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Labor Laws and Firm Performance

August 8, 2017

This paper, written by Illinois State University economics professor Dalia Marciukaityte, uses stock market data between 1996 and 2015 to study the effect of a state’s right-to-work (RTW) status on businesses’ financial growth and success.

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This paper, written by Illinois State University economics professor Dalia Marciukaityte, uses stock market data between 1996 and 2015 to study the effect of a state’s right-to-work (RTW) status on businesses’ financial growth and success.

Unionized businesses operate at a financial disadvantage against their non-unionized competitors, Marciukaityte writes.

“As firms in states with and without RTW laws often are in the same industries, unionized firms in states without RTW laws have to compete with firms that experience lower union costs,” Marciukaityte writes. “Moreover, allowing unions to collect fees from nonunionized employees is not common in other countries. Thus, unionized U.S. firms from states without RTW laws may also have a disadvantage when competing with some foreign firms. As industrialization of states with RTW laws continues, more states adopt RTW laws, and restrictions to foreign trade decline, the disadvantage of higher union costs may become more important for unionized firms in states without RTW laws.

“When not all competitors experience equally high unionization costs, firms incurring higher costs cannot transfer all of these costs to their customers,” Marciukaityte writes. “If these firms try to charge higher prices or offer lower quality products, their customers shift their business to firms with lower labor costs. When firms cannot transfer their higher costs to other parties, their shareholders, the residual claimants of the firms, earn lower returns.”

RTW laws free up dead-weight resources, promoting businesses’ growth, Marciukaityte writes.

“During 1996 to 2015, unionized S&P 1500 firms located in states without RTW laws underperform other firms,” Marciukaityte writes. “Unionized firms in states without RTW laws experience lower earnings and a negative market reaction to earnings announcements. … These firms cannot transfer all of their union costs to their customers as some of their competitors are not burdened by these costs. Thus, the shareholders of unionized firms in states without RTW laws suffer lower returns.”

Article Tags
Economy FIRE
Author
Dr. Dalia Marciukaityte is an associate professor of finance at Illinois State University. She is also a policy advisor for the Heartland Institute.
dmarciu@ilstu.edu