1 Estimating Union Wage E¤ects in Great Britain During 1991-2003 1;2

Using a dynamic model of unionism and wage determination we …nd that the unobserved factors that in‡uence union membership also a¤ect wages. The estimates suggest that UK trade unions still play a non-negligible, albeit diminishing, role in wage formation. It appears that the greater impact of unobservables in determining individual union propensity concerning the second period under analysis, versus past unionisation experience, implies that those remaining in unions during (1997-2002) gain most from their sorting decision. The signi…cant contribution of unobserved heterogeneity renders the total union wage di¤erential highly variable across individuals. The endogeneity correction 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