The Impact of Unions on Nonunion Wage Setting: Threats and Bargaining

This paper estimates the impact of unions on nonunion wage setting in the United States over the period 1980–2010, distinguishing two channels through which unions affect nonunion wages: (1) a traditional threat channel, in which nonunion firms raise wages to preempt unionization by making workers indifferent between forming a union and remaining nonunion (an “emulation wage”); and (2) a bargaining channel, in which nonunion workers use the availability of high-paying union jobs as part of their outside option when bargaining individually with their employer, so that a decline in union job prevalence or the union wage premium erodes nonunion bargained wages even at firms that face no direct unionization threat.

The authors build a search-and-bargaining model grounded in Nash bargaining, with endogenous union formation and, in the most complete version, the possibility of nonunion firm responses to the threat of unionization. Workers in this model can be employed at simple nonunion firms, union firms, or union-emulating firms. The model is embedded in a multi-industry, multi-city framework following Beaudry, Green, and Sand (2012), which formalizes the mechanism by which higher-rent jobs in a city raise outside options and therefore wages for workers in all other jobs throughout that local labor market. This cross-city, within-industry variation is the primary source of identification.

The empirical implementation uses Current Population Survey Merged Outgoing Rotation Groups (1983–2020) and CPS May extracts (1978–1982), pooling observations around 1980, 1990, 2000, 2010, and 2020 across 43 cities and 51 industries. To address endogeneity of outside option variables — which may be correlated with unobserved local productivity shocks — the authors construct Bartik-style instruments based on start-of-period local industry and union employment composition interacted with national changes in industry growth, industry wage premia, and union job transition probabilities. The threat channel is identified by the interaction of the probability a firm in a given industry-city cell faces a union election (proxied using NLRB data) with the outside option value of union workers. The authors derive a model-based overidentifying restriction, test it, and cannot reject it, providing support for their identification strategy.

The central quantitative finding is that de-unionization accounts for approximately 38% of the 16% decline in the mean real (composition-constant) wage in a typical US city between 1980 and 2010. One-third of that de-unionization effect arises from a standard shift-share component — workers moving from higher-paying union jobs to lower-paying nonunion jobs — while two-thirds arises from spillover channels affecting nonunion wage setting. The spillover effects are almost entirely attributable to the bargaining channel rather than the traditional threat channel; the threat probability was too low, even in 1980, to generate large emulation effects in the aggregate. The total impact of a one-dollar increase in the outside option value for the mean wage in industry i is estimated at 1.78 dollars once within-industry feedback loops are included.

The paper finds no evidence of bargaining spillovers in the 1980s specifically, the decade of the sharpest unionization declines. The offsetting forces were declining probabilities of finding union jobs and simultaneously rising union wage premia — with the model explaining the premium increase as a consequence of nonunion firms no longer needing to emulate union wages once the threat of their shop being organized receded substantially. After 1990 the threat stabilized at a low level, the premium declined, and the outside-option effect of declining unionization became the dominant force.

Heterogeneity results show that spillover effects are larger for women than men, and that de-unionization accounts for 43% of the real wage decline for women versus 27% for men. For workers without post-secondary education, de-unionization accounts for 43% of their real wage decline. The traditional threat effect is statistically insignificant in states with Right-to-Work laws, consistent with the interpretation that identification captures emulation responses to unionization threat.

Q: What are the two channels through which unions affect nonunion wages in this model? A: The traditional threat channel operates when nonunion firms raise wages to make workers indifferent between unionizing and remaining nonunion, thereby forestalling a costly union election. The bargaining channel operates because nonunion workers can credibly point to available union jobs when bargaining individually; a decline in union job prevalence or the union wage premium therefore weakens nonunion workers’ outside options and lowers their bargained wages even at firms that face no direct unionization threat.

Q: How large is the overall contribution of de-unionization to the US wage decline between 1980 and 2010? A: The paper estimates that de-unionization accounts for 38% of the approximately 16% decline in the mean composition-constant real wage in a typical US city between 1980 and 2010. One-third of that 38% arises from the direct shift-share effect of workers moving from higher-paying union to lower-paying nonunion employment; the remaining two-thirds arises from spillover effects on nonunion wages.

Q: Which spillover channel dominates in the decomposition, and why? A: The bargaining channel dominates almost entirely. The traditional threat channel is statistically significant but quantitatively small because the probability that any given nonunion firm faced a union election was low even in 1980, so the scope for emulation to affect aggregate wages was limited. The bargaining channel, by contrast, operates through the outside options of all nonunion workers searching across many industries and cities, giving it broader aggregate reach.

Q: Why was there no measurable bargaining spillover in the 1980s despite the decade’s large drop in union density? A: During the 1980s, two forces offset each other: the probability of a nonunion worker finding a union job fell sharply, but the union wage premium rose substantially over the same period, so the expected value of the union outside option changed little. The paper explains the rising premium as a consequence of nonunion firms reducing their emulation wages as the threat of unionization receded, causing nonunion wages to fall faster than union wages and thus mechanically widening the premium. After 1990, when the threat stabilized at a low level, the premium declined and the net outside-option effect of continued de-unionization became the dominant spillover force.

Q: What is the estimated multiplier effect of an improvement in outside options on nonunion wages? A: The total impact of a one-dollar increase in the outside option value on the mean wage in a given industry is estimated at 1.78 dollars once within-industry feedback loops — in which an improved outside option raises wages, which in turn improves outside options elsewhere — are accounted for.

