Report

The Impact of Compulsory Unionism on Economic Development

Executive Summary

With increasing global competition taking a toll on U.S. manufacturing jobs, and state governments and municipalities struggling to achieve greater operating efficiencies in the face of declining revenues and increasing costs, it is time for Pennsylvania policymakers to reassess the costs and benefits of compulsory unionism on the state’s economic development. The evidence suggests that the Keystone State and its citizens would greatly benefit if Pennsylvania became a “right-to-work” state.

“Right-to-work” (RTW) laws are state statutes or constitutional provisions that ban the practice of requiring union membership or financial support as a condition of employment. These laws establish the legal right of employees to decide for themselves whether or not to join or financially support a union. The right to enact a RTW law is assured by Section 14(b) of the Federal Labor-Management Relations Act (also called the Taft-Hartley Act) of 1947.

Since the 1940s, twenty-two states have adopted RTW laws, the most recent being Oklahoma, which added such a provision to its constitution in 2001. Pennsylvania, a non-RTW state, is home to 888,000 unionized employees—or 17 percent of all private and government sector workers employed in Pennsylvania in 2001.

Advocates of RTW laws cite a growing body of evidence showing that RTW states enjoy faster economic and employment growth than non-RTW states. This growth advantage—experienced predominantly by the southern and western states, which comprise the bulk of RTW states—has been in evidence ever since Taft-Hartley was passed.

Opponents of right-to-work laws argue, conversely, that compulsory unionism is necessary to offset the power of big business in a market economy. In this view, big business and free markets are responsible for a slowdown in real earnings for workers and for greater income inequality during the past quarter century.

To evaluate the merits of these arguments, this study compares economic development results in RTW and non-RTW states. It examines a broad cross-section of state economic statistics from the past three decades. Pennsylvania’s economic performance receives particular attention. The results of this analysis contradict many of organized labor’s long-standing contentions.

The following are the key conclusions of the research. Except where otherwise noted, these data are averages of annual figures taken from 1970 through 2000:

  • Pennsylvania’s annual economic growth was more than one-third slower than that of RTW states. From 1977 through 1999, Gross State Product (GSP)—the market value of all goods and services produced in a state—increased at a rate 55 percent faster in RTW states than in Pennsylvania, ranking it 41st in the nation in economic growth.
  • Pennsylvania’s employment growth was 49th in the nation. Employment grew at a rate 45 percent faster each year, on average, in RTW states than in non-RTW states. Pennsylvania’s employment growth rate was outpaced by RTW states, on average, by 222 percent.
  • Pennsylvania’s manufacturing job growth was 46th in the nation. While RTW states created 1.43 million manufacturing jobs between 1970 and 2000, non-RTW states lost 2.18 million manufacturing jobs. Pennsylvania lost more than 600,000 manufacturing jobs during this period, a number exceeded only by New York.
  • Pennsylvania ranked 46th in the nation in construction employment growth. Construction employment grew at a rate 50 percent faster each year, on average, in RTW states than in non-RTW states. Compared to Pennsylvania, construction employment in RTW states grew at a rate 233 percent faster.
  • Pennsylvania’s average unemployment rate was 36th in the nation. Average annual unemployment was 0.5 percentage points lower in RTW states than in non-RTW states.
  • Pennsylvania’s rate of increase in per-capita disposable income was slightly lower than that of RTW states. Per-capita disposable income in Pennsylvania was 1.49 percent higher, on average between 1970 and 2000, than that in RTW states. Although nominal per-capita disposable income was 10 percent higher in non-RTW states in 2000, research shows that the cost of living is also higher in these states; so high, in fact, that after-tax purchasing power—real income—is greater in RTW states. Between 1990 and 2000, per-capita personal income growth in Pennsylvania ranked 31st in the nation.
  • Pennsylvania had the 12th highest unit labor costs—the measure of labor compensation relative to labor productivity—in the nation in 2000. Unit labor costs were, on average, 93.2 in RTW states and 98.1 in non-RTW states in 2000, while Pennsylvania’s were 100.8.
  • Pennsylvania ranked 31st in the nation in poverty rate improvement between 1969 and 2000. The poverty rate fell only 16 percent in Pennsylvania during this period, while poverty rates in RTW states fell by 37 percent. Only seven states saw increases in poverty—all non-RTW states.
  • Pennsylvania’s income inequality ranked 26th in the nation in 2000. While the income gap rose in both RTW and non-RTW states between 1977 and 2000, it has risen significantly faster in non-RTW states.

It would not be an exaggeration to characterize Pennsylvania’s relative economic development during the past three decades as abysmal. Pennsylvania finished in the bottom two quintiles in seven out of nine economic statistics.

While the 1990s brought some very modest improvement in Pennsylvania’s relative standing, it was hardly a decade of economic superiority. The state continued its three-decade tradition of below-average growth in output, employment and income. Once a manufacturing powerhouse with a per-capita income well above the national average, the Keystone State failed to finish in the top half of any of the nine economic statistics.

The post-World War II period has brought rapid economic globalization, which has dramatically increased the importance of labor productivity and of policies, such as right-to-work, that affect it. Advances in information technology, greater capital mobility, and lower barriers to entry for business startups are making it increasingly difficult for businesses to pass higher costs on to suppliers and customers. The net effect is increasing pressure for firms to seek geographical regions with lower cost structures and higher rates of labor productivity.

Right-to-work laws increase labor productivity by requiring labor unions to earn the support of each worker, since workers are able to decide for themselves whether or not to pay dues. This greater accountability results in unions that are more responsive to their members and more reasonable in their wage and work rule demands.

There is a clear correlation between economic growth and RTW status. Corroborated by a growing body of research conducted by many independent scholars, the compelling conclusion is that RTW laws increase state economic development and overall prosperity. This study predicts that Pennsylvania will continue to fall behind economically relative to RTW states until it adopts a right-to-work policy.

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The full report, The Impact of Compulsory Unionism on Economic Development, can be accessed here.