Does Measurement Error Bias Fixed‐effects Estimates of the Union Wage Effect?

Abstract

This paper compares estimates of the union wage effect using cross‐section and panel estimators for male manual full‐time and female employees using data from the British Household Panel Survey, 1991‐1997. A comparison of cross‐section and panel estimates suggests that unobserved heterogeneity biases cross‐section estimates upwards. However, it is also found that the divergence between estimates is overstated because measurement error biases the fixed‐effects estimates downward. Reducing measurement error in the union variable by taking averages and restricting changes in union status to occur only when a change in employer and/or job takes place increases fixed‐effects estimates of the union wage effect.