Response Error and the Union Wage Differential

Abstract

Broad variation in estimates of the union wage gap has perplexed labor economists. One specification error that is consistent with the observed variation is measurement error in reported union status. This article applies results of Bollinger (1996) to estimate a range for the union wage gap. Both a cross‐sectional model and a fixed‐effects model are estimated. In order for the true coefficient in the fixed‐effects model to be bounded below the true coefficient in the cross‐sectional estimates, measurement error would have to be less than 0.8%. The difference between the fixed‐effects estimates and the cross‐sectional estimates is primarily due to measurement error rather than to unobserved heterogeneity. An examination of differences in returns to union membership by industry, occupation, and educational level shows that these differences are largely robust to measurement error. Many of these differences would be found even if error rates were as high as 10% or more.