Econ Focus

There are many things that determine whether or not an area is business friendly. The tax system must be reasonable. The regulatory regime needs to be sound. And, as Michael Steinberger discusses earlier in this issue, access to cutting-edge technology can be a make-or-break issue.

But perhaps the most important factor is labor. After all, if a company can't find the right type of workers at the right price, it will fail.

Some employers argue that unions present significant obstacles to success by driving up the price of labor and making it more difficult to terminate unproductive workers. So they have pushed for "right-to-work" laws. These measures ban the "union shop." In other words, workers do not have to join the union as a condition of employment. Currently, 22 states have right-to-work laws (see map), including three in the Fifth District: North Carolina, South Carolina, and Virginia. Right-to-work laws do not ban unions — collective bargaining is guaranteed by the Wagner Act of 1935 — but they tend to make them weaker. The reason: They create a free-rider problem. All employees benefit from the presence of a union, whether they are members or not, so they have an incentive to avoid joining and paying dues and to instead rely on the actions of others. Not surprisingly, then, union leaders are usually strongly opposed to right-to-work laws.

But do right-to-work laws really have a significant effect on the economy? Economists are divided on this issue. Thomas Palley of the AFL-CIO's public policy department has recently argued that "right-to-work laws have (i) a negative impact on union density, (ii) no impact on the composition of employment, (iii) a negative impact on manufacturing hourly wages and statewide annual incomes, and (iv) a negative impact on the earnings of government workers." What's more, the level of union density — which itself is affected by right-to-work laws — affects government spending. States with less unionized work forces spend less on education and welfare. "Right-to-work legislation therefore has a political significance that is in addition to its labor market significance," Palley concludes. Similarly, Lawrence Mishel, president of the Economic Policy Institute, argues that right-to-work laws have had "statistically significant and negative impacts on workers."

But not everyone is convinced that right-to-work laws are bad for workers or the economy more generally. Thomas Holmes, an economist at the University of Minnesota, argues that they contribute to a healthy manufacturing sector. He has looked at what happens at state borders, areas where "the geographic determinants of the distribution of manufacturing — for example, climate, soil fertility, access to transportation, and the level of agglomeration benefits — are approximately the same" on both sides of the boundary. What differs, then, is policy. "To the extent that pro-business policies pursued by the right-to-work states have been a factor in the migration of industry, there should be an abrupt change in manufacturing activity at the border," Holmes states. "In contrast, if the policies make no difference, there should be no change at the border."

It turns out that the differences in manufacturing activity are "surprisingly big." On average, "the manufacturing share of total employment in a county increases by about one-third when one crosses the border into the pro-business side." He is careful to point out, however, that the effects on manufacturing are the result of overall state policies, of which right-to-work laws are only one. These laws contribute to a state having a robust manufacturing sector, Holmes concludes, but just how much is still a matter of debate.

William Wilson of the Mackinac Center for Public Policy in Midland, Mich., has used raw data to argue that states with right-to-work laws have enjoyed greater prosperity than those without. Among his findings are that average annual manufacturing employment and construction employment grew 1.7 percent and 1 percent faster, respectively, from 1970 through 2000 in right-to-work states. What's more, from 1977 through 1999, gross state product increased 0.5 percent faster on an average annual basis in right-to-work states. Wilson concludes that "compulsory union support hasn't delivered the goods." There is, he says, a "clear correlation between economic growth and right-to-work status."

Data from the Fifth District are consistent with some of Wilson's national findings. From 1970 through 2001, manufacturing employment dropped in all three Fifth District jurisdictions without right-to-work laws (see graph). In contrast, Virginia and North Carolina added manufacturing jobs during this period, and the decline in South Carolina was rather mild. When one considers that some of the most important industries in Virginia and the Carolinas, including textiles and furniture, have contracted during the past three decades, the data take on greater significance. Those states were able to weather big hits to their manufacturing sectors and still keep moving ahead. It's not clear that this is due in large measure to the presence of right-to-work laws, but one might reasonably surmise that those laws played a role.

Matthew Goodfellow, an economic consultant in Chicago, argues that right-to-work laws have encouraged some manufacturing firms, especially those making automotive parts, to settle in the Southeast. And the Carolinas, according to Goodfellow, have been among the region's beneficiaries.

Rep. Bob Goodlatte, a Republican from Virginia, has introduced the National Right to Work Act in Congress. It would repeal the federal law that permits forced-dues unionism and, in effect, establish right-to-work laws across the entire country. "Over the years unions have often provided important protections and services to American workers and local communities," Goodlatte says. "However, they should not be able to force people to pay union dues just to get and keep a job." The bill has been referred to the House Committee on Education and the Workforce, but it's unclear if action will be taken on the measure.