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The union membership wage-premium puzzle: is there a free rider problem?

  • Booth, Alison L.
  • Bryan, Mark L.

Economists have, at least since Olson (1965), suggested that there is a free rider problem associated with labour union membership. The reason is that union-set wages are available to all workers covered by unions irrespective of whether or not they are union members, and - given that there are costs to membership – workers will only join if they are coerced or offered incentive excludable goods. Yet empirical research for both the US and for Great Britain has shown that there is a substantial union membership wage premium amongst private sector union-covered workers. An implication is that the free rider hypothesis is therefore irrelevant, since these studies reveal significant economic gains in the form of higher wages for union members. Using rich data from a new linked employer-employee survey for Britain, we show that this is not the case. While estimates assuming exogenous membership do indeed suggest there is a union membership wage premium of a similar order of magnitude to that found in other studies, we demonstrate that – with appropriate instruments based on theory and with additional controls – this wage premium vanishes.

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Paper provided by Institute for Social and Economic Research in its series ISER Working Paper Series with number 2001-09.

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Date of creation: 01 May 2001
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Publication status: published
Handle: RePEc:ese:iserwp:2001-09
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  1. Budd, J.W. & Na, I.G., 1994. "The Union Membership Wage Premium for Employees Covered by Collective Bargaining Agreements," Papers 94-09, Minnesota - Industrial Relations Center.
  2. Naylor, Robin, 1989. "Strikes, Free Riders, and Social Customs," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 771-85, November.
  3. Booth, Alison L & Chatterji, Monojit, 1995. "Union Membership and Wage Bargaining When Membership is Not Compulsory," Economic Journal, Royal Economic Society, vol. 105(429), pages 345-60, March.
  4. David Metcalf & Kirstine Hansen & Andy Charlwood, 2000. "Unions and the sword of justice: unions and pay systems, pay inequality, pay discrimination and low pay," LSE Research Online Documents on Economics 20195, London School of Economics and Political Science, LSE Library.
  5. John Forth, 2000. "The determinants of pay levels and fringe benefit provision in Britain," NIESR Discussion Papers 171, National Institute of Economic and Social Research.
  6. John Ermisch & Marco Francesconi, 2000. "Educational Choice, Families, and Young People's Earnings," Journal of Human Resources, University of Wisconsin Press, vol. 35(1), pages 143-176.
  7. Blakemore, Arthur E & Hunt, Janet C & Kiker, B F, 1986. "Collective Bargaining and Union Membership Effects on the Wages of Male Youths," Journal of Labor Economics, University of Chicago Press, vol. 4(2), pages 193-211, April.
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