Wrong About Right-to-Work

Laffer throws another curve-ball.

By John Miller

This article is from the July/August 2011 issue of Dollars & Sense magazine.

Boeing and the Union Berlin Wall

Two policies have consistently stood out as the most important in predicting where jobs will be created and incomes will rise. First, states with no income tax generally outperform high income tax states. Second, states that have right-to-work laws grow faster than states with forced unionism.

As of today there are 22 right-to-work states and 28 union-shop states. Over the past decade (2000–09) the right-to-work states grew faster in nearly every respect than their union-shop counterparts: 54.6% versus 41.1% in gross state product, 53.3% versus 40.6% in personal income, 11.9% versus 6.1% in population, and 4.1% versus -0.6% in payrolls.

The Boeing incident makes it clear that right-to-work states have a competitive advantage over forced-union states. So the question arises: Why doesn’t every state adopt right-to-work laws?

—Arthur B. Laffer and Stephen Moore, Wall Street Journal op-ed, May 13, 2011

What do you get when you mix a Wall Street Journal editorial writer with a supply-side economist?

That’s right: more of the same.

This time, however, it’s right-to-work laws, not taxes, that come in for the full Laffer treatment (although without the illustration on the back of a cocktail napkin).

In May of this year, the National Labor Relations Board (NLRB) issued an injunction to stop defense giant Boeing from moving a jet production line from its unionized factories in Washington state to right-to-work South Carolina. The International Association of Machinists & Aerospace Workers union had filed a complaint that the planned move was in retaliation against strikes the union conducted over the last decade, and thus illegal.

The NLRB decision amounts to “a regulatory wall with one express purpose: to prevent the direct competition of right-to-work states with union-shop states,” insist Arthur Laffer, the supply-side economist, and Stephen Moore, former head of the far-right economics think tank Club for Growth and now on the Wall Street Journal’s editorial board. Right-to-work laws enforced in 22 states, mostly in the southern and western United States, prohibit businesses and unions from agreeing to contracts that stipulate that an employer will hire only workers who join the union or pay union dues. In right-to-work states, unions confront a free-rider problem: they have to organize workers who can benefit from collective bargaining without joining (or staying in) the union or paying dues.
The disadvantages that right-to-work states impose on unions give those states a competitive advantage that will enrich them, according to Laffer and Moore. And their report, “Rich States, Poor States,” has the numbers to prove it, or so they claim. Right-to-work states grow faster, add more income, create more jobs, and attract more people than states hamstrung by pro-union labor laws.
But it turns out that the claim that right-to-work laws lead states to prosper is no more credible than Laffer”s earlier claim that cutting income taxes would spur such an explosion of economic growth that government revenues would actually rise despite the lower tax rates. Much like what Laffer had to say about tax cuts and economic growth, Laffer and Moore make the case for right-to-work laws as the key to economic prosperity through sleight of hand and half-truths.
Let”s take a look at exactly where their story goes wrong.

Something Up Their Sleeve

To begin with, Laffer’s and Moore’s report needs to be read carefully. Their claim is that the economies of states with right-to-work laws grow faster, not that their citizens are better off.

And they are not. For instance, while it is true that both output and income have grown faster in right-to-work states than in other states over the last decade, the growth is from a much lower starting point. In fact, output and income in those states still lag well behind the levels in non-right-to-work states. Personal income per capita averaged $37,134 (in 2010) and real GDP per capita averaged $39,365 (in 2009) in right-to-work states, but $41,312 and $42,513 respectively in the other 28 states.

The positive job creation numbers that Laffer and Moore report for right-to-work states over the last decade haven’t resulted in superior job prospects for those out of work. With their faster growing populations, right-to-work states had unemployment rates averaging 8.0% in April of this year, just below the 8.2% average in non-right-to-work states.

