Does union membership pay off? Evidence from organized Indian manufacturing industries.
Bhandari, Amit K.
Trade Union's Role
Trade unionism is a legislative system of organizing workers and
raising voice for economic and social benefits. Unions perform the vital
role of protest, of calling attention to both the direct and unforeseen
consequences of managerial decisions upon workers and the larger
community. In a democratic country trade unions can essentially be
viewed as interest groups of industrial workers, the strength and
organization of which are often tied up with political parties. In the
USA, trade union is an economic association of workers thriving on free
collective bargaining, giving freedom to workers to choose unions. In
Britain unions maintain their separate identities as socio economic
interest groups and enjoy full freedom to bargain with the employers. In
France and Italy trade unions are closely associated with political
parties. In the ex-colonial democracies the trade union movement has
been developed as an aspect of nationalist movement and eventually been
tied with political parties. In India, political parties have
traditionally controlled trade unions.
The presence of unions is associated with collective bargaining
such as higher wages and benefits in order to improve the conditions of
workers. The differences in wages between union and non-union workers
are considered an important indicator of union control. Almost all
studies uniformly conclude that there exists a positive union-nonunion
wage gap. However, when disaggregated calculations are made, union
memberships are not always associated with positive wage gaps (Booth
1994). In the USA and Britain trade unions significantly reduce wage
dispersion among workers. Freeman (1982) showed that the American unions
reduce intra-industry wage dispersion and wage dispersion across certain
labour markets. Trade unions in Britain also reduce wage dispersion
within the union sectors (Gosling & Machin 1993).
In India less than two percent workers in both formal and informal
sectors are covered by union membership. The union concentration is very
high in public sector, basically confined to permanent workers in the
organised industries. In the organised private sector union membership
represents about 60 per cent workers. However, it is much less in small
and medium scale units. In the unorganised sectors which employed 90 per
cent of the labour force, union is virtually absent. With the spread of
industrialization and economic development, trade union movement has
acquired varied colour. One striking feature is the rapid growth in
unionism among white-collar workers (Sahoo 1999). The impact of union is
dependent on many factors such as quantitative and qualitative strength
and its leadership. Unions played a dominant role in the states ruled by
leftist parties such as West Bengal and Kerala. On the other hand, the
North Indian states have comparatively low union penetration. Bigger
firms are more likely to be unionized than small firms (Deshpande et al
2004).
Dunlop (1944) was the first to declare a trade union as an economic
theory, which requires that the organization be assumed to maximize (or
minimize) something. According to him, the aim of trade union is to
maximize the total amount of wages and benefits for its members. During
the seventies and eighties, the development of human capital theory and
access to better data sources made possible the rise in new generation
studies of wage differentials (see Delton & Ford 1977, Freeman &
Medoff 1981, Long & Likn 1983, Dunn 1986). Unions negotiate with
their employer for higher wages, health benefits, retirement benefits,
hours of work and working environment. Unionized members receive same
wages as their non-unionized counterparts. Unions typically do not try
to negotiate lower wages for non-members. If the non-member workers were
paid less, firms would substitute union workers to cheaper non-union
workers, which in turn may drive unions out of existence. However,
empirical evidence on union 'wage effect' suggests that union
members are getting wage advantage in comparison to their non-unionized
counterparts.
The effect of unions on the distribution of earning depends on the
size of the union wage premium, the position of the organised workers in
the non-union earning distribution and the effect of unions on
inequality within the organized sector (Freeman & Card 1993). In the
United States, private sector union members' gain substantially in
terms of wage and benefits compared to their counterpart (Budd & Na
2000, Schumacher 1999). Using British Household Panel Survey Hildreth
(1999) showed that there exists positive wage difference in United
Kingdom. The wage difference between union and non-member workers can be
distinguished as structural effects and the difference that cannot be
traced from the difference in characteristics which is referred as union
effect. The structural effect includes the difference in productivity
augmenting characteristics like education, experience, skills and other
job related characteristics. In India, the presence of union in
manufacturing industries explains only a little portion of the wage gap
between permanent and contractual workers (Bhandari & Heshmati
2008).
