The ‘Right-to-Work for less’ MYTH

From the Heritage Foundation:

Right-to-work laws protect workers’ freedom and attract business investment. In response unions counter that it lowers wages. They contend that unions pressure employers to pay workers more; by reducing union organizing RTW reduces this pressure. They claim workers in states with compulsory dues enjoy higher living standards than they would in RTW states.[19] Union-allied organizations, like the liberal Economic Policy Institute (EPI), make similar claims.[20]

This argument flies in the face of economic theory. Labor unions function as labor cartels: They try to control the supply of labor in an industry so as to drive up its price—wages. Like all cartels these gains come at the cost of greater losses to the rest of society.[21]

To see how this works, consider the United Auto Workers (UAW). The UAW organized the Detroit automakers—General Motors, Ford, and Chrysler—which once comprised nearly the entire U.S. auto market. This gave it a monopoly on hourly labor in the auto industry. The union used this leverage to insist on very generous compensation packages for all three automakers. In the face of strikes the automakers repeatedly caved to union demands. Until the financial crisis, UAW members received more than $70 an hour in wages and benefits.[22]

At the same time the UAW made every American driver poorer. The union’s premium pay and inefficient work rules added about $800 to the cost of every Detroit vehicle.[23] The automakers passed these costs on to consumers. This left most consumers with less money to spend on other goods and services—and priced a new vehicle out of reach for some families. Consequently the automakers sold fewer cars and needed fewer workers, as did their (potentially non-union) suppliers in the steel, plastic, and other industries. The workers who would have been employed in the auto industry and its suppliers worked elsewhere, slightly reducing wages in those sectors.[24] The UAW’s monopoly on auto labor meant higher wages for its members, but higher prices and fewer jobs in the auto industry and lower wages outside it.

On the whole economists find the harm to non-union workers outweighs the economic gains to union members.[25] As one academic literature summary concluded: “[M]ost economists believe, as a generalization, that the negative side of unions outweighs the positive side, at least with respect to resource allocation and efficiency.”[26 ]

Further, unions do not—and cannot—simply redistribute from “the rich.” While unions harm businesses’ profitability, they also hurt low-income and middle-income workers. The higher prices imposed by unions hurt rich, poor, and middle-class consumers alike, but lower-income workers feel the sting of price increases more acutely. Restricting jobs in unionized companies reduces demand in related industries and pushes more workers into the non-union sector. Both effects depress the pay of non-union employees.[27] Most of the income that unions redistribute comes from other workers, not stockowners. To the extent RTW weakens unions, economists would expect it to slightly increase overall living standards.[28]

Unions Argue RTW Hurts Wages. In the same vein, unions argue that RTW laws lower wages. As the Wisconsin AFL-CIO recently claimed:

These anti-worker Right To Work laws just force all working families to work harder for lower pay and less benefits, whether they’re in a union or not. The average worker makes about $5,000 less and pensions are lower and less secure in Right to Work states.[32]

This statement contains a degree of truth: average wages in right-to-work states are approximately that much lower than in non-RTW states. This happens because right-to-work states also have below-average costs of living (COL). Virtually the entire South has passed RTW, but no Northeastern states have passed an RTW law. The Northeast has higher COL and higher average wages; the South has lower living costs and lower wages.

Chart 3 shows this visually. It presents Bureau of Economic Analysis (BEA) living cost data for U.S. states over 2008 to 2012. The values show how much more or less goods and services cost in particular states relative to the U.S. average. For example, New Yorkers pay 15 percent more than the average American and Wisconsinites pay 7 percent less.

All but one right-to-work state has living costs at or below the national average. All ten of the states with the highest COL have compulsory union dues. Analyses that control for these COL differences have historically found that RTW has no deleterious effects on workers’ real purchasing power.[33]

Recently the Economic Policy Institute has claimed that workers in RTW states make 3 percent less than workers without RTW protection, even after controlling for living costs. Heritage replicated this analysis and found that EPI made two major mistakes: it included improper control variables and did not account for measurement error in their COL variables. These mistakes drive their results. Correcting these mistakes shows that private-sector wages have no statistically detectable correlation with RTW laws. The supplement and the appendices to this testimony explain the technical details of this replication. Properly measured, RTW laws have no effect on wages in the private sector.