Union Wage Premium
What is Union Wage Premium?
The union wage premium is the percentage by which a unionized worker's pay exceeds that of a comparable non-union worker doing similar work.
A union raises pay by bargaining as the single seller of labor to an employer, so the wage settles above the level a competitive market would set. The premium is the gap between union and non-union pay for workers matched on skill, experience, occupation and region, and that matching is the hard part, because unions cluster in large firms and high-paying industries and a raw comparison credits the union with pay differences it did not create. Whatever survives the matching is the union effect, and it carries a quantity cost, since at the higher wage the employer moves up its labor demand curve and hires fewer people. The exception is a monopsony employer, where a bargained wage can raise pay and employment together.
Union Wage Premium: a worked example
Matched non-union workers in an occupation earn 24 an hour and union members earn 30. The premium is (30 − 24) ÷ 24 = 0.25, or 25 percent. Now price the employment side. If the employer hired 500 workers at 24 and the elasticity of labor demand is 0.6, then a 25 percent wage rise cuts quantity demanded by 0.6 × 25 = 15 percent, leaving 500 × 0.85 = 425 workers. The union bought a quarter more pay for the members who keep their jobs, at a cost of 75 positions in that workplace.
The mistake students make with union wage premium
The usual error is quoting the raw pay gap between union and non-union workers as the premium. That figure blends in firm size, industry, region and experience, all of which move with unionization, so it overstates what the union itself did. The second error is assuming the premium comes purely out of profit. Part of it is paid for by hiring fewer workers and part by charging the firm's customers more, which is why the premium is widest where the employer faces little competition.
Union Wage Premium questions
How is the union wage premium measured?
The union wage premium is measured by comparing union and non-union workers who look alike on everything the data records, usually with a wage regression that holds education, experience, occupation, industry and region fixed and reads the union coefficient as the premium. That still leaves selection on traits the data cannot see, since unions do not organize a random slice of the workforce. Studies that follow the same person into or out of a union job hold those unseen traits fixed and tend to report a smaller premium than a one-shot comparison does.
Does a union wage premium destroy jobs?
A union wage premium reduces hiring at the unionized employer, which is not the same as raising total unemployment by that number. Workers who cannot get the union job move into the non-union sector, which pushes wages down there and widens the measured gap from both ends. The exception is a monopsony employer already paying below the value of the marginal product, where a bargained wage can raise employment rather than cut it.
Why is the union wage premium larger in some industries?
The premium is largest where labor demand is inelastic, because an employer who cannot escape a wage rise has to absorb it. Industries tied to a fixed location, using skills that machines substitute for poorly, and selling to buyers who accept higher prices give a union the most room to push. Where the employer can automate the task or move the plant, the same bargaining pressure buys a much smaller gap.
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