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Right-to-Work/Low-Union-Profile States: Making or Breaking a Deal

Low-union and right-to-work (RTW) status may not rank at the top of the list when it comes to site selection criteria, but those factors certainly carry considerable weight in the overall decision-making process for many manufacturers. Choosing a state with a low-union profile or locating in a RTW state only ranked 10th and 12th respectively among a list of 26 different site selection factors, according to Area Development’s 26th Annual Corporate Survey. Yet eight out of 10 respondents said that locating in a state with a low-union profile was either an important or very important factor in site selection, while more than three quarters rated locating in a RTW state as just as important.

November 2012
Low-union and RTW status are important site selection factors for manufacturing companies in particular because the labor-management climate varies substantially from location to location across the United States and across North America, notes Mark M. Sweeney, a senior principal at McCallum Sweeney Consulting in Greenville, S.C. In fact, nearly 100 percent of McCallum Sweeney’s manufacturing clients express a preference for operating a nonunion facility. “The primary reason given for this is work force flexibility, which allows companies to compete more effectively and respond in a more timely manner to opportunities in their highly competitive global markets,” says Sweeney.

Another key reason companies prefer RTW locations is concern about higher labor costs. The combination of somewhat higher wages and benefits plus the higher number of employees needed to staff a union operation typically adds more to the bottom line. According to a 2011 research paper published by the Economic Policy Institute in Washington, D.C., wages in RTW states are 3.2 percent lower than those in non-RTW states. In addition, the rate of employer-sponsored pensions is 4.8 percent lower in RTW states.

A predominant number of manufacturers prefer to locate in right-to-work states, agrees Mark Williams, president of Strategic Development Group Inc., a consulting firm based in Columbia, S.C. Ultimately, the reason for that preference is bottom line savings. Even if companies pay more for labor in those RTW states, if the labor is able to be more efficient, then there is greater profitability. Many businesses believe that being able to operate in a nonunion environment has a positive impact on their efficiency, adds Williams. “Many companies are even willing to pay more to employees in order to be able to work in a nonunion environment and, ultimately, have the flexibility to operate more profitably,” he says.

Seeking a Favorable Labor Climate
For some manufacturers, locating in states with low-union profiles is not only important, but a deal breaker. “Whether it is correct or not, I think companies often see right-to-work as a better business climate generally,” says Williams. In some respects, RTW may be a barometer for any number of things other than threat of unionization, such as a state’s willingness to expedite the permitting process, he adds.

Sweeney estimates that three-fourths of the clients at McCallum Sweeney Consulting express an interest in considering only those locations in RTW states. “We explore the issue with our clients in our early alignment sessions and generally discourage the use of RTW as a must or pass-fail decision criterion,” says Sweeney. “It is important to point out that there are good location opportunities in non-RTW states where a firm is likely to be able to operate in a nonunion manner if it so chooses. However, there are real differences in the union risk, the cost of union avoidance, and the impact of a union election in RTW and non-RTW states. So, we understand why many clients have a preference for RTW states,” adds Sweeney.

McCallum Sweeney recommends that its clients consider RTW as one of several important scoring criteria when evaluating potential locations. That being said, approximately 25 to 50 percent of the firm’s clients still prefer to make RTW a “pass-fail” criterion. In addition, those decisions are generally made prior to any communication with development agencies. “So states are unaware of having been evaluated and cut from consideration because of RTW,” adds Sweeney.

Game Changer for Indiana
Indiana became the nation’s 23rd RTW state when it passed new legislation earlier this spring. Although there is considerable debate on what, if any, economic benefit that state may gain by securing RTW status, it appears to already be paying off. “There is no doubt that Indiana is being considered for projects now that it would not have been considered for previously,” says Williams.

As of October 2 of this year, 83 companies have communicated to the Indiana Economic Development Corporation (IEDC) that Indiana’s enactment of RTW legislation will factor into their decision-making process when locating current projects. In fact, 66 of these projects have progressed to the pipeline stage, and potentially could account for more than 8,200 projected new jobs and more than $1.8 billion in investment in Indiana. In addition, 26 of these companies have committed to projects for a total of 3,100 projected new jobs and more than $414 million in investment.

Passing RTW legislation is not a decision that any state enters into lightly. Particularly in states where unions have a strong presence, it can be a hard-fought, contentious battle. For years, IEDC had made a point to ask companies and site selection consultants how the state could be more competitive. “The issue of right to work was consistently raised as the single largest policy change that could improve Indiana’s business climate,” notes IEDC spokesperson Katelyn Hancock.

Although Indiana is the first to pass new RTW legislation in several years, the move raises the question of whether more states, particularly some of its neighbors, will follow suit. Michigan, Pennsylvania, New Hampshire, and Wisconsin are examples of states that have all raised the issue of RTW legislation in recent years. Missouri is one state that held hearings related to RTW earlier in 2012.

“Unions are certainly more entrenched in some areas than others, and they will be effective in communicating their positions and blocking efforts to change to RTW in some states,” notes Sweeney. “I expect there will continue to be efforts in some states by some constituencies to pursue RTW, but I also suspect if any more states change, it will not be a big number changing all at once.”

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