Right-to-Work Laws: New Evidence from the Stock Market

Abstract

1. Introduction Business organizations, the National Right-to-Work Committee, and organized labor periodically devote enormous resources to battles over passage or repeal of individual state rightto-work (RTW) laws. All RTW laws outlaw union shop agreements--clauses in collective bargaining agreements that require employees to join the union that represents them-and about half also outlaw agency shop agreements-clauses in collective bargaining agreements that require nonmembers to pay a fee to the union to cover the cost of representation. Supporters of RTW argue that employees should not be required to pay dues to a labor organization that they do not support. Opponents argue that because union contracts and grievance arbitration systems cover all employees, members and nonmembers, RTW laws encourage free-riding by individuals who want to gain the benefits of unionization without bearing the costs, and that this weakens labor unions. Are RTW laws largely symbolic? Or do they reduce union membership, the probability of union growth, and union bargaining power? Informed opinion is still sharply divided. One view is that RTW laws reduce the probability of union organizing (at least in the years immediately following their passage) and that this, along with lower levels of membership in previously organized units, reduces the level of unionization in a state (e.g., Hirsch 1980; Carroll 1983; Garofalo and Malhotra 1992; Davis and Huston 1993, 1995). Ellwood and Fine (1987) present evidence that the effect on new organizing is most severe-with new organizing diminished between 32 and 38% in the 10 years after passage of a RTW law.1 Zax and Ichniowski (1991; see also Ichniowski and Zax 1991) demonstrate that the dampening of new organizing extends to the public sector when it operates under RTW laws, even when those laws are favorable to unions in other respects. Others, however, argue that RTW legislation is largely symbolic: It reflects the prevailing anti-union opinion climate of a particular state, but has little independent impact on union organizing or membership (Moore and Newman 1985, 1975; Wessels 1981; Lumsden and Peterson 1975; Sobel 1995 presents evidence on the true number of free-riders consistent with the taste hypothesis). RTW legislation is passed, in this perspective, in states in which public opinion is anti-union and the labor movement is politically weak. In these states, workers are less attracted to unions, and it is this public opinion climate, rather than the law itself, that hurts union growth.2 We present a new type of evidence on this issue from two states in which public opinion had turned sharply against unions (or at least in favor of RTW) in the period before the passage of a RTW law. We reason that, if passage of the RTW law itself actually lowers the probability of unionization or reduces the bargaining power of unions operating within a particular state, beyond the effect of the prior shift in attitudes, then anticipated future profits of firms operating in that state will rise in response to passage of that law (because unions are associated with lower firm profits).3 Hence, equity values of those firms will increase. We use event study methodology to discover whether or not this actually happened in Louisiana when it passed a RTW law in 1976 and in Idaho when it passed a RTW law in 1985-1986.4 Louisiana and Idaho are both well-suited to research based on the event study technique. Legislative action in both states took place in the period in which daily stock price data are available from all three sources of stock price data: New York, American, and NASDAQ.5 Daily (as opposed to monthly) stock price data are much more likely to reveal statistically significant changes in shareholder equity (Brown and Warner 1985). Because we use daily rather than monthly data, a finding of no statistically significant change in shareholder equity would be valid evidence that RTW laws are symbolic rather than substantive. …