Abstract
This paper evaluates the effect of US state corporate income taxes on union wage premiums. American workers who belong to unions are paid more than their non-union counterparts, and this difference is greater in low-tax locations, possibly reflecting that unions and employers share tax savings associated with low tax rates. In 2000, the difference between average union and non-union hourly wages was $1.88 greater in states with corporate tax rates below four percent than in states with tax rates of nine percent and above. Controlling for observable worker characteristics, a one percent lower state tax rate was associated with a 0.17 percent higher union wage premium, suggesting that workers in a fully unionized firm capture roughly 31 percent of the benefits of low tax rates. By 2019, state tax rates appear to have little effect on the union wage premium, reflecting changes in union power and the opportunity cost of capital.
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Clausing (2013) calls attention to contrary evidence, and notes that the implied effects of corporate taxes may be implausibly large.
By controlling for value added per worker, Arulampalam, Devereux and Maffini (2012), and in the 2007 version of the same study, attempt to measure the direct effect of corporate taxes on wages. This is similar in spirit, albeit different in details, to estimating the effect of corporate taxes on union wage premiums.
Riedel (2006) offers a rather different answer based on an analysis of the determinants of wages in multinational firms located in 15 European countries from 1996 to 2005. She reports that 10 percent higher tax rates are associated with 4 percent higher local wages and 1 percent lower wages paid by the same firms in other countries, attributing the difference to the incentive to incur deductible labor expenses in places where tax rates are high. Krautheim and Schmidt-Eisenlohr (2011) note that the nature of rent-sharing within multinational firms may even affect national tax rates, as governments could face incentives to reduce tax rates in order to encourage firms to locate additional income in their countries and thereby increase the resources to be shared with local labor.
Mieszkowski and Zodrow also find that state corporate taxes lower the return to capital in both taxing and non-taxing states. Consumers in the taxing state face higher prices as a result of corporate taxes but this is offset by the lower prices faced in non-taxing states.
Card’s findings are similar to those reported by Chamberlain (1994), and are consistent with the determinants of male wages reported in DiNardo, Fortin and Lemieux (1996) and Card (2001). Card, Lemieux and Riddell (2004) likewise report that the effect of unionization on wages falls at higher skill levels, and that the average magnitude of union wage effects declined significantly between the early 1980s and 2001.
Svejnar (1986), Currie and McConnell (1992) and Abowd and Lemieux (1993) offer evidence that union wages are higher in more profitable firms, and Christofides and Oswald (1992) and Budd and Slaughter (2004) similarly find that union wages are higher in more profitable industries. Interindustry wage studies (e.g., Blanchflower, Oswald and Sanfey, 1996; Dickens and Katz, 1987; Katz and Summers, 1989; Krueger and Summers, 1987, 1988) consistently report that wages are higher in more profitable industries, and firm-level evidence (e.g., Hildreth and Oswald, 1997, and Budd et al., 2005) indicates that wages are higher in more profitable firms.
In empirical specifications in which Lee and Mas use a regression discontinuity method similar to that employed by DiNardo and Lee, they find little apparent effect of unionization on stock prices. They reconcile the apparent difference between the event study and regression discontinuity findings by noting that the effect of unionization on stock returns depends on vote margins, reflecting various considerations, including how aggressively firms and unions court voters in certification elections.
The Current Population Survey is a monthly household survey that started in 1968. Households are interviewed in four consecutive months, ignored for eight months and then interviewed again the next four months. Each household is asked about union status and weekly earnings during their fourth and eighth interview. Therefore, we restrict our sample to these interviews which are termed the “Outgoing Rotation Group”. The National Bureau of Economic Research (2000) provides extracts of the CPS data that include only individuals in these outgoing rotation groups.
There are a total of 23 occupations in the data, but the private sector restriction excludes those who work for the armed forces.
There are 50 industries in the dataset in 2000, but those who work in agriculture, private households, public administration and armed services are excluded from the sample.
The highest marginal corporate tax rate is available from several sources including the Tax Foundation (2019) and the World Tax Database from the Office of Tax Policy Research (2022). In 2000, five states allowed complete or partial deductions for federal corporate taxes; the state tax rate is correspondingly adjusted following the formula provided in Chirinko and Wilson (2008).
Appendix Table 7 of Felix and Hines (2009) presents variable means and medians distinguished by state tax rates and industry labor-to-capital ratios. It is noteworthy that some of the union cells depicted in Fig. 2 have small numbers of observations, so there may be considerable sampling variability in comparisons among these cells.
