The effect of labor unions on municipal bonds

Abstract

We present three findings on the effects of local unions on the municipal bond market. First, public- and private-sector unions play differential roles in capital markets: municipal bond issuers in areas with higher public-sector union density incur higher issuance costs and lower credit ratings. Private-sector unions only affect municipal bond issuance costs if bonds are backed by tax revenues, if bonds are not insured, or if bond issuers are exposed to strong private-sector union power. Second, by employing a regression discontinuity design using local variation in the vote share of union elections, we find that closely won union elections lead to significantly higher yields on the secondary market. Third, the issuance costs of municipal bonds are further affected by state-level legislation that restricts the collective bargaining power and impedes the possibility of a strike. Overall, we conclude that union exposure is viewed as a risk factor by municipal bond market participants.