Right to Work Helps Economic Recovery
A number of current and former governors will be running for president in 2016, and each will tout his state’s accomplishments and claim credit for the positives, deserved or not. Politics aside, cross-state comparisons provide a real-world experiment that helps show which economic policies work and which don’t.
There are a number of ways to categorize a state’s business climate. I focused on labor policies and average tax rates. On average, I found that employment growth is twice as high in states that have a right-to-work law and minimum wages that are below average across states, and the difference is “statistically significantâ€â€”meaning that it is unlikely to have occurred by chance. GDP grows about 11/2 times faster over this period in those states.
A state’s labor policies were gauged by its minimum wage relative to other states (or the federal minimum when binding) and whether it had a right-to-work law—which generally prohibits requiring employees to pay dues to a union. Throughout most of the period from 2000 to March 2015, there were 22 right-to-work states. The proportion of a state’s GDP that is taken through taxes varies across states from a high of 12% in New York to a low of 5% in Alaska. The relevant data are available from the Labor Department, the Commerce Department’s Census Bureau and from the Tax Foundation, a nonpartisan research group.
Nevada, Utah, Texas, Arizona and North Dakota enjoyed the highest growth. All have market-oriented labor policies and all but one (Utah) have tax rates that are below average. The poorest performers: Michigan, West Virginia, Mississippi, Illinois and Ohio. Only Mississippi has market-oriented labor policies and four out of five (again excepting Mississippi) have tax rates that are above average.
Indiana, Michigan and Wisconsin changed their right-to-work status during the past three years, although Wisconsin did so too recently to have much of an effect. The before-after comparison is striking. Before the recession, without right-to-work laws, these states averaged slightly negative employment growth that was well below the national average. After right-to-work, growth in these states was 11/2 times the national average.
What do cross-state comparisons tell us about national economies? First, it is clear that a state’s business climate can induce businesses to relocate to where there are better profit opportunities, and employment growth follows as workers move to states where there are vacancies and away from those with high unemployment. New capital and business startups also prefer states that have a business-friendly environment.
A severe recession is no excuse for a weak national recovery. States hit the hardest recovered the fastest. This in turn suggests that, with the right policies, high growth should have followed the deep recession of 2007-09.
Mr. Lazear, former chairman of the Council of Economic Advisers (2006-09), is a professor at Stanford University’s Graduate School of Business and a Hoover Institution fellow.