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Unionization and Wage Inequality: a Comparative Study of the U.S., the U.K., and Canada NBER WORKING PAPER SERIES UNIONIZATION AND WAGE INEQUALITY: A COMPARATIVE STUDY OF THE U.S., THE U.K., AND CANADA David Card Thomas Lemieux W. Craig Riddell Working Paper 9473 http://www.nber.org/papers/w9473 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 January 2003 Some parts of this paper are taken from our forthcoming chapter in the International Handbook of Trade Unions, edited by John Addison and Claus Schnabel. We are grateful to John Addison for comments. Funding for Card’s research was provided by the Center for Labor Economics at UC Berkeley, while that of Lemieux and Riddell was supported by the Social Sciences and Humanities Research Council of Canada. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research. ©2003 by David Card, Thomas Lemieux, and W. Craig Riddell. All rights reserved. Short sections of text not to exceed two paragraphs, may be quoted without explicit permission provided that full credit including notice, is given to the source. Unionization and Wage Inequality: A Comparative Study of the U.S., the U.K., and Canada David Card, Thomas Lemieux, and W. Craig Riddell NBER Working Paper No. 9473 January 2003 JEL No. J3, J5 ABSTRACT This paper presents a comparative analysis of the link between unionization and wage inequality in the U.S., the U.K., and Canada. Our main motivation is to see whether unionization can account for differences and trends in wage inequality in industrialized countries. We focus on the U.S., the U.K., and Canada because the institutional arrangements governing unionization and collective bargaining are relatively similar in these three countries. The three countries also share large non- union sectors that can be used as a comparison group for the union sector. Using comparable micro data for the last two decades, we find that unions have remarkably similar qualitative impacts in all three countries. In particular, unions tend to systematically reduce wage inequality among men, but have little impact on wage inequality for women. We conclude that unionization helps explain a sizable share of cross-country differences in male wage inequality among the three countries. We also conclude that de-unionization explains a substantial part of the growth in male wage inequality in the U.K. and the U.S. since the early 1980s. David Card Thomas Lemieux Department of Economics Department of Economics University of California, Berkeley University of British Columbia Berkeley, CA 94720-3880 Vancouver, BC V6T 1Z1, Canada and NBER and NBER [email protected] [email protected] W. Craig Riddell Department of Economics University of British Columbia Vancouver, BC V6T 1Z1, Canada [email protected] This paper presents a comparative analysis of the link between unionization and wage inequality in the United States, the United Kingdom, and Canada. Our investigation is motivated by several factors. One is to understand better trends in income inequality. Several previous studies have concluded that falling unionization contributed to the steep increase in wage inequality in the U.S. and the U.K. that occurred in the 1980s. Wage inequality did not rise as quickly in these countries in the 1990s. This raises the question of whether the evolution of union coverage and union wage impacts can account for some of the changing trend in wage inequality. More generally, differences across these countries in the timing of changes in unionization and in wage inequality provide an opportunity for further assessing the contribution of institutional change to trends in income inequality. With the addition of questions on union status and wages to the U.K. Labour Force Survey (LFS) in 1993 and the Canadian LFS in 1997, it is now possible to use comparable large-scale micro data sets to examine the impact of unions on wages in the three countries. Estimates of the role of unionization in cross-country differences in wage inequality are no longer significantly affected by survey differences or by the limitations of small sample sizes. Our study is also motivated by the fact that in these three countries the institutional arrangements governing unionization and collective bargaining provide an environment that is suitable for estimating the impacts of unions on wage inequality. As with other aspects of the economy, collective bargaining institutions in these countries are broadly similar. In particular, negotiations are conducted at the enterprise level, and there is no general mechanism to extend union wage floors beyond the organized sector. The fraction of workers covered by collective agreements in the three countries is also relatively modest – currently under one-third of wage and salary workers. Thus it is possible to compare the structure of wages for workers whose 2 wages are set by union contracts, and those wages are not, and potentially infer the effect of unions on overall wage inequality. A similar task is far more difficult in other countries (including the major European countries and Australia) because there is no clear distinction between the union and nonunion sectors. Collective bargaining in these countries is conducted at the industry or sectoral level, and the provisions are formally or informally extended to most of the labor force. Moreover, in many countries, unions exert considerable influence on political decisions (such as minimum wages) that directly effect labor market outcomes. We also seek to assess whether there are common patterns in the impact of unions on the wage structure in countries with economies and industrial relations systems that are broadly similar. Of particular interest are patterns in union coverage and union wage impacts by gender and skill. After briefly reviewing trends in union membership in the three countries, we begin by developing a simple framework for measuring the effect of unions on wage inequality, based on the potential outcomes framework that is now widely used in program evaluation. Our framework emphasizes three key aspects of collective bargaining coverage: How does the probability of union coverage vary for workers who would earn more or less in the nonunion sector? How much do unions raise average wages for workers in different skill groups? How do unions affect the dispersion of wages within narrow skill groups? We then use micro data samples to compare the incidence and average wage effect of unions by skill level on male and female workers in the three countries, and measure recent trends in union coverage by skill level. Despite some differences in the institutional systems that govern the determination of union status across workplaces in the three countries, we find remarkable similarity in the overall patterns of union coverage and in the degree to which unions 3 affect average wages of different skill groups. Within narrowly defined skill groups, wage inequality is always lower for union workers than nonunion workers. For male workers, union coverage tends to be concentrated at the middle of the skill distribution, and union wages tend to be “flattened” relative to nonunion wages. As a result, unions have an equalizing effect on the dispersion of male wages across different skill groups in the three countries, complementing the effect on within-group inequality. For female workers, however, union coverage is concentrated near the top of the skill distribution, and there is no tendency for unions to flatten skill differentials across groups. Thus, unions tend to raise inequality between more and less skilled women in the three countries, offsetting their effect on within-group inequality. As a final step, we use data from the past 25 years to compute the changing effect of unionization on wage inequality. During the 1980s and 1990s, unionization rates fell in all three countries, with the most rapid decline in the U.K. and the slowest fall in Canada. These trends contributed to rising male wage inequality, particularly in Britain. Indeed, we estimate that the precipitous fall in unionization in the U.K. can explain up to two thirds of the difference in the trend in male wage inequality between Britain and the U.S. I. Union Membership and Collective Bargaining Coverage Table 1 presents data on union membership rates as a fraction of paid (wage and salary) employment in the U.S., Britain, and Canada over the past 40 years. As has been noted in many previous studies (e.g., Freeman, 1998; Farber and Western, 2000) union membership rates have been declining in the U.S. since the mid-1950s, and are currently under 15 percent. In the U.S. a relatively small fraction of workers who are covered by collective bargaining agreements are not 4 union members (10-15 percent), so the trend in coverage by collective agreements is similar.1 In contrast to the U.S., union membership rates in Canada rose between 1960 and 1980, but in the 1990s have begun to decline.2 In Canada, as in the U.S., the fraction of workers covered by collective bargaining agreements is only slightly above the union membership rate, so trends in union membership and coverage are similar. In 1960 the union membership rate was higher in Britain than in the U.S. or Canada, and over the 1960s and 1970s membership expanded, peaking at over 50 percent in 1979. During the past two decades, however, union membership has fallen rapidly, losing about 10 percentage points in the 1980s and another 10 points in the 1990s.3 Recent data from the labor force survey suggest that in the U.K. in the late 1990s, the fraction of workers whose pay is set by collective bargaining agreements is about 5 percentage points higher than union membership (Bland, 1999, Table 6). There are no comparable data from earlier periods.
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