The Impact of the Percentage Organized on Union and Nonunion Wages

T HE impact of unions on wages is likely to depend on the extent to which they organize workers in the relevant product market.1 As the organization in a market increases, the opportunity for substituting nonunion for union products will be reduced, lowering the elasticity of demand for organized workers and the potential loss of employment for a given wage increase. As a result, the wages of union workers are likely to be higher, all else the same, the greater the percentage organized. The wages of nonunion workers may also be influenced by the extent of organization, though the direction of the effect is not clear. On the one hand, union wage gains due to greater coverage may induce increases in nonunion wages because of the threat of organization and/or because of shifts in demand favoring nonunion producers brought about by the increased relative cost of union labor. On the other hand, the supply of labor to nonunion firms may increase as a result of reduced employment in the union sector, which would most likely depress nonunion wages. Whether the threat plus demand effect or the supply effect dominates is an empirical issue. The impact of the percentage organized on the union wage differential (the difference between the natural logarithms of union and of nonunion wages) depends on the relative magnitudes of the likely positive impact on union wages and the positive or negative impact on nonunion wages. This paper seeks to disentangle the relation between the percentage of workers organized in a product market and the wages received by union workers and by nonunion workers. In contrast to most of the literature on the union wage effect, which either relates some average of wages in an industry to the percentage organized or which relates the wages of individuals to their membership in a union, our analysis examines the impact of the percentage organized on the compensation of union labor and nonunion labor taken separately.2 By relating the wages of unionized workers to the percentage covered by collective bargaining in the relevant product market, we estimate directly the extent to which unionized workers in highly organized markets receive higher wages than unionized workers in less organized settings. By relating nonunion wages to the percentage covered, we provide direct estimates of the extent to which, as a result of threat, demand, and supply effects, nonunion workers in highly organized markets receive higher or lower wages than nonunion workers in less organized industries or areas. Two sets of data are used in the study: information on individuals from the 1973, 1974, and 1975 May Current Population Surveys (CPS), which contain data on usual weekly earnings, usual weekly hours, union membership status, and key personal characteristics; and information on establishments from the Bureau of Labor Statistics' 1968, 1970, and 1972 Expenditures for Employee Compensation Surveys (EEC), which contain data on the components of compensation, labor hours, collective bargaining coverage, and some relevant establishment characteristics. The availability of both individual and establishReceived for publication April 24, 1980. Revision accepted for publication May 27, 1981. * Harvard University. We have benefited from the comments of K. Abraham, C. Brown, H. G. Lewis, and L. Summers. We are most grateful to G. Bialecki, J. Fay, C. Ichniowski, L. Nelson, M. Van Denburgh, L. Wilson, and J. Zax for research assistance. The study has been supported by the National Science Foundation (Grant APR 77-16279) and the National Bureau of Economic Research (under its program for research on labor economics). Any opinions expressed are not necessarily shared by the individuals who have aided us, NSF, or NBER. I Throughout our theoretical discussion we refer to a product market, which is the appropriate unit of observation for an analysis of the relationship between percentage organized and wages. However, in the empirical work we focus on either a 3-digit Standard Industrial Classification or Census industry (in the manufacturing analysis) or a Current Population Survey state group (in the construction analysis). Unfortunately, the data used do not permit a closer correspondence between the theoretical and empirical parts of our study. 2 For an early attempt to disentangle this relation, using average wages in an industry and percentage organized, see Rosen (1969). For more recent related analyses, see (in alphabetical order) Donsimoni (1978), Hendricks (1975), Kahn (1978), and Lee (1978). For a trenchant treatment of the analysis, see Lewis (1980).