Clark Hildabrand 1
2nd Draft
Introduction:
The passage of the Taft-Hartley Act in 1947 amended sections of the National Labor
Relations Act (1935) and opened the door for states to pass what came to be known as “right-towork” laws. These statutes prohibit contract provisions that require all employees to join and pay
dues to a union as a condition of employment (Moore, 1998, p. 445). A dozen states passed
right-work-laws shortly after 1947, and eleven others have followed suit since then. The most
recent right-to-work state is Indiana which repealed its original right-to-work statute in 1965 but
passed a new right-to-work bill in February 2012 (USA Today, 2/2/12). The battle in Indiana
over right-to-work laws demonstrates the typical array of opposing forces (USA Today/AP,
2/1/12). Lobbying against the proposed law, organized labor and its think tanks, such as the
Economic Policy Institute, claimed that right-to-work laws weaken the bargaining position for
unions and lead to about $1500 in wage reductions for both union and non-union workers after
taking into account price-of-living differences (Lafer, 2012, p. 3). Countering these claims, the
Indiana Chamber of Commerce pointed to higher long-term employment and personal income
growth in right-to-work states when compared to non-right-to-work states (Vedder, Denhart, and
Robe, 2011). While a positive relationship between right-to-work status and economic growth
seems evident, this paper delves deeper into the effects of right-to-work laws on economic
growth. Since past research and political claims emphasize the impact of right-to-work laws on
manufacturing, where unions have historically been strongest in the private sector, this paper
focuses on the relationship between right-to-work laws and growth in the manufacturing sector.
Although past research has attempted to analyze this relationship, many papers are unable to
separate the effects of right-to-work laws from the effects of other “probusiness” policies such as
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lower income, capital, corporate, or overall tax rates (Holmes, 1998, p. 704). Therefore, this
paper will develop and test a model of state manufacturing growth which accounts for both rightto-work status and tax rates.
Literature Review:
Proponents of right-to-work laws typically base their arguments for such statutes on the
claim that prohibiting union shops will reduce the bargaining power of unions which frustrates
their attempts to establish themselves at new firms and maintain their holds on employers who
have already given in to such agreements. In addition to weakening the union’s bargaining power
with the employer, the union’s organizing and maintenance costs rise which increases the
incentives for free-riding off the other union members (Moore, 1998, p. 450). Counteracting the
incentive to free-ride by refusing to pay union dues and declining to join a union, reputation and
disobedience disutilities might weight the individuals’ utility functions toward union support as
argued by Akerlof (1980) and Naylor (1989). Especially in areas of the country lacking a history
of union organization, such as in the South, the dearth of social custom supporting trade unions
might lead both to the passage of right-to-work laws and diminished unionization both before
and after the passage of such bills, a clear case of potential simultaneity bias.
Many empirical analyses have attempted to shed light on the relative strengths of the
bargaining position, free-rider, and social custom hypothesis. For example, Farber (1994) used
models of the supply and demand for union jobs and found that right-to-work laws simply mirror
pre-existing preferences against union membership with social customs in the South decreasing
employee demand for union jobs. However, Farber’s data also showed that right-to-work states
in the South still have substantially lower proportions of the labor force in unions (0.161 for
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right-to-work states and 0.273 for non-right-to-work states), and these results held for nonSouthern states as well (0.245 in right-to-work states and 0.371 for non-right-to-work states)
(Farber, 1994, p. 322). Thus, both the social custom and free-rider hypotheses may have some
merit in explaining the demand for unionization. In response to other studies that found little real
impact of right-to-work laws on the level of union membership throughout a state (a stock),
Ellwood and Glenn (1987) focus on the effects of such laws on union organizing efforts (a flow).
The authors found that union organizing was reduced by nearly 50% in the first five years after
passage of a right-to-work law primarily due to a decline in the number of certification elections
held and a reduction in the average number of workers in each new unit. The reduced organizing
led to a permanent 5-10% reduction in the number of union members thanks to the unions’
weakened bargaining position in new manufacturing plants. Empirical studies seem to give some
weight to each of the three hypotheses regarding unionization which combine to reduce union
membership. Although this paper is not able to evaluate the strengths of the three primary
hypotheses developed in previous papers, they still provide theoretical justification for a positive
correlation between right-to-work laws and growth in the manufacturing sector.
The passage of right-to-work laws, especially in Southern and Western states lacking
social customs that can support union memberships, is likely speeding the relocation of firms to
“probusiness” states where the bargaining position and free-rider problems contribute to the
dominance of manufacturers over organized labor. To partially avoid the identification problem
involved with determining the source of manufacturing growth, Holmes (1998) compared
county-level differences along state borders and found that, on average, the manufacturing share
of total employment in a county increased by one-third when crossing into the probusiness side.
However, since the paper simply shows an overall effect of state probusiness policies, it cannot
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identify the particular contribution of right-to-work laws as the Holmes notes in his conclusion.
