Union wage premium
Everyone 'knows' that unions raise wages. - Freeman and Medoff (1984, 43)
How much more do unionized workers earn than non-unionized workers? Since the 1970s, the wage gap has varied between 10 and 25% in Canada (Renaud 1997) and between 21 and 32% in the U.S. (Freeman and Medoff 1984). However, since that time, wage differentials may have shifted in light of external pressures such as globalization, technological advancement, and demographic changes. Many changes have occurred in workplace practices, such as flexibility, employee involvement, and the adoption of technology. Since unionized and non-unionized workplaces are free to adopt innovations from each other, how they were implemented may also have contributed to shifts in wage differentials.
Some components of wage differences between the two groups of workers may persist because of union policies-for example, union insistence on standard wages with no variable pay component or seniority rules. But other differences may narrow or widen as union and non-union workplaces 'compete' with each other (or with a common foreign competitor) by adopting workplace innovations to enhance quality, productivity, safety, or other outcomes of interest.
This article investigates differences between union and non-union wages using data from the first Workplace and Employee Survey (WES). When compared with historical differences in wages, the results provide a dynamic view of wage differences between the two groups of workers (see Data source).
Union and non-union wages over time
In a perfectly free market, differences between union and non-union wages may not sustain themselves in the long run. However, in practice they do persist even though their magnitude may vary over time. There are at least two explanations for their persistence:
One way for unions to create a sustainable wage premium would be to organize all (or nearly all) the employers in a given industry. They could then 'take wages out of competition' by forcing all (or most of) the employers to pay the same wage.
Another explanation is the 'shock effect' hypothesis (Slichter 1941; Slichter, Healy and Livernash 1960). The arrival of unions in a workplace spurs management to adopt standard and formal procedures for a whole range of personnel activities such as hiring, promotion, record keeping, communication, and so on. By extension, therefore, unionized firms should be more efficient, given their use of formal systems of modern management. In contrast, non-union firms may engage in more ad hoc practices since no union is forcing management to be more systematic. Indeed, unionization is associated with lower turnover, both voluntary and involuntary (Freeman 1981, Brown and Medoff 1978, and Clark 1980).
Generally, wage differences are measured at a given point in time. They may persist, or they may narrow or widen. Spillovers may occur across the two groups. Some non-union employers may emulate union practices in wages and benefits (Foulkes 1980), while unionized employers may introduce employee involvement and flexible work designs fashioned after innovations in leading non-union firms (Kochan and Osterman 1994). In this dynamic view, differences between the two groups may be viewed as a series of leapfrogging rounds of workplace innovation (Verma 1984, 1985). Each group learns from the other and narrows the gap by adopting leading-edge innovations. Even as one group catches up, another round of innovations is set off.
As to historical context, the union wage differentials for selected years between 1984 and 1998 were estimated from various sources (Chart A). The data and model used in the estimation are generally consistent across these years-with some limitations (see Trends). 1 The gap between union and non-union wages narrowed somewhat over time, from the high teens in the 1980s to the low teens in the 1990s. The narrowing was particularly evident in the later 1990s when most Canadian workplaces were finishing a dramatic wave of restructuring begun in the mid-1980s. The year 1990 is the only exception to the trend, when the wage gap was at an all-time high of 20%. This is not surprising, given that 1990 was a recession year, and the union effect on wages tends to be larger during recessions. Union wages are less sensitive than non-union wages to business cycles, partially because union workers have long-term wage contracts (Gunderson and Hyatt 2001). In 1990, average union wages increased $0.85 per hour-far more than the non-union increase of $0.30 per hour.
However, these union wage premium estimates should be viewed with caution because of differences between surveys in both data and model specifications. For example, the industry code is probably more accurate in WES because it is derived from a business profile rather than employee responses.
In 1999, the average unionized worker earned $20.36 per hour while the average non-unionized worker earned $17.82, an overall union wage premium of 14.3% before differences in individual, job, workplace, industry, and regional characteristics were adjusted for (Table 1).
Personal and job characteristics
The union ranks had more men (50% versus 47%), more married people (74% versus 71%), and more people with children (45% versus 42%). Unionized workers were somewhat better educated: more had trade school education (15% versus 11%) or undergraduate or higher education (21% versus 18%), and fewer had only high school education (15% versus 18%). Unionized workers also had longer job tenure (9 versus 6 years). Relatively fewer immigrants were in the union ranks. In terms of occupation, union members were more likely to be production, professional or technical workers and less likely to be managers or clerks.