The objective of the study is to investigate the wage difference
between union and non-union members and the factors that can be
attributed to this difference. How much union effect is there in
bargaining higher wages? Or is there any free rider problem? The present
study brings out the wage differential between unionized and
non-unionized among the permanent workers. Contractual workers have not
been considered because of low union penetration among them.
Theoretical Background
Union membership has traditionally been the principal agent of
voice representation which empower workers in the form of better wages
and benefits, better working conditions as well as job security (Booth
1995). Union set wages for all workers irrespective their membership. It
is very difficult for unions to sell group incentive schemes to its rank
and file, the beneficiaries being only a small subset of its
constituencies. Hence, there exists a free riding problem associated
with union membership. Free riding assumes that any union bargaining is
available to all workers whether or not they are members. In a workplace
free riding problem is relevant where there is no coercion of joining
the union. The reason for joining union in the absence of coercion is
the anticipation of excludable goods and services offered by unions
(Olson 1965). The excludable goods might include pension advice, legal
advice etc (Booth & Bryan 2004). However, empirically it is
difficult to estimate the effects of excludable goods on the decision to
join the union by the workers.
Bargaining in the Age of Reform
Opening up of the economy through globalization and subsequent
increase in competition has led employers to seek greater labour market
flexibility (for a more detailed discussion about globalization see
Bhandari & Heshmati 2007). Rigid labour laws in the country
discourage industries to adjust its labour force according to the
requirement. In principle, lack of flexibility in the labour market is
hurting job market and eroding competitiveness of the domestic industry.
Bhandari and Heshmati (2005) found that Indian labour market is not
inefficient in its labour use. Modest speed of adjustment has led
employment size closer to the optimal level. In practice, permanent
workers are being fired by means of so-called voluntary retirement
schemes, thereby reducing the size of permanent workforce and increase
in the use of contract workers. At the same time firms are attempting to
increase labour productivity by making changes in internal utilization
by redesigning jobs and changing job contents (ILO 1995).
Globalisation has weakened the bargaining position of trade unions
as it increases the substitutability of employees (Rodrik 1997). In
India, trade unions have been loosing the strength ever since the reform
process began. The opening up of the economy is accompanied by a
vigorous campaign for the right to hire and fire workers freely. As the
process of globalization and liberalization deepens, employers are
demanding greater flexibility in labour use so that they can freely
deploy or retrench workers if the business environment demands. As a
result there has been a structural shift in employment from permanent to
temporary, contract or casual employment. All these developments have
resulted in weakening the bargaining power of labour unions. The
bargaining power of trade unions has further been weakened by new
managerial strategies like outsourcing and parallel production (Sharma
2006). During the past two decades, number of maydays lost due to
lockout is higher than strikes by the workers, indicating the loosing
strength of labour laws that have contributed to weaken the bargaining
power of trade unions.
The disconcerting feature of organized manufacturing industries is
the negative employment growth. The drive for labour flexibility and
just-in-time production has led to the changes in employment contract,
whereby full-time work is declining and part time, casual and
contractual work is on the rise (O'Connor et al 1999), Campbell and
Burgess 2001). Official figures indicate that organized manufacturing
industries shed jobs about 18 per cent between 1997 and 2004. At the
same time contractualization is rising proportionately to the fall in
permanent jobs. Contractual employees are typically without the
legislative protection compared to their counterparts. It is much easier
for trade unions to organize permanent workers. In the post-reform era
the total number of jobs has increased but these jobs are created
outside the regular formal sector where the trade unions have failed to
represent workers. Since the contractual workers have no formal
employment status and can be retrenched anytime, it is difficult to
organize them. Moreover, contractual worker cannot join the unions of
the permanent workers. However, they prefer to stay away from any union
activities because of the fear of job and income security. Trade unions
have become more defensive in the age of reform due to structural
transformation of the economy, which forced them to reorient their role
to ensure the survival of the industry. As the future of trade unions
depends on the size of workforce, the growing number of contractual
workers might loosen the momentum of the trade union movement.
