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Are Right-to-Work Laws Actually Good for Corporations?

Indiana has been making national headlines these past few weeks, and not only because of Super Bowl XLVI. Recently, lawmakers there passed legislation that will make Indiana the first state in

Indiana has been making national headlines these past few weeks, and not only because of Super Bowl XLVI. Recently, lawmakers there passed legislation that will make Indiana the first state in over 10 years to enact right-to-work laws.

Right-to-work legislation is nothing new – Indiana joins 22 other states in prohibiting labor agreements at private businesses that would mandate workers to pay union representation fees even if they do not wish to become union members. What is noteworthy, however, is that the Hoosier State is the first of the manufacturing strongholds in the Great Lakes region to go right-to-work, representing a big blow to union interests.

Right-to-work statutes came into effect in 1947 with the passage of the Taft-Hartley Act by Congress, which allowed states the ability to pass laws that outlawed closed union shops. Previously, under the 1935 National Labor Relations Act, unions could enter into closed shop contacts in which employees at these workplaces had to become union members to get hired.

The term “right-to-work” is of course a peculiar one. As Dan Graff, a labor studies professor at the University of Notre Dame remarked to Fortune, it “seems to be a declaration that there is a right to have a job.”

“This country has a different definition of this phrase than everyone else in the world,” he continued. “The phrase is deliberately meant to confuse. A Texas newspaper columnist started calling it that decades ago, and it was picked up to mean working without having to be a member of a union.”

Proponents of right-to-work laws argue that workers should have the right to decide whether or not to join unions, instead of having to be forced to pay fees even if they do not wish to. In campaigning for the law to be passed, the Indiana Chamber of Commerce asserted that the law would help create jobs, because companies searching for “a good location won’t even consider non-right-to-work states for their business growth and expansion plans.”

In contrast, opponents say that such laws not only result in lowered wages and poor quality jobs, they also create a free-rider problem, since non-union employees can still benefit from collective bargaining even though they do not pay union dues. According to the AFL-CIO, workers in right-to-work states earn, on average, $5,333 less than workers in other states ($35,500 versus $30,167).

In explaining his support for a right-to-work law, Indiana governor Mitch Daniels said that his state had been missing out on many projects as companies chose to set up shop in states with such laws. Specifically, he cited the example of German auto company, Volkswagen (VLKAY), which opened its first American factory since the early 1990s in Chattanooga, Tennessee last year.

“I couldn’t get Volkswagen to return our call,” Daniels told Forbes. Even though Indiana, home to assembly plants of other auto manufacturers like Honda (HMC), which opened one in Greensburg in 2008, and Toyota (TM), which has plants in Princeton and Lafayette, was “clearly the fastest growing automotive state, we couldn’t even get Volkswagen to talk to us,” he added.

Making Daniel’s argument compelling is the fact that many other auto companies have also built plants in other right-to-work states. In Texas, GM (GM) and Toyota have assembly plants. In Alabama, Mercedes-Benz, Honda, Hyundai (HYMTF), Toyota and Navistar International (NAV) all have factories as well.

Last summer, defense and aerospace giant Boeing (BA) got into a dispute with the National Labor Relations Board, or NLRB, over its decision to set up a new $750 million plant in right-to-work state South Carolina to build its 787 Dreamliner planes. Boeing’s main factory in Seattle, Washington was already producing the new passenger jets, but the company opted to set up its second 787 production line in North Charleston after several union strikes in Washington.

The NLRB sued Boeing in April last year, saying that the company’s actions were a form of illegal retaliation against unionized workers. The board dropped its case in December after the International Association of Machinists and Aerospace Workers, the union that represents the 31,000 Boeing workers in Washington, urged it to do so.

Whether or not right-to-work laws harm or hurt states is often a matter of interpretation. While it is true, according to the Labor Department’s Bureau of Labor Statistics, that over the past decade, right-to-work states have experienced a net gain in jobs while others have seen a net loss, that statistic does not mean much.

Former Labor Department economist Jared Berstein told the Washington Post that “other variables affect the job-growth equation, including natural resources, infrastructure, workforce quality, location, standard of living, schools, tax rates and other policy decisions not related to unionization.”

“I think it’s important to get away from cherry-picking statistics, because there are so many moving parts,” said Bernstein.

Ultimately, the passage of the Indiana right-to-work law will have only a small impact, since only 6.9% of private sector workers nationally are unionized. Indeed, the popularity of unions has waned significantly since its heydays just after World War II, when over a third of the American workforce was unionized. Today, a mere 11.8% of workers are union members.

However, in political terms, this continued weakening of unions represents a worrying trend for Democrats, who have traditionally relied on campaign donations for Big Labor. In the 2010 election cycle, unions doled out $96.7 million, out of which 94% went to Democrats.

Even with weakened strength, labor organizations like the AFL-CIO do not plan to let the Indiana law pass without a fight, with the Post-Tribune reporting that thousands of labor protestors swarmed the Indiana Statehouse lawn to decry right-to-work legislation.

“They think they won a war because you fought this little skirmish like it was a war,” said Indiana AFL-CIO President Nancy Guyott. “But you know the truth, this was just a skirmish in a long war that’s gone on for a long time. I know the Indiana labor movement and our opponents haven’t seen nothing yet.”

by Sterling Wong

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