Estimating Union Wage E¤ects in Great Britain During 1991-20031;2

Using a dynamic model of unionism and wage determination we \u85nd that the unob-served factors that inuence union membership also a¤ect wages. The estimates suggest that UK trade unions still play a non-negligible, albeit diminishing, role in wage forma-tion. It appears that the greater impact of unobservables in determining individual union propensity concerning the second period under analysis, versus past unionisation expe-rience, implies that those remaining in unions during (1997-2002) gain most from their sorting decision. The signi\u85cant contribution of unobserved heterogeneity renders the total union wage di¤erential highly variable across individuals. The endogeneity correc-tion procedure employed yields a discernible pattern of the estimated union wage e¤ect relative to OLS and Fixed e¤ects. This is in line with Robinson (1989a) and Vella and Verbeek (1998) and refutes the pessimistic conclusions reached by Freeman and Medo¤ (1982) and Lewis (1986) that endogeneity correction methodologies do not contribute to our understanding of the union wage e¤ect puzzle. Key Words: union status, union wage e¤ects, unobserved heterogeneity, dy-namic model of unionism and wage determinatio