Q: How do the authors address endogeneity of the outside option variables? A: They construct Bartik-style instruments based on start-of-period local industry and union employment composition interacted with national-level changes in industry growth, industry wage premia, and the probability of transitioning to a union job. This strategy isolates variation in local outside options that is driven by predetermined compositional exposure rather than contemporaneous local shocks. They derive a model-based overidentifying restriction, test it in the data, and cannot reject it, supporting the validity of the instrument.

Q: How do the authors address selection bias arising from the changing composition of union and nonunion workers as unionization declines? A: They implement a generalized Heckman two-step approach, including a quartic in the change in the proportion unionized to control for selectivity. After this correction, they cannot reject the null of no selectivity effects, and the main estimated coefficients change very little, indicating that compositional selection is not the primary driver of their results.

Q: What heterogeneity is found across gender groups? A: Both the bargaining and traditional threat effects are larger for women than for men. Men experienced a decline in mean real wages between 1980 and 2010 more than double that experienced by women, but spillover effects are of identical size, so de-unionization accounts for a larger share of women’s wage decline (43%) than men’s (27%).

Q: What heterogeneity is found by education level? A: For workers with a high school education or less, the traditional threat effect estimate is twice as large as the bargaining effect, while the reverse holds for workers with post-secondary education. Workers without post-secondary education experienced real wage declines nearly triple those of the more educated group, and de-unionization accounts for 43% of the lower-educated group’s wage decline.

Q: How do the authors validate that they are identifying the threat channel rather than some other effect? A: The traditional threat effect is estimated to be statistically insignificant in states with Right-to-Work (RTW) laws, where the legal environment substantially reduces the ability of workers to organize and therefore reduces the credible threat of unionization that would induce nonunion firms to emulate union wages. This pattern is consistent with the interpretation that the identified effect captures firm emulation responses to a genuine unionization threat.

Q: What are the policy implications of the distinction between the two channels? A: The traditional threat effect can only be activated by increasing union power directly, since it depends on a credible risk of a firm’s workforce voting to unionize. The bargaining channel, however, is not union-specific: any policy that raises workers’ outside option values — such as eliminating non-compete agreements or expanding access to higher-paying jobs in a local labor market — can generate similar wage spillovers. Unions are one powerful mechanism for doing this, but not the only one.

Q: What is the theoretical model structure, and what distinguishes it from Taschereau-Dumouchel (2020)? A: The model is built on TD’s search-and-bargaining framework with endogenous union formation, in which unions can threaten to withdraw the entire workforce from production whereas individual nonunion workers can only threaten to withdraw their own labor. The key modifications are: (1) the hiring-channel mechanism of TD (firms skew toward skilled workers who dislike unions) is replaced with a direct wage-emulation mechanism; (2) the BGS multi-industry, multi-city framework is incorporated to allow outside options to vary with the composition of jobs across industries in a locality; and (3) a single skill level with multiple industries is used, keeping the model tractable for empirical implementation.

Q: What data sources are used and over what period? A: The primary dataset is the Current Population Survey Merged Outgoing Rotation Groups for 1983–2020 combined with CPS May extracts for 1978–1982, covering workers aged 25–65 not enrolled in school. The sample is organized into 93 geographic areas (43 cities), 51 industries based on 1980 Census classification, and analyzed at 10-year intervals (1980, 1990, 2000, 2010, 2020) with three-year pooling windows to reduce noise. NLRB case data on union elections proxies for unionization threat probabilities, and County Business Patterns data are used in constructing emulation probabilities.

Traditional threat effect: The mechanism by which nonunion firms raise wages to an “emulation wage” — the level that makes workers indifferent between unionizing and remaining nonunion — in order to preempt the costs of a union election, thereby reducing the net benefit of unionization below the threshold required for workers to vote for a union.

Bargaining channel (bargaining spillover effect): The mechanism by which the availability of union jobs in a local labor market raises the outside option of nonunion workers during individual Nash bargaining, so that declines in union job prevalence or the union wage premium lower nonunion bargained wages even at firms not directly facing a unionization threat.

Outside option: In the model’s Nash bargaining framework, the value a worker (or firm) obtains if negotiations break down — for nonunion workers, this is the expected value of searching across both nonunion and union jobs weighted by transition probabilities and wage rents in each sector.

Emulation wage: The wage a nonunion firm sets that is just high enough to make workers indifferent between unionizing and remaining nonunion, determined by the firm’s calculation of the threshold below which workers would prefer to bear the costs of unionization.

Union formation (endogenous): In the model, unionization occurs when the surplus workers gain from collective bargaining exceeds the costs of organizing; firms can influence this calculus through wage emulation or direct anti-union actions, making union formation an equilibrium outcome rather than an exogenous event.

Bartik-style instrument (outside option instrument): An instrument for local outside option values constructed by interacting start-of-period local employment composition across industries with national-level changes in industry growth, industry wage premia, and union job transition probabilities, isolating variation in outside options driven by predetermined exposure to national trends rather than local demand shocks.

Shift-share (between) component: The portion of the aggregate wage effect of de-unionization attributable to the direct reallocation of workers from higher-paying union jobs to lower-paying nonunion jobs, distinct from spillover effects on nonunion wage setting itself.