Data
The information available from secondary sources does not permit a
comprehensive analysis of trade union and labour market transition in
India. The quality of data collected and published by the Labour Bureau
is inadequate and poor (Shyam Sundar 1999). The present study uses field
data collected from individual factory workers from different industries
and from different locations in the country. The survey was at the
instance of Indo-Dutch Programme for Alternatives in Development (IDPAD)
sponsored research project on "Political Economy of Labour in a
Globalised Economy". This data was collected from selected
industrial areas of West Bengal, Uttar Predesh, Haryana and Delhi during
2004-05. The survey contains information on workers personal as well as
job related characteristics. The sample includes 271 workers from
different factories in organized manufacturing industries. Factories
belong to 16 industries under 2 digit industry groups of National
Industrial Classification 1998. The information was collected on the
basis of a structured questionnaire. The samples were randomly chosen
within the framework that the number of workers restricted to at most
five in a particular firm in order to cover diverse industry groups. For
the sake of comparability attention was given to select the type of
workers in a firm so that the sample represents diverse category of
workers. As far as union penetration is concerned West Bengal has
traditionally been the stronghold of trade unions compared to other
parts of the country. In compliance with general perception 65 per cent
of the workers are union members, while 35 per cent are from other
states.
The descriptive statistics of the variables used of the study are
presented in Table 2. The union density is 50.6 per cent in the total
sample. The unionized workers earn higher income compared to
non-unionised workers. Unionized workers earn average per hour wage of
Rs. 20.84 while non-union workers earn Rs. 16.65 (The exchange rate at
the time of survey was $1 = Rs. 45). Majority of the union workers
belongs to 31--50 age groups, while most of the non-union workers belong
to lower age groups. The highest number of workers were educated up to
secondary level, followed by higher secondary and graduate education.
The average job tenure, which is a proxy of job experience of the
workers was 10.2 years and 6.2 years for union members and non-members
respectively. A small proportion of workers was found to have special
training. About 75 percent unionized workers were non-migrant, while
majority of non-migrant were non-members. Union penetration was
significantly lower in the Special Economic Zone (SEZ) areas. Union
penetration was the highest in West Bengal, while in other states
non-union members constituted the majority.
Methodology
The method of estimation of the impact of union on wage premium
follows the standard practice of human capital model. The estimation
process is divided into two stages. In the first stage, the wages of
individual workers are regressed on a vector of worker characteristics
(personal and job related). This estimation is made for union and
non-union workers separately. The earning function takes the following
form:
[W.sub.i] = [beta][X.sub.i] + [[epsilon].sub.i]
where W = natural logarithm of hourly wage rate; X = a vector of
worker's personal as well as job related characteristics (see Table
1 for the list of variables), [beta] = coefficient of the individual
variables and [epsilon = random error term which is assumed to satisfy
the usual properties. The earning equation is estimated separately for
both union and non-union workers to investigate the difference in the
return of the individual and job related characteristics considered in
this study.
The estimated earning equation for union and non-union workers are
[[bar.W].sub.u] [[??].sub.u] [[bar.X].sub.u] (1)
[[bar.W].sub.n] = [[??].sub.n] [[bar.W].sub.n] (2)
where the hats denotes estimated parameters and the bars over
variables indicate sample mean. W is the mean wage, X is a vector of the
mean values of the wage determining characteristics. a is a vector of
estimated coefficients or return to the characteristics. The gross
earning differential in logarithm form is given by
[[bar.W].sub.u] - [[bar.W].sub.n] = [[??].sub.u] - [[bar.X].sub.u]
- [[??].sub.n] [[bar.W].sub.n]
In the second step, following Oaxaca (1973) methodology, the above
equation has been expanded. The difference in wages is to be adjusted to
identify the difference in the factors affecting wages. Since there are
two different wage structures there is no theoretical or empirical
guidance for us to know definite wage structure prevailing in the
market. First, we assume that the real wage structure affecting the
labour market is union wage structure and adjust the gross earnings
differential in terms of the coefficient of the union wage equation, and
obtain an estimate of union and non-union earnings differential. Second,
we assume the real wage structure prevailing in the labour market is
non-union wage structure.
