Tuesday, May 23, 2017

Right to Work Laws Increase Wages

 The academic field of industrial relations is, as I pointed out last year, biased in favor of monopolistic unionism and regulation so that much industrial relations research amounts to partisan advocacy, and the claim that real disposable income is higher in forced unionism states is a case in point.

Advocates of forced unionism claim that nominal per capita income is lower in right to work states than in forced unionism states.  They then make a leap of false logic: They claim that right to work laws reduce real wages.

One frequent and major omission from labor research is an adjustment for state or local differences in cost of living.  The cost of living in a forced unionism state like California is 53.4% higher than in a right to work state like Indiana.  On average, the cost of living in the 24 forced unionism states[1] is 21.9% higher than in the 26 right to work states.  (The data cited here and below are not weighted for differences in state population size.)

While nominal per capita disposable personal income is significantly higher in forced unionism than in right to work states ($45,595 versus $39,914), when I apply an index of the cost of living in each state, the cost-of-living-adjusted disposable personal income is higher in right to work states ($42,450) than in forced unionism states ($40,140). The 2016 interstate cost of living index is published by the Missouri Economic Research and Information Center.

In order to assess why real after-tax purchasing power per capita is roughly 6% higher in right to work states than in forced unionism states, it is necessary to consider several important demographic differences between the two groups of states.

Although the mean populations of the forced unionism and right to work states are not terribly far apart (6.9 versus 6.0 million), the forced unionism states tend to be more urban.  The average size of the largest city in the right to work states is 527,800, but it is 1,038,500 in the forced unionism states.  Several large forced unionism states such as California, New York, and Illinois skew the mean.

Today, large cities like Los Angeles, San Francisco, Chicago, Boston and New York have highly educated workforces, but their college-educated populations have grown relatively slowly in recent years. The demographic evidence indicates the primary reason cities like the Big Apple are now much more educated than the U.S. average is massive out-migration of people who do not hold at least a bachelor’s degree.

One reason why forced unionism states are relatively attractive to the highly educated is that high-status service firms such as law, advertising, high-tech, and investment banking firms are found mostly in large cities.  (There is evidence indicating such high-status service industries are now, as other economic sectors like manufacturing have already done, shifting to right to work states, but the shift for high-status services remains today only at an early stage.)  The centralized urban settings that are, at present, more commonly located in forced unionism states reduce interest groups’ costs of organizing; that is, large-city settings facilitate successful lobbying by special interests. For instance, centralized urban settings reduce the cost of travel to group meetings and to political officials’ offices.  The concentration of highly educated workforces residing in forced unionism states and a heavier labor regulation load in forced unionism states may skew real wage levels, distorting comparisons of right to work and forced unionism states over and above the cost of living adjustment.

Specifically, the percent of the 25-to-44-year-old population with a BA or greater is 34.0% in the forced unionism states and 28.0% in the right to work states. Moreover, the right to work states have less labor market regulation (excluding forced unionism) as measured by an index of labor market freedom published by William P. Ruger and Jason Sorens of the Cato Institute.  Education levels are higher and labor market regulation is more burdensome in forced unionism states, and these factors may affect disposable income, including wages.

To examine how those factors affect disposable income, I used a technique called multiple regression analysis that enables one to control for the effects of competing explanatory variables.  I included state-level measures for exports of manufactured goods per capita, overall state population, the population of the largest city, the percentage of 25-to-44 year olds with BAs or higher, labor market freedom not counting right to work laws (as measured by the Cato Institute), and the presence of a right to work law.  I also included controls for the states of New York, California, and Virginia.  I included Virginia because it is a right to work state with a large segment that works in the District of Columbia, which is not a right to work venue.

Of these variables, two rose to the level of statistical significance: the presence of a right to work law and the percentage of 25-to-44 year olds with BAs. Right to work laws raise cost of living-adjusted wages by $4,290, controlling for other kinds of deregulation, workforce education, and the other factors.  Other kinds of labor deregulation are not as important as right to work laws in improving per capita disposable personal income.  The only factor that has a greater effect is the education level.

[1] Since 2016 income and cost-of-living data are being cited, Kentucky and Missouri, which adopted their Right to Work laws only this year, are counted as forced unionism states here.