After reviewing the existing literature, Moore (1998) concludes that right-to-work laws have the effect of reducing unions’ organizing efforts and successes. It follows that right-to-work laws have led to a decline in unionization over the long-run. The evidence on the effects of right-to-work laws on wages is more mixed. According to Moore (1998), most empirical evidence suggests that right-to-work laws have no impact on wages. There are exceptions: Carroll (1983) and Garofalo and Malhotra (1992) report large negative effects of right-to-work laws on average wages of all workers. Farber (1984) finds that union wage premiums are slightly larger in states with right-to-work laws, interpreting this difference to reflect higher nonpecuniary costs incurred by workers who join unions in states with right-to-work laws. As a result, these workers may earn higher union wage premiums but lower rents than their unionized counterparts in states without right-to-work laws.
The R-squared of 0.49 indicates that despite controls for industry and occupation, and the inclusion of many variables capturing worker characteristics, there remains considerable unexplained wage variation. This variation presumably reflects the unobserved variety of worker attributes and employment circumstances.
The (statistically insignificant) 0.7502 coefficient on the corporate tax rate suggests that non-union wages are higher in states with high corporate tax rates. This is consistent with the pattern of medians depicted in Fig. 1, and may reflect political differences in which higher-income states choose to impose higher corporate tax rates.
The data on active US corporations filing Form 1120 are available at Internal Revenue Service (2022). The reported figures do not include wages and salaries of people working in the nonprofit and government sectors, those who work for privately held companies, partnerships, S corporations, LLCs and other business organizations that are not subject to corporate taxes.
Exceptions include Chirinko and Wilson (2008, 2017), who analyze state investment tax credits in addition to statutory rates, and Suárez Serrato and Zidar (2018), who consider a range of state tax provisions affecting corporate tax obligations, finding that differences in statutory rates are not generally offset by compensating adjustments in other tax provisions.
Firms with operations in multiple states may have national unions that demand common compensation packages despite differences across states in costs of living, workforce characteristics, and state taxes. Strict adherence to common contracts should have the effect of reducing, or for some firms eliminating, the impact of state taxes on local union wage premiums. Multistate firms whose employment is concentrated in individual states are likely to offer union contracts that reflect those states’ tax features, and the employee data will reflect that pattern, since the bulk of the observations of a firm’s employment will be those of employees whose state of residence matches the state whose tax policies influence wages the most. Furthermore, firms facing such national contracts have incentives to undo their effects with selective hiring, choosing to employ only those workers generating the most surplus in states where the associated after-tax cost is the highest, and more generally choosing to concentrate operations in states where the common employment contract restriction is least burdensome. Thus, while the existence of national union contracts will mitigate the impact of state taxes on local union wage premiums in some cases, the ability of employers to choose their locations and their employees, together with the natural concentration of firm activity in individual states, implies that there should remain a significant effect of state taxes on local union wage premiums.
Operations are unitary only if they have sufficient connection to each other. Thus, a national petroleum company with centralized management, procurement and distribution as well as service stations in all 50 states would use formulas to calculate its taxable income in each state, whereas a New Jersey electronics firm that also owns restaurants in Hawaii would not: that firm would pay tax on its electronics income to New Jersey, and its restaurant income to Hawaii. Gordon and Wilson (1986), Goolsbee and Maydew (2000) and Anand and Sansing (2000) consider the effects of state apportionment formulas on factor demands and the resulting incentives for states to adopt differing formulary weights.
Riedel (2011) develops a theoretical model of wage bargaining among multinational firms facing corporate taxation with formula apportionment. When labor is the only input factor and corporate taxes are based on payroll apportionment, domestic wages fall when corporate tax rates increase.
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Acknowledgements
The authors thank D Agrawal (the editor) and two anonymous referees for many valuable suggestions, and A Auerbach, C Brown, D Card, W Gentry, P Kline, J McCrary, P Orrenius, and D Rostam-Afschar for helpful comments on earlier drafts of this paper. A Pope and S Shampine provided excellent research assistance. The views expressed in this paper are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System. The data files and programs used to obtain the results reported in this paper are available from the authors upon request.
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Felix, R.A., Hines, J.R. Corporate taxes and union wages in the United States. Int Tax Public Finance 29, 1450–1494 (2022). https://doi.org/10.1007/s10797-022-09753-x
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DOI: https://doi.org/10.1007/s10797-022-09753-x