New evidence on the effect of right-to-work laws on productivity and population growth.

• Author: Hicks, Michael J.
• Position: Report

In his study of right-to-work (RTW) laws, Richard Vedder (2010) outlined the classical-liberal argument regarding workplace liberty and offered evidence of the effects of RTW legislation on employment and output in individual states. He found that RTW laws have a positive impact on both jobs and output as firms and workers move to states with greater economic freedom.

This article extends Vedder s work by examining the impact of RTW laws on productivity and population growth. We begin with a review of the literature on both issues. Second, we reprise the exposition of labor demand theory offered by Hicks and LaFaive (2013), directly tying their work to estimates of total factor productivity (TFP), the Solow residual, and labor productivity across RTW and non-RTW states. Third, we re-evaluate earlier estimates of the effect of RTW laws on population growth offered by Hicks (2012) and Hicks and LaFaive (2013). In doing so, we incorporate an identification strategy introduced by Hicks (2012) designed to adjust for population growth unrelated to RTW legislation.

The Impact of Right-to-Work Legislation: A Review of the Literature

The National Labor Relations Act of 1935 (the Wagner Act) did not permit states to restrict union contracts from mandating universal union membership within a union-represented establishment. In 1947, the Taft-Hartley Act allowed states to opt out of this requirement and allowed employees to avoid union membership and payment of union dues. The affirming vote of states to permit this union opt-out has become known as RTW legislation.

Some state legislatures actually voted for RTW laws prior to passage of the Taft-Hartley Act. The states that first passed RTW laws were heavily concentrated in the South, Soudiwest, and Great Plains. Those regions were not heavily industrialized at the time and did not possess large transportation sectors. Furthermore, there was considerable cultural opposition in the South toward the labor movement (Black and Black 1989). Since the Taft-Hartley Act, 25 states have passed RTW legislation, with Indiana doing so twice. The two most recent adopters are in tire heavily unionized manufacturing states of Indiana and Michigan.

A large body of analysis has been performed regarding the impact of RTW legislation. The role of RTW legislation on unionization levels and rates has a long empirical history (Dickens and Leonard 1985, Freeman 1985, Farber 1987, Lazear 1988, Reder 1988, Jarley and Fiorito 1990, Moore 1998) and generally concludes that RTW laws reduce private-sector union participation, although some later works (e.g., Koeller 1994) find no impact.

Newman (1983) focused on RTW laws in the South from the 1940s through 1970s and found that RTW legislation was a significant contributor to population growth as labor-intensive manufacturing firms moved to RTW states.

Holmes (1998) extended Newman's work by using RTW as an identification tool to siphon out the impact of other business-friendly policies on firm location at the county level. His study was especially important in that it included a broad range of business-friendly policies in a carefully executed study of counties in different states but with contiguous borders. Holmes (1998) reports a very large increase in manufacturing employment in places with business-friendly policies and no unusual geographic complications. For example, he notes that while Louisiana and Mississippi are both RTW states, their border shows stark differences in manufacturing location because Louisiana has a long history of unfriendly policies toward business.

More recently, Stevans (2009) introduced an endogeneity correction in the adoption of a RTW law. Since it is possible that local factors (such as strong unions) prevent the passage of RTW laws, any test of RTW versus non-RTW states is not a natural experiment. Stevans found that after applying an econometric correction for the endogeneity problem, there were no wage or employment effects of RTW legislation. Vedder, Denhart, and Robe (2011) conducted a study of RTW using a pooled OLS (ordinary least squares) model from 1977 through 2007. They found a roughly 1 percent increase in the growth rate of per capita personal income for states passing RTW legislation. The strength of their work is its parameterization of several contributing factors and the length of time analyzed, but they do not correct for the endogeneity problem.

Hicks (2012) estimated the impact of RTW laws on manufacturing employment, manufacturing incomes, and the share of manufacturing income in states from 1929 through 2005. He examined the actual effect of RTW7 legislation using an identification strategy that isolated old Southern states and 1947 manufacturing employment to account for political factors affecting the passage of RTW laws. Hicks reported no impacts on manufacturing employment, share, or incomes from the full sample. However, there were statistically significant contributions of RTW laws to manufacturing income growth in the vast majority of states that had adopted legislation since 1950. Criticism of the empirical design of the study prompted a follow-up article (Hicks and LaFaive 2013) that looked at shorter time periods. The new study found that prior to 1970, RTW legislation had only a small effect on population, income, and employment. However, later periods (1971-90 and 1991-2011) saw a large and statistically significant influence of RTW.

Vedder (2010) extends the RTW literature by identifying two likely effects of RTW legislation--namely, higher population growth and levels, and higher labor productivity. His work offers its greatest contribution in explaining the transmission of policy to the action of individuals and firms. Vedder (2010: 178) suggests that his empirical work "is likely not the last word," and it is in that spirit we proceed to refine his empirical framework.

Economic Theory and Right-to-Work Legislation

Minimal formal modeling of the impact of RTW legislation exists in the economic literature. The work outlined above is either empirical or offers a descriptive theory of effects. Reed (2003) provides a review of the complexity of economic theory surrounding RTW laws and develops several arguments. The first of these is that the presence of RTW laws may permit nonunion workers to free ride, eroding the strength of unions to bargain and thereby reducing the wage premium for workers. Second, the increased requirement for effective unions under an RTW environment may motivate unions to demonstrate their effectiveness by securing higher wage and benefit gains. These two arguments, both of which are plausible, may occur simultaneously.

The impact of RTW laws on firm location decisions is of interest both as a research and policy question. The effects of RTW legislation during different periods of regional growth offer some evidence of the overall effect of RTW. Among the questions that can be asked of RTW are whether or not unionization leads to differences in firm productivity, and whether wages and benefits vary across regions with different levels of unionization. Moreover, insofar as wages and benefits are not the primary cost differential between union and nonunionized firms, other matters may play a bigger role in firm location decisions. For example, negotiating with unions may be costly, and much of the cost-increasing effects of unions are embedded in work rules and decreased flexibility in hiring and firing, not pay. Earlier researchers have offered a formal model of a production function (Hicks and LaFaive 2013), which we reprise here.

We model a simple production technology [theta](N) that is solely dependent on labor, N. As described above, suppose that the level of unionization affects productivity, then [theta](N[u]), but the...