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

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