In 2002, the Mackinac Center for Public Policy published a study written by former Comerica economist Dr. William T. Wilson titled "The Effect of Right-to-Work Laws on Economic Development." This study compared states that had enacted right-to-work laws and those that had not using common measurements such as gross state product, job creation, per-capita income and poverty rates. It was found that states with right-to-work laws had outperformed the other states in nearly every category, and that Michigan in particular had lagged behind.
Five years have passed, and the state has entered a condition of steady economic stagnation. Michigan-based automobile manufacturers have continued to lose market share, Michigan’s largest bank has moved its headquarters out of state, families have left the state to pursue opportunities elsewhere and political leaders wrestle with the consequences of a shrinking economy and declining tax revenues.
With little grounds for belief that these trends will reverse on their own, Michigan’s residents are increasingly open to fundamental changes in policy that will make the state more attractive to entrepreneurs, who are the real creators of wealth and jobs. One possible way to attract new investment and business into the state would be to enact a right-to-work law.
This report will pick up where the 2002 study left off, updating fundamental measurements of economic health and assessing whether the advantages held by right-to-work states in 2002 remain in place in 2007.
The basic concept of a right-to-work law is simple: workers should not be obligated to join or give support to a union as a condition of employment. Under federal law, workers have both the right to join unions and the right to refrain from union membership, and while a union contract will cover all employees within a given bargaining unit, individual workers are free to join or not join the union at their discretion.
But while a strict "union shop" contract, in which all workers covered by a collective bargaining agreement must formally join the union, is prohibited, federal law does allow something similar: the agency shop, in which covered workers who opt not to join the union must pay an agency fee, which generally is equal to the regular union dues paid by full union members.
The agency fee does not render the right to refrain from joining a union into a total dead letter. A worker who does not join the union is free from legal union sanctions if he chooses not to take part in a strike, and he can also invoke rights affirmed under the Supreme Court’s Beck decision to reduce his agency fee. In theory, his union dues should be limited to a pro rata share of the costs of collective negotiations and contract administration, including the processing of grievances. In practice, Beck rights have proved difficult to enforce — but the remedy is there and offers some relief from supporting union political and social activities that workers often oppose.
Many states have given workers complete discretion to decline membership in, and financial support of, a union that they individually oppose. Enacting a right-to-work law abolishes agency fees and allows workers themselves to decide if a union deserves their financial support.
This policy has much to recommend it from the perspective of workers themselves. While union officials argue that right-to-work laws allow for "free riders" to enjoy the benefits of union representation without shouldering the costs, this argument is based on the presumption that all workers gain equally under collective bargaining agreements. Unions have the potential to be of great value to workers as a representative in contract negotiations, as an advocate in grievances and, if necessary, as a means for united action such as strikes. But it is irresponsible for the law to assume that every union contract creates benefits for every worker it covers: an inept union may agree to terms that are not advantageous for its members and a corrupted union might sell its members short as part of a "sweetheart contract." Union officials may capriciously decide to favor the interests of one group of workers over another for entirely personal reasons. Even a capable and conscientious union negotiator may need to choose between competing interests among the rank-and-file.
Union officials are not infallible. Given the responsibility that they have as worker representatives, the lines of accountability between union and workers should be as firm as possible. Right-to-work laws strengthen accountability by giving dissatisfied members the option of withdrawing all financial support from a union that they believe is not serving their purposes. In the process, it creates incentives for union officials to pay attention to the interests of all members. This, in turn, reduces the temptation for unions to seek to use their position as worker representatives to influence day-to-day operations in ways that benefit only a handful of members. As a consequence, labor is more productive and more attractive to employers. In turn, higher labor productivity drives up the demand for labor in right-to-work states, increasing both wages and the number of jobs available.
In his 2002 study, Wilson found compelling evidence that right-to-work laws also improved state economic conditions across the board. In particular, between 1970 and 2000:
The economies of right-to-work states grew faster. Between 1977 and 1999 the average right-to-work state’s gross state product grew by 3.4 percent annually, compared to 2.9 percent in non-right-to-work states. Michigan’s economy grew by 1.8 percent during that period.
Between 1970 and 2000 overall employment increased by 2.9 percent annually in right-to-work states versus 2.0 percent for non-right-to-work states. Job growth in Michigan was barely half that of right-to-work states at 1.5 percent. Manufacturing employment grew by 1.5 percent annually in right-to-work states but declined by 0.2 percent in non-right-to-work states during that same period.
