Theory of Union Wage Effects

7/27/2019 Theory of Union Wage Effects

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Theory of union wage effects


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Relative Wage Advantage

This occurs when there is a differential between the wagespaid to workers in the same industry with this differentialsolely attributed to whether or not a worker is a part of aunion.

The relative wage advantage that unions would have gained fortheir members can be represented by:

R=(Wu-Wn)/Wn

Where: Wu is union wage and Wn is non-union wage.


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The four effects on wages for unionized andnon-unionized workers in the same sector

Spillover Effects

Threat Effects

Wait UnemploymentShifts in Labour Demand


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Spillover Effects


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Spillover Effects

Union is successful in raising their members wages but as a resultsome jobs in the union sector were lost.

The unemployed union workers must go over to the non-unionsector find employment which causes the supply to increase andwages to decrease in the non-union sector.

The relative wage advantage for union workers is:

R1=(W1u-W

1n)/W

1n

The absolute wage advantage for union workers is:

A=( W1u-W0)/W0 The relative advantage will tend to be higher than the absolute

advantage since W1n is greater than W0.


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Threat Effects


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Threat Effects Non-union employers increase their wages because of the fear of

loosing workers to the union sector. This increase is above themarket clearing wage but below the union wage

With the increased wage there is a high level of unemploymentsince the unemployed in this sector constitutes spillover workers

from the union and workers that were initially in the non-unionsector.

The relative wage advantage is smaller than the absolute advantagesince W*n is greater than W0.

R2=( W1u- W

*n)/ W

*n


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Wait Unemployment Wait unemployment occurs when an unemployed worker refuses to

accept a lower paying job in the non-union sector since he has theexpectation of gain a job in the union sector since vacancies maycome about due to retirements, deaths or voluntary turnover.

Not everyone who loses a job in the union sector will spill over intothe non-union sector, while sometimes non-union workers quit theirjobs for a chance to gain employment in the higher paying unionsector.

The presence of wait unemployment in the union sector will reducethe spillover of workers to the nonunion sector, thus moderating

downward pressure on nonunion wages. If enough nonunion workers decide to search for union jobs, the

labor supply curve to the nonunion sector could even shift to theleft. In this case, unionization in one sector could cause wages inthe nonunion sector to rise, just as with the threat.


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Shifts in Labour Demand

Unions may carryout activities that may result in the increaseddemand for union members labour services such as an increase inthe demand for the product the union members produce.

Since labour demand is a derived demand, an increase in productdemand will cause an increase in labour demand which will result inthe labour demand curve to shifting and wages to increase.

When wages increase in the union sector workers may leave the

non-union sector to gain a higher wage.


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Evidence of Union Wage Effects

The union relative wage advantage in the United States appears tofall into the range of 10 percent to 20 percent;38 that is, our bestestimate is that American union workers receive wages that aresome 10 percent to20 percent higher than those of comparablenonunion workers.

The private sector union wage advantage in the United States islargerthan that in the public sector.

The union relative wage advantage in the United States is largerthan it is in most other countries.


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Evidence of Union Wage Effects Unions everywhere tend to reduce the dispersion of earnings

among workers, especially men. They raise the wages of less-skilledworkers relative to higher-skilled workers within the union sector,thereby reducing the payoff to human-capital investments. Theystandardize wages within and across firms in the same industry, andthey reduce the earnings gaps between production and officeworkers. They also reduce the wage gap between white and blackworkers in the United States.

The union relative wage advantage in the United States, at least in

recent decades, has tended to grow larger during recessionaryperiods. While evidence prior to the 1980s is mixed, the wagechanges of union members have been less sensitive to businessconditions than the wages of nonunion workers in recent years.


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Evidence of Union Wage Effects

Greater levels of unionization in a sector leads to an increase inwages in the non-union sector because the threat effects tend todominate within highly unionized cities.

On the other hand in highly unionized industries non-union wagestend to be lower since the spillover effect will dominate.


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Evidence of Union Total Compensation Effects

The wages of union workers exceed the wages of otherwisecomparable nonunion workers for two reasons:

1. Some estimates ignore the fact that wages are only part of thecompensation package and employee benefits such as vacationpay, sick leave, and retirement benefits, will be higher in firms

that are unionized than in nonunion firms.

2. Ignoring conditions of employment may cause one to overstate theeffect of unions on their members overall welfare levels

compared with those of non-union workers.

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Theory of Union Wage Effects