Labour Economics assignment 1
Chapter Fifteen Union Impact on Wage and Nonwage Outcomes
© 2012 McGraw-Hill Ryerson Ltd.
Prepared by Dr. Amy Peng
Ryerson University
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Learning Objectives
Discuss the difficulties in measuring the impact of unions on the wages of their members and the methodologies that are often used to overcome those difficulties.
Describe the mechanisms whereby unions may affect the wages of nonunion workers.
Explain how unions affect pay wage inequality and the distribution of income.
Discuss how the impact of unions may differ across various characteristics such as skill level, gender, the public and private sectors, and the degree of competition in the product market.
Describe how unions may affect productivity, investment, and the profitability of the firm, as well as overall efficiency in the economy as a whole.
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Union Wage Impact
The basic two-sector model:
Measuring union–nonunion wage differential: the percentage difference in wages between union and nonunion workers
The basic predictions of the model:
Union results in a workers wage increase but decline in employment in that sector
Union employment will rise in nonunion sector resulting in a wage decrease there
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Union Wage Impact
Further impacts of unionization :
Nonunion firms will raise wages to compete with unionized firms for the work force
Union sector may get the top applicants
Nonunion employers may raise wages in order to reduce the threat of their employees to become unionized (threat effect)
The threat effect is greater when:
The union wage is high
The nonunion sector is easy to organize
The potential union is aggressive
Employers have a strong aversion to unionization
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Union Wage Impact
Union Wage Impact in a two-sector model:
Both sectors start with competitive wage W0
Union raises wages from W0 to Wu , creating a reduction in employment
Displaced workers are shifting to the nonunion sector and, increasing the supply of labour and, hence, reducing the wages from W0 to WN
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Union Wage Impact in a Two-Sector Basic Model
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Union Wage Impact with Threat Effect
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Union Wage Impact in a Two-Sector Model with Vertical Contract Curve
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Employment is fixed in the unionized sector, no impact on the non-union sector
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Union Wage Impact
Wait or queue unemployment:
Workers that are unable to obtain a job in union sector will seek one in nonunion
It will be rational to wait for union job because its higher pay
The increase in supply in nonunion sector will be less than the reduction in employment in the union sector
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Union Wage Impact with Wait Employment
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Some displaced worker prefer to engage in “wait” employment, looking in jobs in the union sector.
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Union Wage Impact
To estimate the pure union–nonunion wage differentials, we need to control for a number of factors:
Skills difference factor
Labour quality
Differences in the characteristics of job assignments of workers
Education, training, and experience
Productivity related factors
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Union Wage Impact: Empirical Evidence
The main findings indicate:
Unions cause higher wages
Union–nonunion wage differential is 10–20 percent for the U.S. economy as a whole
Union–nonunion wage differential is 10–25 percent for Canadian economy as a whole
Higher wages make unionization more likely
Longitudinal Studies:
Longitudinal data contains observations on the same individual over time
The estimated union–nonunion wage differential is reduced to approximately 10 percent
Deficiencies in longitudinal studies
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Variation in the Union Wage Impact
The union–nonunion wage differential varies across firms, industries, and workers
The average differential varies over time
Wage differential tends to be larger when a high proportion of the relevant jurisdiction is organized
As more of the industry is unionized the remaining firms may face higher possibility that their work force will unionize
Wage differential declines as firm size rises
Union threat is higher in larger firms
Union organization is higher in blue collar jobs
Also higher in non-manufacturing industries
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Variation in the Union Wage Impact
Wage increases with skill levels
But more in nonunion sector
The nonwage premium is the vertical distance and it is larger at lower skill levels
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Variation in the Union Wage Impact
Some empirical findings:
Union wage gap is highest among low skilled workers
Union wage premiums tend to be lower when the sector is subject to greater foreign competition
Wage impact tends to be smaller in the public sector
Union and nonunion wages are equally responsive to gender
Unionism has lowered the wages of nonunion workers
Union wages exhibit less cyclical variation
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Unions, Wage Dispersion, and the Distribution of Income
In Canada there is less wage dispersion among union workers
Unions have larger impact on blue collar wages
Net effect of unionism is to reduce wage dispersion
Unions reduce wage inequality
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Wage Dispersion in the Union and Nonunion Sectors
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In the union sector the wage distribution is more compressed
the tails of the distribution are compressed into the higher spike at the middle of the wage distribution in the union sector.
The union distribution also tends to be to the right of the nonunion distribution, reflecting the higher wages generally received in the union sector.
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Union Impact on Resource Allocation and Economic Welfare
Unions affect the allocation of labour and other resources in the economy due to wage and employment alterations
Changes in wages and employment result in inefficient allocation of resources and reduction in output
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Union Impact on Resource Allocation and Economic Welfare
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Deadweight Losses
Employment Relocation
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Union Impact on Resource Allocation and Economic Welfare
With absence of unions the wage in both sectors is W0
With higher union wage Wu, the employment level declines in the union sector (E1U) and increases in the nonunion sector (E1N)
The wage in the nonunion sector declines to WN
The income is lower as well—equals to the sum of both shaded areas
Dead weight losses: areas abc and dgf = def
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Union Impact on Recourse Allocations and Economic Welfare
The reduction in the value of total output is a deadweight loss
Higher wages and reduced employment in the union sector push workers into less productive and lower paying jobs
The Existence and the magnitude of deadweight loss associated with the union wage will depend on:
Elasticity of labour supply
Amount of queuing and unemployment
The extent to which firms and unions negotiate wage–employment outcomes
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Union Impact on Nonwage Outcomes
Union and Fringe Benefits
Nonwage benefits account for a higher proportion of total compensation among union than nonunion firms
Workers prefer fringe benefits because they are not being taxed
The benefits provide work incentives and reduce turnover
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Union Impact on Nonwage Outcomes
Union and Fringe Benefits:
Unions represent the wishes of the median voter
Nonunion organizations represent the wishes of marginal worker
The demand for fringe benefits increases with age and packages in unionized firms will devote greater share of them
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Union Impact on Nonwage Outcomes
Union Impact on Employment:
Employers substitute away from higher cost union labour
Higher cost of workers will tend to raise the price of output
Union will bargain in terms of levels of employment
Unions may impose featherbedding rules that fix the ratio of labour to capital
Unions will restrict the use of cheaper labour
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Union Impact on Nonwage Outcomes
Union Impact on Working Conditions:
Nonunion firms tend to be less rules oriented
Nonunion firms tend to exhibit more worker and management flexibility
More structured work setting and less flexible hours in nonunion firms
Faster work pace in nonunion firms
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Union Impact on Nonwage Outcomes
Union Impact on Turnover
Quit rate is lower in unionized firms
Differed compensation is more prevalent in unionized firms
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Union Impact on Nonwage Outcomes
Union Impact on Productivity, Profitability, and Investment
Union firms will utilize more capital
Union firms will hire more productive labour
Union has a positive effect on productivity, morale, and cooperation
Union may improve the communication between labour and management
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Summary
Union wage impact: effect and consequences
Two sector model: union vs. nonunion employment and wages
Wait unemployment cause and effect
Union vs. nonunion wage differences
Impact of union on wage and conditions of employees
Economic welfare and unions
Fringe benefits and influences
Union impact on employment, working conditions, turnover, and productivity
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