouth." Industrialand Labor RelationsReview35:392-405. Johnson, George E. 1984. "Changesover Time in the Union-NonunionWage Differentialin the United States." In The Economicsof TradeUnions:New Directions,ed. Jean-JacquesRosa. Boston: Kluwer-Nijhoff. 147 148 The Journal of Human Resources Kennedy, Peter E. 1981. "Estimation with Correctly Interpreted Dummy Variables in Semilogarithmic Equations." American Economic Review 71:801. Kokkelenberg, Edward C., and Donna Sockell. 1985. "Newer Estimates of Unionism in the United States: 1973-1981." Industrial and Labor Relations Review 38:497-543. Lewis, H. Gregg. 1986. Union Relative Wage Effects: A Survey. Chicago: University of Chicago Press. Linneman, Peter, and Michael L. Wachter. 1986. "Rising Union Premiums and the Declining Boundaries Among Noncompeting Groups." American Economic Review Papers and Proceedings 76:103-08. Moore, William J., Robert J. Newman, and James Cunningham. 1985. "The Effect of the Extent of Unionism on Union and Nonunion Wages." Journal of Labor Research 6:21-44. Raisian, John. 1983. "Union Dues and Wage Premiums." Journal of Labor Research 4:1-18. U.S. Bureau of the Census. Various years. Statistical Abstract of the United States. Washington: GPO. ANDCIRCULATION STATEMENT OF OWNERSHIP MANAGEMENT R,qu,.;by 39 u.s.c 36851 I1 18. TITLE OF PUBLICATION THE OF JOURNAL I.FREOUENCY OF St., MAILING Same as OF FILING 9/17/86 I ANNUALLY Spring, AODRESS 114 N. Murray 2'DATE NO. PU8LICATION | sO 3A.NO.OFISSUESPUBLISHED138.ANNUALSUSCRs.PTION Winter, MAILING S, COMPLETE 2 I IH8 RESOURCES SSUE Quarterly: 4. COMPLETE HUKAN Madison, ADORESS OFFICE PRICE Ind: 4 Fall Summer, OF KNOWN OF PUBLICATION S8 $35 Inst: Dry.Co.ry, S.,.. iS'r.. Z.l. ,nd Cod )Nor. pnn.m WI 53715 OF GENERAL OF THE HEADOUARTERS 8USINES5 OF THE PU8LISHER OFFICES (N. p1l.rf above S.FULLNAMESANDCOMPLETE EDITOR{rhr ftm MAILING ADDRESSOF PU8LISHEREDITORAND MANAGING PUBLISHER N ..... Comp.-re M.a,n- Prof. Eugene EDITOR 4226 Smolensky, ~d Comp/,r (Nrme b*t^[ Addr.,. St.. 114 N. 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