[DELTA]W = [[bar.W].sub.u] - [[bar.W].sub.n] = ([[bar.W].sub.u] -
[[bar.W].sub.n]) [[??].sub.u] + [[bar.W].sub.n] ([[??].sub.u] -
[[??].sub.n])
= ([[bar.W].sub.u] - [[bar.W].sub.n]) [[??].sub.n] -
[[bar.W].sub.u] ([[??].sub.a] - [[??].sub.n])
Thus, the average wage differential between union and non-union
workers is decomposed into two components. The first term on the right
hand side is expected to correspond to the difference in productivity or
the difference in endowment evaluated according to the non-union returns
([[beta].sub.n]), the second term is the differences in the pay
structure between union and nonunion workers evaluated by the mean value
of the union characteristics, which is termed as union wage premium.
Empirical Results
Table 3 reports the results of standard earning function of
unionized and non-unionized segment. The estimated coefficients
highlight the importance of human capital model in determining earning,
following Mincer's earning equation. The earning equation is
estimated for each category using education level, occupational
experience, skill, migration and industrial location (Table 3). The
results help us to identify the impacts of earning determining
characteristics of workers. Most of the coefficients for both unionized
and non-unionized segment are statistically significant.
As expected, each successive education level is associated with
subsequent higher earnings. The estimated earnings of graduates are
significantly higher in the non-unionized segment than in the unionized
segment. However, the return to higher secondary level of education is
higher for unionized segment. The return to job tenure is significantly
higher for union members than non-members. Special training provided by
firms pays a significant premium for both unionized and non-unionized
workers. It is important to mention here that advanced trainings are not
provided in the conventional education system. Workers have to get
additional technical skill from different training institutes before
entering the job or employers provide the necessary training according
to the requirement of the jobs. Earnings of migrant workers differ
depending on whether they are union member or not. For non-unionized
workers migration is associated significantly with lower pay, while for
unionized workers the coefficient is positive but not significant.
Workers belonging to Special Economic Zones receive lower wages compared
to other areas for non-unionized members. Let us now turn to the
analysis of the decomposition of the wage difference for these two
segments of workers.
Decomposition
Based on the formula [absolute value of exp(D)- 1], where D is the
difference in log points in the earning between union and non union
workers, there is an earning difference 0.221, representing an adjusted
pay difference of 23.5 per cent. Measured with union members'
coefficients, 59.34 per cent of this difference is due to the
wage-determining characteristics. When evaluated with non-members'
coefficients, the difference in observed characteristics explains 24.98
per cent of the pay difference. This variation may due to structural
differences among some attributes of the non-unionized workers. The
unionized workers are expected to be more motivated and prepared to
invest in productivity-augmenting factors (Budd & Na 2000).
Thus, union wage premium, the higher return earned by the unionized
segment for the same characteristics is in the range of 40.66 per cent
and 75.02 per cent. This indicates the impact of wage reservation by the
unions for their members in the organised manufacturing sector. Thus,
workers are not able to grab the opportunity of free riding the benefits
of collective bargaining by unions.
Summary & Conclusions
There has been increasing interest on the bargaining power of trade
unions in the age of globalization. This paper estimated the pay
difference between union members and non-members in the organised
manufacturing industries. The result indicates that in Indian
manufacturing industries trade unions are able to reserve higher wage
for their members. Unionized workers earn 23.5 per cent more compared to
their non-unionized counterparts. A standard earning decomposition model
is applied to investigate the factors responsible for this gap.
Productivity related characteristics explain 59.3 percent wage gap when
evaluated with the coefficients of unionized workers. However, when
evaluated with non-unionized workers' coefficient the productivity
related characteristics explains only 24.9 per cent wage difference. The
variation in wage determining characteristics between unionized and
non-unionized workers might explain this difference. A higher proportion
remains unexplained of what is referred to as union premium. This
highlights the fact that non-unionized workers are getting advantage of
union bargaining. The result indicates that unions are able to reserve
higher wages for their members. This in turn highlights the fact that
high unionization can reduce inequality of earnings and help raise
overall industry wage rates.
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Table 1: Variable Descriptions
Variables Definition
Age
Below 31 years = 1 if age below 31 years
31-40 = 1 if age between 31-40
years
41-50 = 1 if age between 41-50
years
51 & more = 1 if age 51 years and above
Wage Hourly earning of each
worker (Rs.)
