Right-to-work laws and state economic development strategies

A high-profile issue right now, especially in Michigan, is the effects of state right-to-work laws on state economic development.

As an economic development strategy, the adoption of a state right-to-work law is an uncertain and risky strategy, as I have outlined in several recent interviews.  Proponents argue that right-to-work laws will boost a state’s employment growth. However, the available research suggests that whether this positive growth effect will occur is highly uncertain. In addition, some research suggests right-to-work laws may reduce wages. Therefore, how a state’s earnings per capita will be affected by right-to-work laws is unclear, and the effect may even be negative. As I have argued before, increasing earnings per capita for most of a state or local area’s population is the best approximation to a good bottom-line goal for local economic development effects.

For example,   the study with the strongest methodology that has found positive effects of right-to-work laws on state manufacturing growth is a study by Tom Holmes. But a later study by Kalenkoski and Lacombe that used a similar methodology did not find positive effects of right-to-work laws on manufacturing growth.

Part of the difficulty is that until recently, there has not been much variation over time in which states had right-to-work laws.  Until Indiana adopted right-to-work in 2012, and possibly Michigan as well, the last states to adopt right-to-work were Idaho in 1985 and Oklahoma in 2001. Since World War II, right-to-work laws have mostly been in place in many Southern and some Western states. This limited time series variation in right-to-work laws makes it difficult to come up with precise estimates of the effects of right-to-work laws that can be convincingly separated from other characteristics of these Southern and Western states.

Some studies have tried to use the recent experience of Idaho and Oklahoma to ascertain the effects of right-to-work. A study by Eren and Ozbeklik finds positive effects of right-to-work on the share of the state’s employment in manufacturing in Idaho, but not in Oklahoma.  In neither state was the adoption of right-to-work associated with any change in per-capita-income.  A study by Farber finds significant negative effects of right-to-work on non-union wages in Idaho, but not in Oklahoma. (Non-union wages might be affected due to right-to-work reducing the threat of unionization at non-union firms.) Other studies can be found to dispute these findings. Furthermore, the variation across studies suggests that the right-to-work effect is difficult to estimate precisely in different contexts.  We might not want to assume that the experience of Idaho and Oklahoma can be generalized.

The greater difficulty is that it seems likely that state economic development is determined by more fundamental forces. These fundamental forces dominate or obscure the more minor effects of many other possible influences on state and local economic development such as right-to-work laws.  Even if we restrict ourselves to state economic development policy, there are economic development strategies with far more evidence than right – to – work laws of robust effects on state economic development.

As I have argued before, stronger local economic development can be best achieved by focusing on cost-effective investments in the skills of state residents, combined with targeted policies to reduce the costs of job-creating business investments. Skill improvement policies that have high benefits per dollar include high-quality early childhood programs.  Business job creation can be promoted cost-effectively  by some services for small and medium sized businesses, such as customized job training and manufacturing extension services, as well as by some well-designed and targeted business tax incentives (but not all).

Targeted policies to build skills and to directly promote job-creation have extensive evidence in favor of their economic development benefits. If the goal is stronger state economic development, it is better to rely on policies with strong evidence rather than to rely on policies whose influence is more obscure or perhaps even counter-productive.

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