The Importance (or Non-Importance?) of Right-to-Work in Location Decisions

The Importance (or Non-Importance?) of Right-to-Work in Location Decisions

Many companies refuse to consider locations that are not in right-to-work states, but should it be a threshold criterion?

The pros and cons of right-to-work (RTW) laws have been debated for decades.  Indiana’s recent conversion to RTW has given fresh life to the debate, especially in the Midwest.  Do RTW laws increase job creation?  Do they lower wages?  Are they good for states?  Will other Midwestern states be forced to follow suit to compete for new jobs and investment?

While there is a body of research dedicated to the effect of RTW on economic prosperity (with differing conclusions that extend beyond the scope of this article), very little commentary exists specifically on the role of RTW in a corporate location decision.

What does appear to be indisputable is that many companies refuse to even consider locations that are not in RTW states.  This is especially true for manufacturing operations. 

Dennis Donovan, a location advisor with Wadley Donovan Gutshaw Consulting, estimates that one third of his industrial clients use RTW as a filter. Most, if not all, location selection consultants agree on this point, citing percentages in the same general range.

The economic development community confirms this dynamic.  Economic developers in Indiana say they are now seeing projects they wouldn’t have seen otherwise.  Economic developers in Oklahoma, the second most recent state to adopt right-to-work (2001), also report being given the opportunity to compete for additional projects after their legislation took effect.

There appears to be little opposition to the claim that non-right-to-work states (sometimes referred to as “forced unionism” states) forego the opportunity to compete for a significant volume of potential projects, and thus also of corporate investment and employment.  Whether this fact alone is sufficient cause for adoption of right-to-work legislation is a decision for elected officials and voters.

Yet while states and communities debate the merits and vices of right-to-work legislation, corporate executives have their own decisions to make.  How important is RTW to a location decision?  Should it be a threshold criterion?  In practice, site search teams often mistakenly use RTW to assess the level of union activity in a location, so a more in-depth look at the true implications of RTW may be useful.

Do right-to-work laws lower the risk of unionization?

When we ask our clients, "Why do you need a right-to-work state?" many respond "We don't want the distraction of union organizing." There exists a disconnect, however, because while unionization rates are sometimes lower on a state-wide basis in right-to-work states, there is no solid research to indicate right-to-work laws directly diminish a union's ability to organize or win an election.

In fact, some argue a union may actually have an organizing advantage in right-to-work states. The logic, however counter-intuitive, is as follows. In a right-to-work state, workers can elect the union but still opt out of membership and paying dues.  In theory, that means employees can benefit from the union’s collective bargaining efforts without a financial commitment on their part, thus potentially making it easier for unions to achieve a “yes” vote or at least an abstention from those individuals.

Are right-to-work laws an indicator of less union activity?

If right-to-work laws don’t directly cause fewer union elections, can they at least be used as a proxy for measuring union activity? In theory,  yes.  As Kenneth Sparks, a Shareholder with Vedder Price P.C. specializing in labor relations, notes, states become RTW only if unions don’t have the political clout to avoid the legislation. 

However, while RTW states tend to have lower unionization rates, the data in Table 1 clearly indicate right-to-work status is not, by itself, a reliable indicator in all cases.  For example, Nevada is a right-to-work state but has the sixth highest unionization rate in the analysis.

Companies wanting to measure unionization rates and election activity should look specifically at that data.  Moreover, union activity can vary tremendously within a state, regardless of whether it's RTW. Sparks agrees that generalizing about future unionization based principally or solely on state RTW status is unlikely to prove meaningful and that those seeking to make predictions would have to take a closer look at data on specific communities, or even at the zip code-level.

 
If a facility is unionized, are there advantages to being in a right-to-work state?

Labor laws require equal treatment of employees whether they are members of the union or not.  A unionized facility in a right-to-work state must pay all of its workers – union members and non-members alike -- in accordance with the terms negotiated with the union. The same is true for the benefits and work rules covered by collective bargaining.  In other words, there is effectively no operational or financial advantage to operating a unionized facility in a right-to-work state versus a forced unionism state.

Is RTW a predictor of lower labor costs?

Table 2 illustrates that, while there is a general tendency for “forced unionism” states to have higher labor rates, there is not a perfect correlation.  In many cases higher labor costs can be explained by other factors, such as higher overall cost of living.  As with union activity measures, if the wage rates are an important factor to the site search, the more accurate approach is to look specifically at wage data, not to use RTW as a proxy.

Is RTW a predictor of a business-friendly regulatory environment?

Objectively assessing regulatory environments in a consistent manner across the country is no easy challenge and is subject to a great deal of interpretation.  To be sure, there appears to be a correlation between perceptions of overall regulatory climate and RTW, as RTW states tend to score better in these rankings. However, if we look at Chiefexecutive.net’s ranking of states for “Taxation and Regulations” or CNBC’s ranking of the “Business Friendliest” states, we find three of the 10 most favored states in each poll are “forced unionism” states, while the other six are RTW states.

Additionally, union work rules are an important consideration when assessing the regulatory environment and should not be overlooked.  If a union is present in the market, corporate leaders will want to understand the nuances of those rules, how flexible they are, and the relationship between the union(s) and management. Furthermore, many unions have demonstrated their readiness to engage management in special agreements to modify work rules as needed to meet competitive benchmarks to preserve jobs and increase productivity.

Should RTW be considered in a site selection project at all?

For all its shortcomings as a measure of union activity or overall business friendliness, RTW is as good a measure as we have for assessing a state’s receptivity towards unionization.  For this reason alone, RTW cannot be discounted and will inevitably be in the mix of factors being considered. 

However, there remains the risk of unintentionally putting too much emphasis on RTW by using it as a filter.  When companies refuse to consider locations in non-RTW states, they elevate RTW to the status of being a deal-breaker, despite a location’s other potential advantages, e.g. an ideal site, low unionization representation, abundant and highly-skilled labor, competitive wages, and first-rate incentives.  Such a black-and-white approach can result in a sub-optimal location decision. Whereas, a more nuanced method, employing RTW as a scored criterion rather than a filter, could better serve the search team’s objectives.  In this way, RTW states receive “bonus points” over their forced unionism competitors, but non-RTW states are not eliminated out-of-hand. 

Looking Ahead

With the adoption of Indiana’s new laws, companies now have a Midwestern right-to-work option.  That’s a powerful pitch for Indiana, and there is no question that business leaders in the Midwest have taken notice.

Other states such as Michigan and Minnesota – both of which have seen RTW legislation introduced in their current sessions – may look to follow.  New Hampshire and others outside of the Midwest are also actively discussing the issue.

While companies may be putting too much emphasis on RTW in their location decisions, executives will no doubt continue to have a strong preference for RTW states and use RTW as a factor in site searches for years to come.

Tracey Hyatt Bosman is managing director of Biggins Lacy Shapiro & Co., a location economics consultancy. Based in Chicago, Bosman develops and executes incentives and location selection strategies for BLS’ corporate and institutional clients.  She has 20 years of professional experience across a wide range of sectors, including data centers, manufacturing, headquarters, back office and contact center operations, and logistics

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