Education
Literate = 1 if literate
Basic = 1 if basic education
Secondary = 1 if secondary education
Higher Secondary = 1 if higher secondary
Graduate = 1 if graduate and above
Job Tenure
Below 10 years = 1 if below 10 years experience
11-20 years = 1 if 11-20 years experience
21 years & more = 1 if 21 years & more years
experience
Advanced Skill
Yes = 1 special training
No = 1 no special training
Migration
Migrant = 1 if the worker is a migrant
Non migrant = 1 i f the worker is not a
migrant
Industrial location
SEZ = 1 for Special Economic Zone
(SEZ)
included in the study
Other Places = 1 for other industrial locations
Region
West Bengal = 1 if industries are located in
West Bengal
Other Places =1 if industries are located
outside West Bengal
Table 2: Descriptive Statistics
Union workers Non-union workers
Standard Standard
Variables Mean Deviation Mean Deviation
Age
Below 31 years 0.12 0.33 0.49 0.50
31--40 0.42 0.50 0.35 0.48
41--50 0.34 0.48 0.14 0.35
51 & more 0.11 0.31 0.02 0.14
Wage (Rs.) 20.84 9.18 16.65 7.80
Education
Up to Secondary 0.77 0.44 0.68 0.47
Higher Secondary 0.16 0.37 0.22 0.41
Graduate and above 0.08 0.27 0.10 0.47
Job Tenure
Below 10 years 0.33 0.47 0.76 0.43
11--20 years 0.34 0.48 0.16 0.37
21 years & more 0.33 0.47 0.07 0.26
Migration
Migrant 0.25 0.43 0.70 0.45
Non migrant 0.75 0.43 0.30 0.45
Advanced Training
Yes 0.23 0.42 0.18 0.38
No 0.77 0.42 0.82 0.38
Industrial location
SEZ 0.04 0.19 0.15 0.35
Other Places 0.96 0.19 0.85 0.35
Region
West Bengal 0.91 0.29 0.19 0.39
Other Places 0.09 0.29 0.81 0.39
Number of
Observation 137 134
Table 3: Decomposition of the Wage Equations: Comparison
by Union Membership
Union Member
Coefficient t-value
[Age 15-30]
31 - 40 0.045 0.380
41 - 50 0.006 0.045
51 & more 0.025 0.143
[Education: Up to Secondary]
Higher Secondary 0.232 * 2.424
Graduate 0.226 ** 1.810
[Tenure: < 10 years]
11 - 20 years 0.248 * 2.621
21 years & more 0.470 * 4.031
[No special training]
Special Training 0.338 * 3.738
[Non migrant]
Migrant 0.025 0.292
[Other areas]
SEZ -0.225 -1.219
[Region: West Bengal]
Other regions -0.080 -0.585
Constant 2.615 * 18.166
Adjusted R Squared 0.306
F Statistics 6.462 *
Non Member
Coefficient t-value
[Age 15-30]
31 - 40 0.012 0.171
41 - 50 0.083 0.797
51 & more 0.307 ** 1.894
[Education: Up to Secondary]
Higher Secondary 0.131 1.745
Graduate 0.252 2.442
[Tenure: < 10 years]
11 - 20 years 0.064 0.691
21 years & more 0.036 0.268
[No special training]
Special Training 0.369 4.321
[Non migrant]
Migrant -0.291 -4.155
[Other areas]
SEZ -0.089 -0.891
[Region: West Bengal]
Other regions -0.222 -2.347
Constant 2.829 * 37.714
Adjusted R Squared 0.295
F Statistics 6.049 *
Note: Omitted reference category are shown in brackets
Coefficients of industry category and area are not reported
* Statistically significant at 0.01 level; ** at 0.05 level
of significance
Table 4: Decomposition of Union/Non Union Wage Gap
Portion Attributed to Difference in
Decomposition Total Gap Characteristics Union Premium
Returns to union 0.211 0.125 0.086
member are baseline (100.00) (59.34) (40.66)
Returns to non member 0.211 0.053 0.158
are baseline (100.00) (24.98) (75.02)