Unionism and Wage Rates: A Simultaneous Equations Model with Qualitative and Limited Dependent Variables

A large number of studies have been made on the impact of labor unions on wage rates of workers. These studies generally have found positive and significant effects of unionism on wage rates. More recently, a few authors have studied the simultaneous effects between unionism and wages. Ashenfelter and Johnson [1972] used aggregated U.S. Manufacturing Industries Data and found that unionism had no significant impact on wage rates, but that the wage rate had a significant effect on the extent of unionism. Since the data they used were quite limited, they could only conclude that the magnitude of the effects of unionism on wage rates was uncertain. Schmidt and Strauss [1976] reached similar conclusions using macroeconomic data. Their mixed logit approach, however, is not based on choice behavior and does not fit into a traditional econometric framework. This study extends recent investigations of the joint determination of the extent of unionism and the effects of unions on wage rates, using macroeconomic data from the Survey of Economic Opportunity Sample of 1967. Economic considerations suggest that the propensity to join a union depends on the net wage gains that might result from trade union membership. The explicit inclusion of this interdependence between the wage gain equation and the union membership equation in the model represents our point of departure from the previous work of Ashenfelter and Johnson and Schmidt and Strauss. The model is a variant of a traditional simultaneous equations model with a binary qualitative variable (union membership) and limited dependent variables. In Section 2, the conceptual framework of the model is discussed. Properties of the data are presented in Section 3. Section 4 briefly discusses estimation methods, and empirical estimates are presented in Section 5. Finally, in Section 6, conclusions are drawn.