The Indiana House of Representative has just approved Right to Work legislation that would protect employees from mandatory union fees. From the Washington Post:
INDIANAPOLIS — Indiana’s Republican-controlled House of Representatives has cleared the way for Indiana to become the first right-to-work state in the traditionally union-heavy Rust Belt.The House voted 54-44 Wednesday to make Indiana the nation’s 23rd right-to-work state after Democrats ended a periodic boycott which had stalled the measure for weeks. The right-to-work proposal would ban unions from collecting mandatory representation fees from workers.
Indiana would mark the first win in 10 years for national right-to-work advocates who have pushed unsuccessfully for the measure in other states following a Republican sweep of statehouses in 2010.
The measure is expected to face little opposition in the Republican-controlled Indiana Senate and could reach Republican Gov. Mitch Daniels’ desk shortly before the Feb. 5 Super Bowl in Indianapolis.
To the extent that unionization increases labor costs, it makes a given location a less attractive place to invest new capital resources. Suppose a firm is contemplating locating its operation in southern Indiana, where there is no RTW law, or a couple hundred miles away in Tennessee, a state possessing such legislation. Suppose general labor market conditions are similar in both areas, with wages for most unskilled workers being about $10 an hour. Suppose, however, the firm considers the possibility of unionization to be high in Indiana, but low in Tennessee, and that unionization will add at least 10 percent to labor costs. Since labor costs are perhaps 50 percent – or even more – of total costs, this means the firm considers it a real possibility that total per unit costs of producing output could be at least five percent higher in Indiana, encouraging the firm to locate in Tennessee rather than Indiana.
Thus, other things equal, capital will tend to migrate away from, rather than into, non-RTW states where the perceived costs of unionization are relatively high. Over time, this works to lower the ratio of capital to labor in non-RTW states relative to ones with RTW laws. Since labor productivity is closely tied to the capital resources (machines and tools) that workers have available, labor productivity will tend to grow more in the RTW states, stimulating economic growth, including growth in wages and employment.