Right-to-Work Laws: New Evidence from the Stock Market.

• Author: Abraham, Steven E.

Steven E. Abraham [*]

Paula B. Voost [+]

This article is an empirical examination of whether or not stockholder wealth rises in response to passage of a right-to-work law--a state law banning union security clauses from collective bargaining agreements. Stockholder wealth rose when Louisiana passed such a law in 1976 and when Idaho did so in 1985-1986. Presumably this occurred because investors anticipated higher future profits with weaker labor unions or a lower probability of future organization. This is new evidence that such laws are more than symbolic: They hamper labor unions.

1. Introduction

   Business organizations, the National Right-to-Work Committee, and organized labor periodically devote enormous resources to battles over passage or repeal of individual state right-to-work (RTW) laws. All RTW laws outlaw union shop agreements--clauses in collective bargaining agreements that require employees to join the union that represents them--and about half also outlaw agency shop agreements--clauses in collective bargaining agreements that require nonmembers to pay a fee to the union to cover the cost of representation. Supporters of RTW argue that employees should not be required to pay dues to a labor organization that they do not support. Opponents argue that because union contracts and grievance arbitration systems cover all employees, members and nonmembers, RTW laws encourage "free-riding" by individuals who want to gain the benefits of unionization without bearing the costs, and that this weakens labor unions.

   Are RTW laws largely symbolic? Or do they reduce union membership, the probability of union growth, and union bargaining power? Informed opinion is still sharply divided. One view is that RTW laws reduce the probability of union organizing (at least in the years immediately following their passage) and that this, along with lower levels of membership in previously organized units, reduces the level of unionization in a state (e.g., Hirsch 1980; Carroll 1983; Garofalo and Malhotra 1992; Davis and Huston 1993, 1995). Ellwood and Fine (1987) present evidence that the effect on new organizing is most severe--with new organizing diminished between 32 and 38% in the 10 years after passage of a RTW law. [1] Zax and Ichniowski (1991; see also Ichniowski and Zax 1991) demonstrate that the dampening of new organizing extends to the public sector when it operates under RTW laws, even when those laws are favorable to unions in other respects.

   Others, however, argue that RTW legislation is largely symbolic: It reflects the prevailing anti-union opinion climate of a particular state, but has little independent impact on union organizing or membership (Moore and Newman 1985, 1975; Wessels 1981; Lumsden and Peterson 1975; Sobel 1995 presents evidence on the true number of free-riders consistent with the taste hypothesis). RTW legislation is passed, in this perspective, in states in which public opinion is anti-union and the labor movement is politically weak. In these states, workers are less attracted to unions, and it is this public opinion climate, rather than the law itself, that hurts union growth. [2]

   We present a new type of evidence on this issue from two states in which public opinion had turned sharply against unions (or at least in favor of RTW) in the period before the passage of a RTW law. We reason that, if passage of the RTW law itself actually lowers the probability of unionization or reduces the bargaining power of unions operating within a particular state, beyond the effect of the prior shift in attitudes, then anticipated future profits of firms operating in that state will rise in response to passage of that law (because unions are associated with lower firm profits). [3] Hence, equity values of those firms will increase. We use event study methodology to discover whether or not this actually happened in Louisiana when it passed a RTW law in 1976 and in Idaho when it passed a RTW law in l985-1986. [4]

   Louisiana and Idaho are both well-suited to research based on the event study technique. Legislative action in both states took place in the period in which daily stock price data are available from all three sources of stock price data: New York, American, and NASDAQ. 5 Daily (as opposed to monthly) stock price data are much more likely to reveal statistically significant changes in shareholder equity (Brown and Warner 1985). Because we use daily rather than monthly data, a finding of no statistically significant change in shareholder equity would be valid evidence that RTW laws are symbolic rather than substantive.