The unemployment rate between 1978 and 2000 averaged 5.8 percent in right-to-work states versus 6.3 in non-right-to-work states, while Michigan’s unemployment rate averaged 8.1 percent.
Per-capita disposable income was higher in non-right-to-work states than in right-to-work states, but between 1970 and 2000 per-capita disposable income was rising faster in states with right-to-work laws, by 0.2 percent annually.
From 1969 to 2000 the poverty rate in right–to-work states decreased by 6.7 percent, but in non-right-to-work states poverty decreased by only 2.0 percent. In Michigan the percentage of people living in poverty as defined by the Census Bureau increased by 0.6 percent during that same period.
Wilson also observed that unit labor costs — the cost of labor associated with a unit of output — were lower in right-to-work states than in non-right-to-work states, making labor a better overall value in right-to-work states, which, in turn, become more attractive places for businesses to locate. Michigan’s per-unit labor costs were among the highest in the country, second only to New Jersey’s.
Wilson’s study found that right-to-work states outperformed non-right-to-work states in every important economic category. Michigan in particular had performed poorly, placing in the bottom fifth for most of the preceding 30 years in economic growth, job creation, unit labor costs and change in the poverty rate. While the 1990s were a relative bright spot for Michigan, the growth of the state’s overall economy, job creation and income were still little better than average. Wilson expressed particular concern about the state’s high labor costs and their implications for the state’s future: "As the forces of globalization and competition intensify, Michigan’s high unit labor costs will increasingly discourage fresh capital from planting new seeds."
These words appear to have been prophetic, as Michigan has encountered a string of economic setbacks at a time when the rest of the United States is experiencing steady economic growth. The accelerated decline of Detroit’s automobile industry, evidenced by mass layoffs and buyout of employees at the main domestic auto manufacturers and the nettlesome Delphi bankruptcy, has generated constant headlines. At the same time, the state has largely failed to attract employers seeking to expand out of other states or to develop successful, growing firms from within.
The quickening erosion of jobs from the automotive industry, combined with the failure to attract new investment or develop new companies, has left the state with a declining tax base. In combination with structural flaws that make government services more expensive — binding arbitration of labor disputes involving public safety officers, an expensive public employee pension system and a severe prevailing wage law pegged strictly to union construction wages — this has led to a more or less constant budget crunch in Lansing and in many county and municipal governments.
This report will update Wilson’s work, focusing on the economic performance of right-to-work and non-right-to-work states over the five year period from 2001 to 2006. For the purposes of this report, Oklahoma, which passed a right-to-work law by referendum in 2001, will be treated as a right-to-work state unless otherwise noted.
For the most part, this paper will examine the same fundamental economic measurements of economic growth, employment, income and productivity as the Wilson study. It should be noted that this period opens at the beginning of a brief national recession occasioned by the terrorist attacks of September 2001 and also includes the aftermath of Hurricane Katrina in August 2005. As a consequence, growth rates in employment and wages are somewhat lower for all states than for the period measured by Wilson, which generally covers the period from 1970 to 2000. Because Katrina mainly affected the right-to-work states of Louisiana, Mississippi and Alabama, the data may actually understate the value of right-to-work laws. Nonetheless, these measurements will show that the case for a Michigan right-to-work law remains strong and, if anything, has become stronger.
By themselves these statistical measurements do not prove that right-to-work laws alone are responsible for dramatic economic improvement; correlation suggests causation, but the two are not the same. But at a minimum, it seems fair to conclude that right-to-work laws are not incompatible with a strong state economy, high growth in jobs, low unemployment and steady wage gains. And it is certainly logical to ask right-to-work critics what exactly does cause right-to-work states to outperform non-right-to-work states in so many measurements of economic health.
It is not our intention to make the right-to-work concept into a panacea, nor do we claim that right-to-work laws are an absolute necessity before Michigan’s economy can recover. There are a large number of public policies that can affect a state’s economy: high taxation levels, counterproductive government programs, state laws (such as the prevailing wage) that make necessary state activities needlessly expensive, and regulatory burdens that impede economic growth and limit employment. Michigan could probably become a leading state by reducing taxes and streamlining environmental rules, but in the absence of a right-to-work law, the fiscal and regulatory remedies would need to be more stringent. Passing right-to-work legislation is a step Michigan can take to make the state more attractive to employers and create jobs without complicating already difficult budget decisions or taking any environmental risks.