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					                                                                                Clark Hildabrand 1

                                             2nd Draft


       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-to-

work” 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recent right-to-work state is Indiana which repealed its original right-to-work statute in 1965 but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 right-

to-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 non-

Southern 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-to-

work 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.


        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): S75-
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):
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): 667-
Lafer, Gordon. “Working Hard to Make Indiana Look Bad: The tortured, uphill case for ‘right-
       to-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.

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