Right-To-Work and the Business Location Decision
Although wages tend to be lower in right-to-work states, it's not a magic bullet; these states still need to be competitive on all the other major site selection factors.
Steve Stackhouse-Kaelble (Summer 2012)

It was the topic of fierce debate this past winter in Indiana - so hot that even the NFL Players Association weighed in as the Super Bowl in Indianapolis approached. Protests, speeches, and letters to the editor all took up the topic of right-to-work. Are right-to-work laws fair or unfair to workers? Do they enhance business' profitability or do they make little difference? Do the laws encourage greater manufacturing growth? Do they have an impact on location considerations?

A short answer to that last question: yes and no. If a company is choosing between a site in a right-to-work state and another in a state without such laws, that factor may influence the decision or be deemed less important than other factors. On the other hand, some companies won't even consider a location unless it's in a right-to-work state.

Background
"Right-to-work" refers to a law that prohibits unions and companies from negotiating contracts requiring all workers to either join the union or pay a fee for union-provided services. These laws are so named because they establish a "right" for a worker to land or keep a job without regard to union status - even if the job is at a workplace covered by a union contract. There are now 23 states with right-to-work laws, including Indiana, which joined the club this year. Most of those states are in the South and the West.

Unions, of course, oppose such laws because they tend to weaken union membership. If a workplace is unionized, the contract applies to all workers and the union must provide representation and services to all workers. In a right-to-work state, any worker choosing not to join the union or pay for the services still gets the benefits. Unions often refer to those workers as "free riders," and because wages tend to be lower in right-to-work states, unions famously refer to the concept as "right-to-work for less."

The business community tends to support right-to-work because it makes unionization less likely. That, in turn, often means lower labor costs, both because of potentially lower wage rates and greater flexibility in terms of work rules, job descriptions, and the ability to move workers around in ways that unions might oppose. The benefits to business are most pronounced in the manufacturing sector.

Asking for Right-to-Work
"Almost all of our manufacturing clients have expressed an interest in operating in a nonunion manner, and more than a quarter have expressed an initial interest in limiting their search to only right-to-work states," says Mark M. Sweeney, senior principal at McCallum Sweeney Consulting in Greenville, S. C. For those whose job it is to promote sites in non-right-to-work states, "The challenge is that you don't even know how many projects didn't even contact you."

Setting such a limit - essentially crossing 27 states off the list right at the start of a site search - is not generally a good idea, Sweeney adds. Indeed, plenty of companies are able to avoid unionization in non-right-to-work states and operate quite profitably. He advises that companies avoid making right-to-work status a "pass-fail" measure, and instead put it on the list of weighted criteria to consider. "It becomes part of the decision," he says.

Still, not all companies follow that kind of advice. "There are a lot of companies that won't make an investment in a state that isn't right-to-work," says Barry Broome, president and CEO of the Greater Phoenix Economic Council. He should know - he works now in a right-to-work state, but has spent much of his economic development career in the non-right-to-work states of Ohio and Michigan.

Bill Cronin - who practiced economic development in right-to-work states such as South Carolina and Florida before recently moving to another state to become vice president for economic development at Invest Atlanta - has seen the same thing on many occasions. "Sometimes companies will come out and tell you that they're looking specifically for a right-to-work location," he says.

It's not just heavy industry and manufacturing that are smiling on right-to-work locations, Broome adds. There's a lot more interest among tech companies as well, he says, from computer manufacturers to software and Internet firms. His area was on a consideration list a while back when a computer company was considering an expansion. The company ended up deciding against pursuing the expansion, but while the potential deal was on the table, "they did an absolute deep dive into state labor laws," he recalls.

It's not always easy to find companies willing to state their preference publicly, as proponents of the Indiana law have found. Before the new law passed, they pointed to such examples as the closing of the Colgate-Palmolive plant in Clarksville, Ind., which pulled up stakes and moved to a right-to-work state. But soon after the bill passed, proponents claimed one recent economic development victory as a vote in favor of right-to-work, only to have the business owner in question publicly deny that right-to-work had anything to do with his decision.

Business-Friendly Environments
Right-to-work typically plays out as a business vs. union story, but Broome says that's missing the bigger picture. "People automatically see it as an anti-union stance. It's really just a pro-entrepreneur stance - you're a state where entrepreneurs are prized and management rights are parallel to other rights," he says.

"It's not that anyone is anti-union," agrees Cronin. "They're just anti-cost. Where can a company generate the most profits?"

"It's more of an affirming statement," Broome continues. "It signals an attitude toward regulation of business. If you're right-to-work, you tend to also have an anti-regulatory attitude in general. It's a symbol of how a company is going to be treated."

Broome cites his own state, Arizona, as an example. "We're a right-to-work state, and in the last two years the Arizona legislature has also cut corporate income taxes, cut property taxes, and has moved the elective sales factor to 100 percent. You can see the pattern."

Researcher Thomas J. Holmes has documented growing manufacturing employment in right-to-work areas compared with neighboring jurisdictions that are not. But in a journal article back in 2000, he also cited the pattern Broome describes. "Right-to-work states historically have pursued a number of other smokestack-chasing policies, such as low taxes, aggressive subsidies, and even, in some cases, lax environmental regulations. Thus, my results do not say that it is right-to-work laws that matter, but rather that the `pro-business package' offered by right-to-work states seems to matter."

"It is notoriously difficult to separate the impact of a single government policy from myriad competing economic factors, statutes, and regulations that help shape a state's economy," agree researchers Gordon Lafer and Sylvia Allegretto, writing in a 2011 briefing paper from the Economic Policy Institute.

Lafer and Allegretto take issue with the conclusion that right-to-work laws clearly lead to an increase in manufacturing employment. "The fact that states that share a common attribute have stronger average growth rates cannot be taken as evidence that the attribute in question is the cause of that growth," they write. In fact, they determined that the statistics showing overall growth in right-to-work states are skewed by particularly high growth in just a handful of those states, and that many right-to-work states actually have growth rates lagging their non-right-to-work neighbors.

On the other hand, it's hard to argue with the cost differences. According to U.S. Department of Labor statistics from 2010, the average wage for all occupations in right-to-work states was nearly $4 an hour lower than in the remaining states. Though many factors might play into those regional cost variations, there's little debate that operating in nonunion states tends to translate into lower costs, Sweeney observes. Not only are wages often lower, but also companies may be able to get by with fewer workers if they're not restricted by union rules. In auto manufacturing, for example, operating nonunion reduces the labor cost per car, often substantially. "All of that adds to a company's competitiveness," Sweeney points out.

Even so, it's quite possible to achieve such benefits and thrive in a non-right-to-work state, Sweeney adds. "One of those places that we used to use as an example was Indiana," he points out. For example, long before the state joined the right-to-work roster, it competed for and landed huge auto assembly plants that today make Toyotas, Hondas, and Subarus. In fact, even as a non-right-to-work state, Indiana boasted one of the nation's most manufacturing-intensive economies.

Conversely, a location in a right-to-work state is not a guarantee against unionization. It makes it less likely, Sweeney says, and reduces the avoidance cost, but "the number one thing is how you manage your work force. You still have to manage your people well."

The bottom line is that right-to-work isn't a magic bullet, and right-to-work states still need to be competitive on all of the other factors that go into a site location decision. But, says Sweeney, the fact remains that right-to-work states still tend to get more lookers.

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