The Effect of Unions on the Structure of Wages: A Longitudinal AnalysisDavid CardEconometrica, Vol. 64, No. 4. (Jul., 1996), pp. 957-979.Stable URL:http://links.jstor.org/sici?sici=0012-9682%28199607%2964%3A4%3C957%3ATEOUOT%3E2.0.CO%3B2-FEconometrica is currently published by The Econometric Society.Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available athttp://www.jstor.org/about/terms.html. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtainedprior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content inthe JSTOR archive only for your personal, non-commercial use.Please contact the publisher regarding any further use of this work. 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For more information regarding JSTOR, please contact [email protected]://www.jstor.orgMon Jul 2 14:16:54 2007Econometnca, Vol. 64, No. 4 (July, 19961, 957-979 THE EFFECT OF UNIONS ON THE STRUCTURE OF WAGES: A LONGITUDINAL, ANALYSIS This paper studies the effects of unions on the structure of wages, using an estimation technique that explicitly accounts for misclassification errors in reported union status, and potential correlations between union status and unobserved productivity. The econometric model is estimated separately for five skill groups using a large panel data set formed from the U.S. Current Population Survey. The results suggest that unions raise wages more for workers with lower levels of observed skills. In addition, the patterns of selection bias differ by skill group. Among workers with lower levels of observed skill, unionized workers are positively selected, whereas union workers are negatively selected from among those with higher levels of observed skill. KEYWORDS:Longitudinal data, unobserved heterogeneity, measurement error, trade unions. DESPITEA LARGE AND SOPHISTICATED LITERATURE there is still substantial disagreement over the extent to which differences in the structure of wages between union and nonunion workers represent an efSect of trade unions, rather than a consequence of the nonrandom selection of unionized workers. Over the past decade several alternative approaches have been developed to control for unobserved heterogeneity between union and nonunion workers.' One method that has been successfully applied in other areas of applied microeconometrics is the use of longitudinal data to measure the wage gains or losses of workers who change union status. Unfortunately, longitudinal estimators are highly sensitive to measurement error: even a small fraction of misclassified union status changes can lead to significant biases if the true rate of mobility between union and nonunion jobs is low. This sensitivity led Lewis (1986) to essentially dismiss the longitudinal evidence in his landmark survey of union wage effects. In this paper I present some new evidence on the union wage effect, based on a longitudinal estimator that explicitly accounts for misclassification errors in reported union status. The estimator uses external information on union status misclassification rates, along with the reduced-form coefficients from a multi- variate regression of wages on the observed sequence of union status indicators, to isolate the causal effect of unions from any selection biases introduced by a correlation between union status and the permanent component of unobserved wage heterogeneity. Recognizing that unions may raise wages more or less for 'Originally prepared for the 1991 Conference of the Econometric Study Group in Bristol, England. I am grateful to Michael Quinn for outstanding research assistance, and to Gary Solon for pointing out an error in an earlier draft. Thanks to Orley Ashenfelter, Henry Farber, Alan Krueger, the editor and two referees for comments. 'See Robinson (1989) for a discussion of these approaches and a comparison of the underlying assumptions typically used in each.958 DAVID CARD workers of different skill levels, and that the selection process into unionized jobs may generate different selection biases for workers with different levels of observed skills, the econometric model is estimated separately for five skill groups using a large panel data set formed from the 1987 and 1988 Current Population Surveys. Simple cross-sectional estimates of the union-nonunion wage gap are large and positive for workers with lower levels of observed skills (35 percent for workers in the lowest quintile of the distribution of observed skills) and negative for workers with the highest levels of observed skills (-10 percent for workers in the upper quintile of observed skills). Estimates from a measurement-error- corrected longitudinal estimator suggest that this pattern arises from a combina- tion of a larger union wage effect for less-skilled workers and opposing patterns of selection bias for unionized workers from the upper and lower tails of the observed skill distribution. Among workers with lower levels of observable skills, union members are positively selected, leading to a positive bias in the OLS union wage gap. Among workers with higher levels of observable skill, on the other hand, union members are negatively selected, leading to a negative bias in the OLS union wage gap. Perhaps surprisingly, estimates for a pooled sample indicate essentially no selection bias, suggesting that the opposing selection biases for more- and less-skilled workers approximately "cancel" in the overall workforce. These findings shed some new light on the nature of the union selection process, and suggest that both employer and employee incentives affect the nature of