The many empirical studies of union wages that have controlled for the possible endogeneity of union membership have generally followed an ad hoc approach that bears little relation to the small theoretical literature on unionization. In Discussion Paper No. 884, Research Fellow Alison Booth and Monojit Chatterji develop a formal model of the simultaneous determination of union wages and membership. Membership is voluntary, so union-negotiated wages apply to all workers in the sector. A single union represents workers in competing firms with which it bargains over wage levels, but the firms set the employment level and choose workers regardless of union status. The union also supplies an excludable incentive good to members only (such as unemployment and sickness benefits, legal and pensions advice, or support during grievance and promotion procedures). The quality and amount of this good provided to each member are fixed, and the union is also constrained to finance all its activities from employed members' subscriptions.

Booth and Chatterji estimate simultaneous equations for union density (dependent on the wage rate and the cost of providing the excludable good) and the manual wage rate (dependent on membership, union bargaining power, the cost of providing the excludable good, the attractiveness of alternative employment, and demand conditions), using data from the UK's 1990 Workplace Industrial Relations Survey (WIRS) a nationally representative sample of 2,061 establishments employing 25 or more employees. Their results lend some support to the view that unions face a free-rider problem. Without the `closed shop', which made union membership a condition of employment, unions will increasingly have to rely on the provision of excludable incentive goods to attract members, since increasing wages alone has very little effect. They use their model to predict that the further increases in female participation and part-time working expected in the 1990s are likely to have only a small effect on the (hourly) wage but lead to a pronounced fall in union density; an end to the recession could raise wages by 14% and union density by almost 10%.

Union Membership and Wage Bargaining when Membership is not Compulsory
Alison L Booth and Monojit Chatterji

Discussion Paper No. 884, January 1994 (HR)