Therefore, in order to gauge the true impact of right-to-work laws on manufacturing growth, this
paper must also consider the effects of other probusiness policies.
Despite the frequent claims of politicians that lower corporate, income, capital, and
overall tax rates should act as incentives for employment growth, the state-level evidence for
such probusiness policies is rather mixed. For example, Helms (1985) used pooled time series
and cross section data from 1965 through 1979 for the 48 contiguous states and found that state
and local tax increases significantly retard economic growth when the tax increases are used for
wealth transfers. However, Helms also found that tax increases could still improve economic
growth if the additional funds were used to support infrastructure and education. This finding
suggests that measures of state spending may reveal the true probusiness nature of state fiscal
policies. Gabe and Kraybill (2002) also found that economic development incentives in Ohio had
little effect on actual employment growth in both manufacturing and nonmanufacturing
establishments, but this paper only studies data from 1993 to 1995 and fails to take into account
the historic economic trends of this Rust Belt state. Fox (1986) takes into account regional
differences through the use of a state border comparison of retail sales and finds that sales and
income taxes both have a negative relationship with retail activity. After accounting for state
differences through a measure such as state fixed effects, this paper might be able to find a link
between tax rates and growth in the manufacturing sector. Through comparison with other
probusiness policies such as right-to-work status and state expenditure on non-transfer payments,
this paper attempts to unravel the actual effects of lower tax rates on state economic growth.
Theory and Model:
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The theory and model section is one I hope to work on more in the coming weeks. For
the connection between right-to-work status and manufacturing growth, I plan on discussing the
three hypotheses mentioned above and how firms view labor costs and supply. Since a
substantial amount of the manufacturing growth likely comes from relocation, I will include a
few sentences on the additional costs from relocating such as the need to invest in new capital.
When discussing the theoretical link between taxes and manufacturing I am planning on
mentioning the tax multiplier and how the Laffer Curve predicts that a decrease in taxes at
certain tax levels may actually raise tax revenues through greater incentives to work and
produce. State spending on education could increase human capital and help prepare workers
through vocational training to work in local manufacturing plants.
For the model, I will use manufacturing growth as the dependent variable with right-towork status, state income tax rate, state capital tax rate, state corporate tax rate, a combined
measure of overall tax rates, state fixed effects, year effects, and education spending as a percent
of the state budget as potential independent variables.
Data:
As Kalenkoski and Lacombe (2006) demonstrate, geographically correlated factors have
a significant effect on the effectiveness of right-to-work laws so I will at least confine my study
to the 48 continental states since the geographic isolation of Hawaii and Alaska prevent easy
relocation of manufacturing firms to those states. This practice is common in previous literature
such as Helms (1985). Data from the Census of Manufacturers might provide evidence on
manufacturing growth, but finding information on the right-to-work status, tax rates, and
education spending will require more digging around. Right-to-work status could prove
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especially tricky since some states, such as Indiana, have changed their status multiple times
since 1947.
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Works Cited
Akerlof, G.A. “A Theory of Social Custom, of Which Unemployment May Be One
Consequence,” Quarterly Journal of Economics, XCIV (1980): 749-75.
Ellwood, David T. and Fine, Glenn. ‘‘The Impact of Right-to-Work Laws on Union
Organizing.’’ Journal of Political Economy, 95 (April 1987): 250–73.
Farber, Henry S. “The Decline of Unionization in the United States: What can be Learned from
Recent Experience?” Journal of Labor Economics, Vol. 8, No. 1 (January 1990): S75S105.
Fox, William F. “Tax Structure and the Location of Economic Activity Along State Borders.”
National Tax Journal, Vol. XXXIX, No. 4 (1986): 387-401.
Gabe, Todd M. “The Effect of State Economic Development Incentives on Employment Growth
of Establishments.” Journal of Regional Science, Vol. 42, No. 4 (2002): 703-730.
Helms, L. Jay. “The Effect of State and Local Taxes on Economic Growth: A Time Series-Cross
Section Approach.” The Review of Economics and Statistics, Vol. 67, No. 4 (Nov., 1985):
574-82.
Holmes, Thomas J. “The Effect of State Policies on the Location of Manufacturing: Evidence
from State Borders.” Journal of Political Economy, Vol. 106, No. 4 (August 1998): 667705.
Lafer, Gordon. “Working Hard to Make Indiana Look Bad: The tortured, uphill case for ‘rightto-work.’” Economic Policy Institute, January 3, 2012.
Moore, William J. “The Determinants and Effects of Right-To-Work Laws: A Review of the
Recent Literature.” Journal of Labor Research, 1998.
Naylor, Robin. “Strikes, Free Riders, and Social Customs.” The Quarterly Journal of Economics,
Vol. 104, No. 4 (Nov., 1989): 771-85.
Vedder, Richard, Matthew Denhart, and Jonathan Robe. “Right-to-Work and Indiana’s
Economic Future.” Indiana Chamber of Commerce, January 2011.