Academic journal article The Cato Journal

New Evidence on the Effect of Right-to-Work Laws on Productivity and Population Growth

Academic journal article The Cato Journal

New Evidence on the Effect of Right-to-Work Laws on Productivity and Population Growth

Article excerpt

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. …

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