   Moreover, Louisiana and Idaho are good for our purposes in that they are both reasonably small. The only firms likely to be affected greatly by a law passed in Louisiana or Idaho would be firms that derive a significant portion of their business from operations in those states. Most of our work is based on the standard event study methodology used in other studies regarding the impact of legislation on shareholder returns; identification of a sample of firms affected by legislation to a greater degree than average is a requirement of this research strategy. (As detailed in the methodology section, event studies control for the general level of the market and the historical relation of shareholder returns for a particular stock to the general level of the market.) Finally, however, as a further check, we contrast results for the Louisiana and Idaho firms in our data set with results for two "control groups," each consisting of firms located primarily outside a respective state, but matched by industry to the state sample. [6]

2. Louisiana

   A considerable amount of background information is available on the events leading up to the passage of Louisiana's RTW law in 1976 (Canak and Miller 1990). Attempts to organize oil-related industry in Louisiana in the late 1960s stimulated the formation of several oil- and construction-based anti-union state business organizations in the early 1970s. [7] The various groups became more unified, gained increasing support from major multinational corporations doing business in Louisiana over the next few years, and increased their influence over state legislative races. In 1975, the business lobby began generating support for RTW legislation, and then mounted a major media and lobbying blitz. Public opinion was swayed against unions when violence erupted in January 1976 in a jurisdictional dispute related to the construction of a chemical plant. Later in 1976, a more conservative legislature was elected, again with support from these same business organizations.

   Nonetheless, organized labor in Louisiana, especially as represented by the state AFL-CIO, felt it could rely on lobbying and efforts in the legislative arena to block RTW. The AFL-CIO believed that it would be successful in keeping RTW legislation tied up in hostile committees, avoiding a full legislative vote. When these lobbying efforts failed, however, it was too late for labor to mount a campaign to influence public opinion (Canak and Miller 1990). The chronicle of the struggle over Louisiana's RTW law indicates that the probability of the passage of RTW legislation rose and fell with daily events in Louisiana's legislature--presumably affecting investors' evaluations.

3. Idaho

   Idaho also has a long history with RTW. In the 1970s and 1980s alone, there were six different RTW bills introduced into the Idaho legislature, including the bill that was passed in 1985. [8] In the early and mid-1980s, RTW was generally supported by Idaho Republicans, and opposed by Idaho Democrats, including Governor John Evans. In the November 1984 elections, Republicans won a "veto-proof" majority in both houses of the state legislature, and Idaho newspapers specifically mentioned that RTW legislation was likely to be passed in the coming legislative session. In January 1985, RTW was indeed passed, vetoed, and then passed over that veto. This triggered an effort by the state AFL-CIO to subject the new law to a referendum, a referendum that was eventually held in November 1986 but won by RTW supporters. Events in Idaho, thus, took place over a longer time span than events in Louisiana. Legislative history was relatively less important and public contest of pro- and anti-RTW views was relatively more impor tant. In some respects, Idaho thus provides a less "clean" test of the impact of RTW legislation (because crucial event dates are less easy to determine) than Louisiana. Still, evidence from both states is worthy of consideration insofar as these are the only two states to pass RTW legislation in recent years. We use techniques that consider both specific "event dates" and the entire span of time in which RTW legislation was "pending" in either state.

4. Event Studies of Unions, Profitability, and Shareholder Wealth (Returns)

   In developing our view that passage of a RTW law would elevate shareholder wealth in Louisiana and Idaho if RTW laws substantively hurt unions, we relied on a growing number of studies demonstrating that unionization and events associated with unionization reduce profits and shareholder wealth. By reducing the probability of unionization, and disadvantaging unions in other respects, a RTW law would increase shareholder wealth.

   In the labor relations context, event studies estimate the change in security returns that occurs when unexpected information about a particular labor relations event is revealed to the investing public. Changes in security returns are treated as an unbiased estimate of the change in the discounted future profits of a firm (referred to as shareholder wealth) in response to the event. Event studies have been used frequently to evaluate the impact of unionism and events associated with unionism on firm profitability. In general, profits and shareholder wealth are negatively affected by unionization, other things equal.

   Ruback and Zimmerman (1984)...