And in practice, right-to-work laws are very much “right-to-work-for-less” laws, as union critics call them. In a recent Economic Policy Institute briefing paper, economists Elise Gould and Heidi Shierholz looked closely at the differences in compensation between right-to-work and non-right-to-work states. Controlling for the demographic and job characteristics of workers as well as state-level economic conditions and cost-of-living differences across states, they found that in 2009:

• Wages were 3.2% lower in right-to-work states vs. non-right-to-work states–about $1,500 less annually for a full-time, year-round worker.
• The rate of employer-sponsored health insurance was 2.6 percentage points lower in right-to-work states compared with non-right-to-work states.
• The rate of employer-sponsored pensions was 4.8 percentage points lower in right-to-work states. On top of that, in 2008 the rate of workplace deaths was 57% higher in right-to-work states than non-right-to-work states, while the 2009,poverty rate in right-to-work states averaged 15.0%, considerably above the 12.8% average for non-right-to-work states.

But here is the real kicker: once their effect is isolated from the effects of other factors, right-to-work laws seem to have little or no impact even on economic growth itself. For instance, a 2009 study conducted by economist Lonnie Stevans concludes that:

While…right-to-work states are likely to have more self-employment and less bankruptcies on average relative to non-right-to-work states, there is certainly no more business capital. …Moreover, from a state’s economic standpoint, being right-to-work yields little or no gain in employment and real economic growth. Wages and personal income are both lower in right-to-work states, yet proprietors’ income is higher. Those lower wages and lower personal incomes are especially detrimental in today’s fragile economic recovery, still plagued by a lack of consumer spending.

A Bad Move

The evidence above militates against the notion that right-to-work laws are the key to economic prosperity for state economies, and in favor of the notion that anti-union laws, much like deregulation and tax cuts targeted at the rich, are another mechanism for securing more and more for the well-to-do at the expense of most everyone else.

That is especially clear when it comes to Boeing’s planned move from Washington state to South Carolina. Ironically, union-heavy Washington tops right-to-work South Carolina in Laffer’s and Moore’s Economic Outlook Rankings for 2010 and in their Economic Performance Rankings for 1998–2008. Personal income, output, and employment all grew considerably faster in Washington state than in South Carolina from 1998 to 2008. And personal income per capita and GDP per capita in Washington state ($43,564 and $45,881 respectively) far exceed their levels in South Carolina ($33,163 and $30,845).

Beyond that, unemployment and poverty rates in Washington state are both well below those in South Carolina. By all those measures, Washington’s economy is far and away the more vibrant of the two.

Working conditions are a lot better in Washington state too, something not lost on Boeing. Wage workers in Washington state on average make $11,020 a year more than their counterparts in South Carolina. Production workers in Washington state earn $5,560 a year more. South Carolina workers are 69% more likely to die on the job than workers in Washington. And not surprisingly, just 6.2% of wage and salary workers in right-to-work South Carolina were union members in 2010, versus more than 20% in Washington.

So then why does Boeing want to leave the Evergreen State for the Palmetto State? To benefit from a more vibrant economy? Or to take advantage of workers whose ability to organize is hindered by right-to-work laws, whose bargaining power has been eroded by high unemployment and poverty, who have few alternatives than to endure working in far more dangerous conditions while getting paid less than workers in Washington? The numbers speak for themselves.

No wonder the NLRB filed an injunction against Boeing’s planned move. Labor board members saw it for what it is: not a mere relocation, but an exercise of raw power intended to bust a union.

JOHN MILLER, a member of the Dollars & Sense collective, is professor of economics at Wheaton College. 

SOURCES: Arthur B. Laffer and Stephen Moore, “Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, 3rd edition,” Wall Street Journal, April 7, 2010; Lonnie K. Stevans, “The Effect of Endogenous Right-to-Work Laws on Business and Economic Conditions in the United States: A Multivariate Approach,” Review of Law & Economics, Vol. 5, Issue 1, 2009; Elise Gould and Heidi Shierholz, “The Compensation Penalty of ‘Right-to-Work’ Laws,” Economic Policy Institute Briefing Paper #299, February 17, 2011 (epi.org); Gordon Lafar, “‘Right-to-Work’: Wrong in New Hampshire,” Economic Policy Briefing Paper #302, April 5, 2011 (epi.org); Carl Horowitz, “NLRB Sues Boeing; Seeks End to Commercial Jet Production in South Carolina,” National Legal and Policy Center, May 4, 2011 (nlpc.org).