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Wage Differentials Between Union and Non-union Workers: An Econometric Analysis


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  • K.R.Shanmugam
  • S.Madheswaran


Abstract It is increasingly recognized that institutional factors such as trade unions do play a dominant role in determining the levels of wages, standard of working conditions. This is more pronounced in the industrial sector of developing economies. The role of labor organizations in the labor market has been firmly identified especially in relation to wage bargaining with studies focussing mainly on the advanced industrial economies. In the Indian context, there exist a number of studies on the evolution of the structure; functions and aspects of trade unions; but the empirical analysis of the impact of trade union on wages are rather limited. In this backdrop, this paper attempts to analyze the impact of trade union on wages using a survey covering blue collar male workers employed in manufacturing industries in Chennai district of Tamil Nadu, in southern part of India. We have estimated earnings functions for union and non-union workers separately. The earnings functions are corrected for selectivity bias. Oaxaca, Cotton and Reimer’s decomposition method has been used to decompose the gross earnings differential between union and non-union workers into explained and unexplained differentials. The result shows that there exist significant wage differentials between workers in the union and non-union sector. The unexplained portion of the decomposition, which is around 47 percent (reduced to 42 percent after correcting for selectivity bias) can be attributed to unionism. Key Words: Trade Unions, Wage differentials, decomposition and selectivity bias JEL Classification: J31, J51, C35

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Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 413.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:413

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Keywords: Trade Unions; Wage differentials; decomposition and selectivity bias;

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  1. David Shapiro, 1978. "Relative wage effects of unions in the public and private sectors," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 31(2), pages 193-204, January.
  2. Pencavel, John H, 1974. "Relative Wages and Trade Unions in the United Kingdom," Economica, London School of Economics and Political Science, vol. 41(162), pages 194-210, May.
  3. Joni Hersch & W. Kip Viscusi, 1990. "Cigarette Smoking, Seatbelt Use, and Differences in Wage-Risk Tradeoffs," Journal of Human Resources, University of Wisconsin Press, vol. 25(2), pages 202-227.
  4. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  5. Robinson, Chris & Tomes, Nigel, 1984. "Union Wage Differentials in the Public and Private Sectors: A Simultaneous Equations Specification," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 106-27, January.
  6. Orley Ashenfelter, 1970. "The Effect of Unionization on Wages in the Public Sector: The Case of Fire Fighters," Working Papers 394, Princeton University, Department of Economics, Industrial Relations Section..
  7. Cotton, Jeremiah, 1988. "On the Decomposition of Wage Differentials," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 236-43, May.
  8. Schmidt, Peter & Strauss, Robert P, 1976. "The Effect of Unions on Earnings and Earnings on Unions: A Mixed Logit Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 17(1), pages 204-12, February.
  9. Schmidt, Peter, 1978. "Estimation of a Simultaneous Equations Model with Jointly Dependent Continuous and Qualitative Variables: The Union-Earnings Question Revisited," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 19(2), pages 453-65, June.
  10. Oaxaca, Ronald, 1973. "Male-Female Wage Differentials in Urban Labor Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(3), pages 693-709, October.
  11. Hotchkiss, Julie L, 1991. "The Definition of Part-Time Employment: A Switching Regression Model with Unknown Sample Selection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(4), pages 899-917, November.
  12. Alberini, Anna & Cropper, Maureen & Fu, Tsu-Tan & Krupnick, Alan & Liu, Jin-Tan & Shaw, Daigee & Harrington, Winston, 1997. "Valuing Health Effects of Air Pollution in Developing Countries: The Case of Taiwan," Journal of Environmental Economics and Management, Elsevier, vol. 34(2), pages 107-126, October.
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