The Endogeneity of Union Membership in a Pay Model

Abstract

Cross-section estimates of union-nonunion pay differentials can be based either on models in which pay is determinied by a set of exogenous variables including union membership or on more complex models in which union membership and pay are jointly determined. Although several investigators have argued that the complex model is more appropriate, they have rarely examined in depth the economic meaning and the statistical assumptions of their union membership and pay equations. Because their complex models may be misspecified, it is not at all clear whether these models yield better or worse estimates of union-nonunion pay differentials than the simpler models in which union membership is treated as exogenous. The endogeneity of union membership in a model of cross-section unionnonunion pay differentials can be based on at least four arguments.' First, individuals choose to work in the union or nonunion sector depending on the pay and conditions of employment in each sector, as well as their tastes for unionization.2 Second, union organizers choose particular firms or industries as unionization targets and among their choice criteria are relative or absolute rates of pay. Third, employees deciding uni1on representation elections consider expected union and nonunion pay in casting their votes.3 Fourth, employers allocate the excess supply of labor at uLnion pay levels by selecting especially wellqualified workers. The plausibility of these arguments is not sufficient reason to infer that the endogeneity of union membership in a current pay model is a good assumption. With regard to the first argument, it is important to note the limited sectoral mobility of many workers. Given the correlation between unionization and both occupation and location, it is clear that many individuals' long-run occupational and residential choices essentially have placed them in either the union or nonunion sector. In order to move from the union to the nonunion sector, they would have to migrate or to sell skills for which they would not be highly rewarded. For example, a unionized teacher in the New York Public