RTW Reduces Private Sector Pay MYTH

From The Heritage Foundation:

Advocates for compulsory unionization have argued that right-to-work (RTW) laws reduce wages by 3 percent. A forthcoming Heritage Foundation Backgrounder finds instead that, when living costs are fully taken into account, private-sector workers in RTW states enjoy real wages equivalent to those in non-RTW states. Policymakers considering RTW legislation may do so confident that it will have no negative impact on private-sector wages. RTW laws do appear to slightly reduce the pay of government employees, easing constraints on hard-pressed state budgets.

Unions and their advocates argue that, by reducing their membership, RTW laws reduce wages. They claim that weakening union power reduces the pressure on businesses to pay more.

In its new study, The Heritage Foundation has replicated the research that unions and some economists use to support that claim, and has found it fundamentally flawed, as it only partially controlled for cost-of-living differences among states.[2] Using the same model but fully controlling for price differences shows that RTW laws have no effect on private-sector workers’ purchasing power. Heritage did find that government employees make approximately 5 percent less in RTW states.

Workers earn lower nominal wages in RTW states. However, RTW states also have below-average living costs. As Map 1 shows, virtually the entire South has passed RTW laws; no Northeastern states have done so. The Northeast has higher costs of living than the South. In fact, all but one RTW state—Virginia—has living costs below the national average.[3] Consequently, the higher nominal wages in non-RTW states do not necessarily purchase more goods and services. Researchers need to account for differences in the cost of living among states to determine how RTW affects workers’ real purchasing power. Most academic studies that do this find that RTW has little effect on real wages.[4]

However, a new study from the Economic Policy Institute (EPI), a union-backed think tank, concludes that workers earn 3 percent less in RTW states, even after controlling for differences in living costs.[5] That study is fundamentally flawed.

Table 1 shows how that study came to that result. In developing the table, The Heritage Foundation used the same data,[6] econometric model,[7] and control variables[8] to replicate the EPI findings. In Table 1, columns 1 through 4 replicate the main findings. Column 1 shows the raw difference in wages between RTW states and non-RTW states. Workers earn about 13 percent less in RTW states, taking nothing else into account. Column 2 adds demographic and individual-level labor market variables to the analysis. That reduces the RTW “penalty” to about 8 percent. Column 3 shows the researchers’ preferred specification, which adds state living costs and unemployment rates as control variables. Column 4 adds 2013 data; the earlier study only covered 2010 to 2012. Both columns 3 and 4 report workers earning approximately 3 percent less in RTW states.[9] That is essentially the EPI result. Unions have used that study to argue that Missouri, Kentucky, and West Virginia, among other states, should continue to force workers to pay union dues.

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RTW laws affect wages differently in the private sector than in government. Unions contend that RTW reduces union membership and thus unions’ ability to pressure businesses to pay higher wages. In government, however, unions raise their members’ pay primarily by negotiating expensive contracts with friendly politicians. RTW reduces the amount of money that government unions can use to campaign for their political allies.

Because RTW laws affect wages through different channels in the government and in the private sector, analysts should examine them separately.

Union allies argue that “RTW laws seek to hamstring union’s ability to help employees bargain with their employers for better wages, benefits, and working conditions.”[15] If so, RTW laws are wholly ineffective. Many workers opt out of union membership when union dues become voluntary. Nonetheless, real wages in RTW states are just as high for private-sector workers as they are in states with compulsory dues.

Policymakers have no economic justification for forcing workers to pay union dues. Workers who want to unionize have the right to do so. But the government should not force workers who see little benefit from union representation to purchase it.