2372 working paper department of economics UNION WAGES AND THE MINIMUM WAGE

Union Wages and the Minimum Wage Henry S. Farber Massachusetts Institute of Technology It is argued that a change in the minimum wage may affect the outcomes of collective bargaining through its effect on a hypothetical "reference wage" which the union rank-and-file use as a basis of comparison in formulating their wage demand. It is further argued that the importance of the minimum wage in the reference wage is stronger for collective bargaining relationships which have base wage rates relatively close to the minimum wage. In order to investigate these hypotheses empirically and to measure the effect of changes in the minimum wage on the wage and strike outcomes of collective bargaining, a sample of 209 contracts representing nineteen collective bargaining relationships over the period from 1957 through 1979 was formulated. The results of the empirical analysis suggest that changes in the minimum wage have an effect on negotiated wage changes which is quite small and, given the precision with which it is estimated, which is unlikely to be of substantial magnitude. Even for relationships with base wage rates only 10 percent above the minimum wage the elasticity of union wages with respect to a change in the minimum is less than .05. This small effect declines further as the base wage increases relative to the minimum. No systematic relationship could be found between changes in the minimum wage and the likelihood or duration of strikes. However, these results were rather poorly determined, and further theoretical and empirical analysis of the determinants of strike activity in general is needed before conclusions can be drawn with confidence. In order to investigate a potential mechanism through which changes in the minimum wage might affect the outcomes of collective bargaining, an Ashenf elter-Johnson type model of outcomes was developed and implemented. However, data constraints forced the elimination of the four lowest wage relationships from the sample which reduced its usefulness in an investigation of the effects of changes in the minimum wage. Nonetheless, two interesting tentative results relating to the minimum wage were found. First, no systematic relationship could be found between changes in the minimum wage and union wage demands while changes in a manufacturing average hourly earnings measure were found to have a substantial impact on union wage demands. Second, it was found in the context of the model that the level of the minimum wage relative to the base wage is an important determinant of the alternative wage available to workers. Since this quantity governs the ultimate concessions the union will make, it can have an important effect on outcomes. More specifically, it is likely that a change in the minimum wage increases wage settlements somewhat as the base wage rises to reassert partially the old union-minimum wage differential. There may also be a reduction in strike activity.