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Theory of union wage effects

Relative Wage Advantage


This occurs when there is a differential between the wages paid to workers in the same industry with this differential solely attributed to whether or not a worker is a part of a union. The relative wage advantage that unions would have gained for their members can be represented by: R=(Wu-Wn)/Wn Where: Wu is union wage and Wn is non-union wage.

The four effects on wages for unionized and non-unionized workers in the same sector
Spillover Effects Threat Effects Wait Unemployment Shifts in Labour Demand

Spillover Effects

Spillover Effects
Union is successful in raising their members wages but as a result some jobs in the union sector were lost. The unemployed union workers must go over to the non-union sector find employment which causes the supply to increase and wages to decrease in the non-union sector. The relative wage advantage for union workers is: R1=(W1u-W1n)/W1n 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.

Threat Effects

Threat Effects
Non-union employers increase their wages because of the fear of loosing workers to the union sector. This increase is above the market clearing wage but below the union wage With the increased wage there is a high level of unemployment since the unemployed in this sector constitutes spillover workers from the union and workers that were initially in the non-union sector. The relative wage advantage is smaller than the absolute advantage since W*n is greater than W0. R2=( W1u- W*n)/ W*n

Wait Unemployment
Wait unemployment occurs when an unemployed worker refuses to accept a lower paying job in the non-union sector since he has the expectation of gain a job in the union sector since vacancies may come about due to retirements, deaths or voluntary turnover. Not everyone who loses a job in the union sector will spill over into the non-union sector, while sometimes non-union workers quit their jobs for a chance to gain employment in the higher paying union sector. The presence of wait unemployment in the union sector will reduce the 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 the left. In this case, unionization in one sector could cause wages in the nonunion sector to rise, just as with the threat.

Shifts in Labour Demand


Unions may carryout activities that may result in the increased demand for union members labour services such as an increase in the demand for the product the union members produce. Since labour demand is a derived demand, an increase in product demand will cause an increase in labour demand which will result in the 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.

Evidence of Union Wage Effects


The union relative wage advantage in the United States appears to fall into the range of 10 percent to 20 percent;38 that is, our best estimate is that American union workers receive wages that are some 10 percent to20 percent higher than those of comparable nonunion workers.

The private sector union wage advantage in the United States is larger than that in the public sector.
The union relative wage advantage in the United States is larger than it is in most other countries.

Evidence of Union Wage Effects


Unions everywhere tend to reduce the dispersion of earnings among workers, especially men. They raise the wages of less-skilled workers relative to higher-skilled workers within the union sector, thereby reducing the payoff to human-capital investments. They standardize wages within and across firms in the same industry, and they reduce the earnings gaps between production and office workers. They also reduce the wage gap between white and black workers in the United States. The union relative wage advantage in the United States, at least in recent decades, has tended to grow larger during recessionary periods. While evidence prior to the 1980s is mixed, the wage changes of union members have been less sensitive to business conditions than the wages of nonunion workers in recent years.

Evidence of Union Wage Effects


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

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

Evidence of Union Total Compensation Effects


The wages of union workers exceed the wages of otherwise comparable nonunion workers for two reasons: 1. Some estimates ignore the fact that wages are only part of the compensation package and employee benefits such as vacation pay, 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 the effect of unions on their members overall welfare levels compared with those of non-union workers.