Thursday, July 28, 2011

California versus Texas: Part 2: The power of right-to-work legislation

For those unfamiliar with them, right-to-work laws greatly reduce the power of unions. Below I have the same chart as in the first post. I indicate the right-to-work states by coloring their bars red.

There is a very strong correlation between right-to-work laws and job creation. There are a couple of southern states that have lost jobs despite being right-to-work, but those states have major handicaps associated with poorly educated and rural populations.

I think that companies really do not want to have to deal with strong unions, and that right-to -work laws enhance the value of the workforce to the employer. My job creation model uses a 17% enhancement in value, which is equivalent to workers being willing to work for $6000 less than they actually receive in pay.

This is not due to people having to work for less. Given two workforces of equal educational levels and equal pay, the workforce in the right-to-work state is worth a lot more to an employer.

Correlation or Causation?

It is possible I suppose that right-to-work laws are correlated with something else which is responsible for the job growth. However, there is plenty of qualitative evidence that companies favor right-to-work states for expansion. Hyundai built their factories in Alabama. Toyota went for San Antonio for their new pick-up truck plant. BMW went to South Carolina and Mercedes went to Alabama.

Seattle based aircraft maker Boeing is going to great lengths to get away from their unionized, Washington state workforce. Despite having enviable pay and perks, this workforce goes on strike every few years for more money. Management and the union hate each other.

On their new 787 airliner, Boeing outsourced most of the production to factories in Italy, Japan and South Carolina.  South Carolina is a right-to-work state. Despite trouble recruiting qualified workers in South Carolina, Boeing is going ahead with a major expansion of that plant. They are putting a final assembly line there, which will allow them to deliver 787s without any of the parts passing through Seattle.
Boeing hated their union so much, they built this plane to fly wings and fuselages in from elsewhere!!!

Does right-to-work create jobs or just move them around?
It is certainly possible that right-to-work states are just stealing jobs from union friendly states. However, as the 787 project shows, jobs that leave union-friendly states can always go overseas. I think that both job creation and job shifting are factors in the success of right-to-work states. 

(Blog note: I'm on Twitter as Schrodinger333 and will try to remember to send out a Tweet whenever I put up a new blog post)


  1. Good post. I have two questions:

    1. What is the time period in question that you are defining as the "last economic cycle"?

    2. Washington and Alaska are pretty significant outliers to the trend. Alaska is understandable (it's a petroleum state with a small population), but Washington is a bigger question. What is your explanation for this anomaly?

  2. 1/ The quick answer is 2002 to 2009. The longer answer is that the time period varies a little by state. I define the last economic cycle as being from the low in employment of the recession that began in 2001 to the low in employment of the recession that began in 2008. In a few places that might be 2003 to 2010. I do things this way because I want to exclude all of the bubble jobs that disappeared in the recession.

    2/ Washington state is an anomaly and I don't know what is going on up there. At first I thought it might be something to do with the amount of trade going through the ports, but when I worked the numbers out Washington state seems to be less trade intensive than Texas.

    The other thing I wonder about is if this is some sort of 'Boeing effect.' Demand for airliners has been strong for the past ten years, and Boeing is a large unionized company that pays lots of wages.

    Washington is anomalous in many ways. For example, it has no state income tax, and the state tax burden is on the low side. On the other hand, it voted Democrat in the last 3 Presidential elections and the politics appear to be moderately liberal.

  3. I've done a little more research on Washington state and it seems to be an odd hybrid. If you look at the politics then it looks like California. On the other hand, if you look at the state taxes and the size of state government, then it looks a lot more like Texas.