Right-to-Work in Michigan: Kills Workers or Jobs?

12/09/2012 11:58:00 AM
It appears that Michigan has become the newest state to enact a so called "right-to-work" law which restricts the rights of worker to engage in collective bargaining. The measure was introduced into the republican-dominated Michigan Senate and House on Thursday, and was approved by both chambers the same day. Procedural rules require at least one of the chambers to vote again on the bill no earlier than Tuesday, at which time republican Governor Rick Snyder is expected to sign it into law. Michigan will be the 24th state to enact a version of this law.

For a bit of history: The United States began to industrialize in the 1870s. Prior to industrialization, the vast majority of people (somewhere on the level of nine out of every ten residents) were rural farmers, so issues like wage bargaining and workplace safety just weren't an issue. By 1900, close to half the population had moved to the city, most of them taking up jobs in factories, and workplace conditions became an issue that concerned a very large portion of the population. There were no age restrictions, no minimum wage, no workers' compensation or workplace safety regulations, and no overtime pay or work-week restrictions. Needless to say, factory workers did not live long, nor did they live well, when compared to their agrarian fathers. This provided impetus for laws to protect workers, which were promptly thwarted in 1905 when the Supreme Court delivered its landmark decision in Lochner v. New York. The specific case struck down a state law restricting the workweek, and the precedent was subsequently used (during what's now refered to as the Lochner Era), to prohibit other restrictions such as minimum wages, minimum age restrictions, and workplace safety regulations.

In the absence of legal recourse, workers turned to labor unions to try to force employers to improve workplace conditions. This trend found political allies in 1935 when President Roosevelt enacted the National Labor Relations Act, which was formulated as a regulation against "unfair labor practices," of which, union busting was one. This gave unions official legal recognition, restricting the ability of employers to avoid negotiating with the unions. Following the act, wages soared, workplace injuries plummeted, and workweeks got shorter, eventually coalescing to the 40 hour week standard we use today. On the other hand, the unemployment rate, which had been plunging between 1933 and 1935, stagnated for the rest of the decade--and if this famous paper by economists Cole and Ohanian is to be believed, the unions were to blame.

In 1947 a new breed of congressmen came to power. The New Deal super majority that the liberal wing had enjoyed under Roosevelt disappeared under Truman, one consequence of which was the enactment of the Taft-Hartley amendment tot he National Labor Relations Act. This act expanded the Act's definition of "unfair labor practices" to include a variety of strategies employed by labor unions, including, specifically, the use of "closed shops" wherein employers agreed to a contract with a labor union to only hire from members of that union. Notably, while the law left in-tact the ability to use "union shops" wherein employers agree to a contract with a union requiring all employees of the firm to join the union (and pay dues) within a period of time after being hired, it specifically allowed states to "opt-out" by enacting what's now called "right-to-work" laws, which say that a worker can ignore the firm's contract with the union by choosing not to pay union dues.

By allowing firms to ignore their union contracts and hire workers who do not pay union dues, Right-to-Work laws effectively eliminate all the bargaining power of labor unions. Dues let unions stockpile funds in case they need to support the workers during a strike, for example, as well as pay for a full-time professional staff to negotiate on behalf of workers. These are, to use some econ jargon, non-exclusive services provided by the union to the workers--that is, the union has no way of ensuring that the benefits they provide go to dues paying but not non-dues paying members. Basic economic game theory, then, tells us that no one should pay dues in a right-to-work state, because from each individual's perspective, they can free-ride on the dues paid by their co-workers. The effect, of course, is that the union can no longer bargain, and all the workers loose those benefits.

The basic argument in favor of right-to-work laws is that they increase employment, by allowing firms to pay less. This argument need not be true. For example, to the extent that the employer is a monopsonist--that is, their employees have no other feasible job offers--the presence of union wage bargaining could actually increase both workers' pay and total employment. The reason is that a profit-seeking monopsonist will use their market power to cut pay, because the gains they get from cheaper labor exceed the losses from fewer people being willing to work for them. Empirical evidence shows that while there are very few cases of total monopsony--where workers are completely unable to find employment elsewhere--firms often exercise a moderate degree of market power in the sense that they can underpay their workers by a substantial amount before the workers will pick up and find a job elsewhere.

Setting aside cases where wage-bargaining can actually increase employment, there are strong theoretical reasons to believe that right-to-work won't lead to a substantial increase in aggregate employment levels, and this is substantiated by the empirical research on past right-to-work legislation. The reason for this is simple: unions have only ever represented a fraction of the workforce. Some industries, like automobiles and airlines, are heavily unionized, while others are not at all. Thus, if we accept the premise that unions bargain for higher wages and therefore lower employment in the union industries (actual evidence shows that this need not be true--unions often bargain for better workplace conditions, not higher wages), there still exists a non-union sector with a floating wage rate. Workers who loose union jobs will spillover into the non-union sector to seek employment there. The non-union wage will fall until all of those workers who want jobs at the lower wages have them. Aggregate employment therefore falls as a result of unionization only if workers choose not to work at the lower non-union wage. This theory still predicts very slight changes in aggregate employment in response to unionization, with the magnitude of the change depending on the wage elasticity of labor (how the willingness to work responds to changes in the wage), and the size of the union relative to the non-union sector. If the union sector is very large and the wage elasticity of labor is very large and positive, then we will have a large decrease in aggregate employment. However, in reality the microeconomic research suggests that the wage elasticity of labor is small--though still positive--and, in fact, unions represent a pretty small fraction of the workforce.

Together with these empirical facts, the theory says that right-to-work laws, which aim to de-unionize industries, should have large effects on the distribution of employment between sectors, but a negligible effect on aggregate employment. The empirical research has found that such laws in the past have led to large increases in employment in previously unionized industries, coupled with large decreases in employment in previously non-union industries, so that the aggregate effect is usually insignificant. In other words, we find in reality exactly what the theory predicts.

Unfortunately, this means that whether or not right-to-work is optimal policy is very ambiguous. If monopsony is a pervasive problem, then it is definitely not optimal--unions would in that case be welfare-improving. If we assume perfect competition, we would usually expect to see a net loss of aggregate welfare as a result of unionization. However, this need not be true in every case, since unionization's primary effect is on the distribution of income across union and non-union households. While there is a loss of efficiency from the fact that the union sector will under-produce and the non-union sector will over-produce, there is potential for a net gain in aggregate welfare if, for some reason, union workers have a higher marginal utility of wealth than the non-union workers, which is true, for example, low-skill industries are unionized.

I do not have strong opinion on right-to-work laws. They are mostly a moot point since the vast majority of workers these days are not covered by union contracts with or without the law. However, whether or not they are welfare-improving relative to the status quo, I think it is clear that unions have only ever been a second-best option. They developed as a second-best alternative to government-enforced workforce regulations, which had been prohibited under the Lochner ruling. To the extent that firms distort labor markets through use of monopsony power, the appropriate remedy is probably trust-busting similar to the Sherman Anti-trust Act. And as for the potential gains from redistribution of income, this will always be less efficient than a redistributive income tax.