Why Do Union Jobs Pay More? New Evidence from Matched Employer-Employee Data

Abstract

We use Canadian matched employer-employee data to assess the sources of the union pay premium. After controlling for worker heterogeneity using the two-way fixed effects approach of Abowd, Kramarz, and Margolis (AKM), we find that unionized firms pay about 15 log points more than non-unionized firms. Forty percent of this gap is linked to productivity differences between unionized and non-unionized firms as measured by value added per worker. The remaining gap reflects unions’ ability to extract more rents for workers. Our estimates imply that unions raise pay among unionized workers by around 9 log points, with considerable heterogeneity by industry and firm birth cohorts. The union effect grows to about 11 log points in an extension of the AKM approach where unions also affect the returns to unobservable worker characteristics.