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The Rising Skill Premium and Deunionization in the United States

Baris Kaymak and Omer Acikgoz

No 1433, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: During the past 50 years, the US economy has been characterized by a rapid decline of labor unions and a substantial rise in the wage inequality. This paper proposes that the rise in the skill premium in the non-union sector, for instance, due to technical change, can potentially explain these trends. Based on the premise that labor unions compress wages between skilled and unskilled workers, a larger skill premium encourages skilled workers to withdraw from the union. If this is accompanied by a fall in the productivity of unskilled workers, firms become more reluctant to hire the relatively expensive union workers, reinforcing the decline in the unionization rate. To evaluate our hypothesis, we develop a macroeconomic model of endogenous union membership where union members are selected from the middle of the skill distribution and have significant wage gains that are decreasing in skill, consistent with the US evidence. The model predicts that the rise in skill prices in the non-union sector explains 30-60% of the decline in the unionization rate. It was argued that the declining union activity contributed to the rise in wage inequality by changing the labor force composition. We find this effect to be much smaller due to selection into union jobs.

Date: 2011
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