The Effect of Unions on the Structure of Wages: A Longitudinal Analysis

Abstract

This paper studies the effects of unions on the structure of wages, using an estimation technique that explicitly accounts for misclassification errors in reported union status, and potential correlations between union status and unobserved productivity. The econometric model is estimated separately for five skill groups using a large panel data set formed from the U.S. Current Population Survey. The results suggest that unions raise wages more for workers with lower levels of observed skills. In addition, the patterns of selection bias differ by skill group. Among workers with lower levels of observed skill, unionized workers are positively selected, whereas union workers are negatively selected from among those with higher levels of observed skill. DESPITE A LARGE AND SOPHISTICATED LITERATURE there is still substantial disagreement over the extent to which differences in the structure of wages between union and nonunion workers represent an effect of trade unions, rather than a consequence of the nonrandom selection of unionized workers. Over the past decade several alternative approaches have been developed to control for unobserved heterogeneity between union and nonunion workers.2 One method that has been successfully applied in other areas of applied microeconometrics is the use of longitudinal data to measure the wage gains or losses of workers who change union status. Unfortunately, longitudinal estimators are highly sensitive to measurement error: even a small fraction of misclassified union status changes can lead to significant biases if the true rate of mobility between union and nonunion jobs is low. This sensitivity led Lewis (1986) to essentially dismiss the longitudinal evidence in his landmark survey of union wage effects. In this paper I present some new evidence on the union wage effect, based on a longitudinal estimator that explicitly accounts for misclassification errors in reported union status. The estimator uses external information on union status misclassification rates, along with the reduced-form coefficients from a multi- variate regression of wages on the observed sequence of union status indicators, to isolate the causal effect of unions from any selection biases introduced by a correlation between union status and the permanent component of unobserved wage heterogeneity. Recognizing that unions may raise wages more or less for