The Effect of Unions on the Distribution of Wages: Redistribution or Relabelling?

Abstract

This paper re-examines the connection between unions and wage inequality, focussing on three questions: (1) How does the union wage effect vary across the wage distribution? (2) What is the effect of unionism on the overall variance of wages at the end of the 1980s? (3) How much of the increase in the variance of wages over the 1970s and 1980s can be attributed to changes in the level and distribution of union coverage? Cross-sectional union wage gap estimates vary over the wage distribution, ranging from over 30 percent for lower wage workers to -10 percent for higher wage workers. Using a longitudinal estimation technique that accounts for misclassification errors in union status, I find that this variation represents a combination of a truly larger wage effect for lower-paid workers, and differential selection biases. The estimated effect of unions on the variance of wages in the late 1980s is relatively modest. Nevertheless, changes in the level and pattern of unionism -- particularly the decline of unions among lower wage workers -- have been an important component of the growth in wage inequality. Changes in unionization account for one-fifth of the increase of the variance of adult male wages between 1973 and 1987.