Virtually the same proportion of employees worked part time (15.7% versus 15.0%), had a college education (21.1% versus 21.2%), immigrated during the 1970s or earlier, or had an occupation in marketing.
The workplace characteristics of unionized employees also differed. They were more likely to be in primary manufacturing, communications and utilities, or education and health-care industries (Table 2). Union members were more likely to be found in larger firms (45% versus 11%) and in not-for-profit organizations (45% versus 11%). In terms of location, Quebec and British Columbia workers were more unionized. Ontario and Alberta had significantly more non-unionized employees.
Raw and adjusted wage differentials
The gross wage differential was adjusted for differences in employee and workplace characteristics (see Estimation). The adjustments reduced the union wage differential between comparable workers in comparable workplaces from 14.3% to 7.7% (Table 3). Since the size of establishment differed significantly for the two groups, the adjustment was also done for two sub-samples: workplaces with more than 50 employees and those with more than 100. Although sample sizes were smaller, a better balance was gained between unionized and non-unionized workers: 46.4% in workplaces with more than 50, and 50.7% in workplaces with more than 100. The union wage differential was further reduced to 6.2% and 6.0% respectively in the two sub-samples. Since both unionization and size are closely associated with formalization of workplace policies, a better estimate of the true union effect on wages should result from a sub-sample of larger workplaces.
The union wage differential appeared to be similar for men and women (7.6% versus 7.0%). The union effect tended to be larger for women, but women are less likely to be union members. The two factors work in opposition so that, overall, the union effect on wages is not much different for men than for women.
Industry and occupation
The gap also varied by industry (Chart B). Construction, retail trade and consumer services, and education and health care groups were near the top of the scale-19%, 11% and 8% respectively. At the low end were business services, finance and insurance, and communication and utilities, all of which had no discernible wage gap. In labour-intensive tertiary manufacturing, the gap (7%) was close to the mean. Real estate, rental, and leasing was the only industry in which non-union wages were higher (11%).
Occupations such as construction (15%); chefs, protective, childcare and home support workers (14%); and teachers and arts (13%) had large differentials (Chart C). The management and professional group (-1%) had the smallest differential, followed by financial, administrative and clerical group (2%), one of the largest occupational groupings in the WES sample.
British Columbia had one of the higher wage differentials at 14% (Chart D). Three other regions showed a wage gap in favour of unionized workers: the Atlantic provinces (12%), Manitoba and Saskatchewan (9%), and Alberta (8%). Quebec, the most unionized region in Canada, showed a modest gap of 5%; Ontario, a relatively less unionized province, had a union wage premium of 6%, somewhat below the national average.
Explaining the union wage premium
Previous research has shown that the union wage premium can be partially explained by differences in personal, job and workplace characteristics. The proportion 'explained' tends to be higher if the non-unionized group or the total economy is used as the base line (see Decomposition). About 75% of the pay differential can be attributed to differences in various wage determinants. Even so, a significant portion (25%) still cannot be explained. In fact, returns to additional amounts to various productivity-related personal characteristics-such as education, experience, skill, and marital status-are generally lower in the union group than in the non-union group (Benjamin, Gunderson and Riddell 1998). However, because unionized workers start off on average with higher wages-indicated by the larger intercept of the union wage equation, the lower returns reflect the structural difference between the two groups in compensation policies.
These findings provide a glimpse into the nature of union-non-union wage differentials toward the end of the 1990s. An average wage gap of 7.7% (6.0% in workplaces with more than 100 employees) is somewhat smaller than reported previously in the literature. This, along with evidence from other Statistics Canada surveys between 1981 and 1998 suggests a narrowing of the wage gap over time. This narrowing could be partially attributed to the diminishing ability of unions to seek monopoly rents, due to factors such as technological advancement, greater competition from overseas, and deregulation. Another explanation could be a strategic reorientation of unions to objectives other than wages, such as employment and job security or less costly forms of employee voice (Gunderson and Hyatt 2001). In addition, results based on the 1999 WES show that some traditionally observed union wage premiums appear to hold across nearly all industries, occupations and regions.