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New Evidence on the Effect of Right-to-Work Laws on Productivity and Population Growth

June 11, 2016
By Michael J. Hicks, Michael LaFaive, and Srikant Devaraj

This paper examines the effects of right-to-work laws on worker productivity and population growth.

This paper—written by Ball State University economics professor Michael Hicks, assistant economics professor Srikant Devaraj, and Mackinac Center for Public Policy fiscal policy initiative director Michael LaFaive—examines the effects of right-to-work laws on worker productivity and population growth.

Right-to-work (RTW) laws influence where business owners create jobs, meaning RTW is tied to how effective workers are at those jobs, Hicks and the researchers write.

“The impact of RTW laws on firm location decisions is of interest both as a research and policy question,” Hicks and the researchers wrote. “The effects of RTW legislation during different periods of regional growth offer some evidence of the overall effect of RTW. Among the questions that can be asked of RTW are whether or not unionization leads to differences in firm productivity, and whether wages and benefits vary across regions with different levels of unionization. Moreover, insofar as wages and benefits are not the primary cost differential between union and nonunionized firms, other matters may play a bigger role in firm location decisions. For example, negotiating with unions may be costly, and much of the cost-increasing effects of unions are embedded in work rules and decreased flexibility in hiring and firing, not pay. Earlier researchers have offered a formal model of a production function, which we reprise here.”

Using a process called a Cobb-Douglas production function, Hicks and the researchers write that workers in states with forced-unionism laws are between 57 and 64 percent as productive as workers in worker-freedom states.

“We estimate a Cobb-Douglas production function for manufacturing industries at the state level and find that total factor productivity in non-RTW states was about 57 percent of the level in RTW states,” Hicks and the researchers wrote. “Our derivation of the Solow residual suggests that non-RTW manufacturing productivity was roughly 64 percent of the RTW states. Furthermore, our firm-level analysis from the 2007 Survey of Business Owners found that RTW states achieved higher productivity (sales per employee) than firms in non-RTW states.”

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