Right-to-Work States are Free-Rider States

Frank Manzo IV is the Policy Director of the Illinois Economic Policy Institute (ILEPI). Visit ILEPI at www.illinoisepi.org or follow ILEPI on Twitter @illinoisEPI.

Today, the Illinois Economic Policy Institute and the University of Illinois jointly released Free-Rider States: How Low-Wage Employment in “Right-to-Work” States is Subsidized by the Economic Benefits of Collective Bargaining [PDF]. The report has three main findings:

  1. Right-to-work laws have negative impacts on the public budget;
  2. Workers in collective-bargaining states are subsidizing the low-wage model used by employers in right-to-work states; and
  3. Illinois would have been worse off if it was a right-to-work state in 2013.

A “right-to-work” law reduces worker earnings by 3.2 percent, reduces union membership by 9.6 percentage points, reduces the share of workers covered by a health insurance plan (3.5 percentage points) and by a pension plan (3.0 percentage points), and increases the poverty rate among workers by 0.9 percentage points.

All of this has negative impacts on the public budget. Lower worker earnings decrease income tax contributions: a right-to-work law lowers the after-credit federal income tax liability of workers by 11.1 percent. Lower worker earnings also increase the chances of a worker needing to rely on government assistance programs: workers in collective-bargaining states receive 18.9 percent less in tax relief from the Earned Income Tax Credit and 14.1 percent less in food stamp value than their counterparts in right-to-work states.

Additionally, right-to-work laws have inconclusive impacts on employment. While the report finds that they are associated with a small increase in hours and weeks worked by employees, this is likely because they are forced to work more time to earn anything close to their annual income in a collective-bargaining state. Furthermore, two case-studies using data from the Bureau of Labor Statistics illustrate how right-to-work states have negligible impacts on total employment:

  1. In March 2012, Indiana enacted right-to-work. From March 2012 through July 2014, the Indiana unemployment rate fell from 8.0 percent to 5.9 percent– a 2.1 percentage point drop. At the same time, the unemployment rate of collective-bargaining Illinois fell by 2.0 percentage points. This difference is statistically insignificant.
  2. In January 2013, Michigan enacted right-to-work. From January 2013 through July 2014, the Michigan unemployment rate fell from 8.9 percent to 7.7 percent– a 1.2 percentage point drop. At the same time, the unemployment rate of collective-bargaining Illinois fell by 2.4 percentage points. This difference is significant, and shows how a right-to-work law does not lead to improved employment outcomes.

The result of a big drop in worker earnings but a minimal impact on employment is that workers in high-wage collective-bargaining states (such as Illinois) are subsidizing right-to-work states. While workers in right-to-work states account for just 37.4 percent of all federal income tax revenues, they receive a disproportionately larger share of all non-health, non-retirement government assistance: 41.9 percent. This type of government assistance accounts for 9.3 percent of the average worker’s total income in a right-to-work state compared to just 7.4 percent in a collective-bargaining state. This effective subsidy enriches employers in right-to-work states at the expense of the worker and the taxpayer.

The report finds that Illinois would have been worse off if it was a right-to-work state in 2013. Total labor income would have declined by $2,444 per worker, the official working poverty rate would have been 1.2 percentage points higher, and state income tax revenues would have been $492.3 million lower. Spending on the Earned Income Tax Credit and on food stamps to workers, however, would have been $307.1 million and $159.0 million higher, respectively. These findings align with (and update) a 2013 study on the economic impact of adopting a right-to-work law in Illinois.

Meanwhile, labor unions have opposite effects. Although there are approximately 116,000 fewer union members in Illinois today than there were a decade ago, labor unions continue to play a vital role in the direction of the economy in Illinois. On average, union membership lifts a worker’s wage and salary income by 17.4 percent, improves health insurance coverage by 6.4 percentage points, raises pension coverage by 12.5 percentage points, increases a worker’s federal tax liability by 18.5 percent, reduces reliance on food stamps by 1.1 percentage points, and lowers the probability of a worker being below the official poverty line by 2.9 percentage points. Union membership promotes self-sufficiency and reduces reliance on government assistance.

This Labor Day, Illinois workers, residents, and taxpayers should be reminded that “right-to-work” laws are free-rider laws. At the microeconomic level, they allow workers to free-ride on the efforts of their peers in a collective bargaining unit. At the macroeconomic level, they allow states to free-ride on the high-road model of employment in collective-bargaining states. By reducing union membership, they also reduce a worker’s ability to support a family without reliance on government programs. Right-to-work laws weaken state economies and strain public budgets.

Full Report:

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