MASS LAYOFFS, MANUFACTURING AND STATE BUSINESS CLIMATES: DOES STATE POLICY MATTER?

Abstract

I. INTRODUCTION State economic development officials tout their rankings on the various best states lists as evidence of possessing a pro-business climate to employers. Further, legislatures of these states enact laws to reinforce this probusiness image. These pieces of legislation include flexible labor market, regulatory, and taxation policies. These policies are designed to attract new jobs to a state, and their effectiveness along these lines has been the focus on considerable research. However, these policies may also affect the rate of job loss out of a state. This study is the first to explore this possibility empirically. The same policies designed to attract jobs to a state may also serve to mitigate the number of jobs lost within a state. This reduction might be due to the retention of a state's existing employment base or through the avoidance of neighboring (rival) states poaching its employers. Following from arguments laid out in Wasylenko and McGuire (1985) and Greenhut (1956), a firm's location decision is determined by where it can maximize its revenue function, minimize its cost function, or both. While state policies might not directly address a firm's revenue maximization, they may help to minimize its cost function. Incentives, regulatory, and tax policies could serve to decrease the cost of hiring within a state and allow for a lower cost structure, ceteris paribus. These policies might also help to minimize the number of jobs lost as firms respond to economic downturns. By contrast, states adopting pieces of legislation which increase the cost of hiring might not just see the diminished employment growth prospects found in the literature, but also might encourage firm shutdowns and layoffs as responses to these state policies. However, state-level policies designed to promote a more favorable business climate may simply lead to a relocation of jobs away from rival states. This creates incentives for the rival states to match, or even better, the benefits extended to their firms. These policies may ultimately result in a redistribution of existing jobs among various states rather than an increase in total employment. Another concern is the stability of any jobs created by these policies. If employers are truly footloose in that they are easily attracted to states with more favorable business environments, then they could just as easily be subsequently poached by competing policy changes in rival states. Furthermore, relaxed business regulations and decreased unemployment insurance (UI) may themselves lead to less stable employment (Autor 2003; Autor, Kugler, and Kerr 2007; Surfield 2014). For example, consider so-called right-to-work (RTW) policies. Such policies allow workers who are employed at unionized establishments to be covered by the conditions established through collective bargaining, while opting not to pay union dues. These policies reduce the attractiveness of joining a union and, as a result, weaken its ability to engage in collective bargaining. Accordingly, jobs gained through RTW policies might also be less likely to come with the protections usually associated with unionization. The size of a state's government expenditures may also proxy for a state's effective regulatory environment, and might play a role in determining the extent of job losses. Although likely designed to increase the security and stability of jobs held by workers, states with a higher number of labor market regulations might actually see greater job losses. Increases in government expenditures may allow states to both enact and effectively enforce a larger number of business and employment regulations. Such expenditures could diminish a firm's profitability and encourage it to seek a more favorable state in which to do business. Given these concerns, the focus of this article is on the evaluation of the relationship between probusiness policies and job losses. …