J Labor Res (2008) 29:99–113

DOI 10.1007/s12122-007-9031-0

The Decline in American Trade Union Membership

and the “Government Substitution” Hypothesis:
A Review of the Econometric Literature

Christopher K. Coombs

Published online: 23 June 2007

# Springer Science + Business Media, LLC 2007

Abstract This paper reviews the empirical literature on the “Government

Substitution” hypothesis. We focus our attention on the sample periods used, model
specification, and econometric technique. The seminal piece on this topic is
Neumann and Rissman (J Labor Econ 2:175–192, 1984) and to date there have
been less than a handful of extensions beyond this initial investigation. By tracking
the limited development of this hypothesis over time we are able to conclude that
there is still an opportunity for additional empirical exploration in this area.

Keywords American trade union membership .

“Government substitution” hypothesis . Union services

Introduction

Union density in the United States has declined from 29.3% in 1964 to 12.5% in
2005, on average.1 There have been several hypotheses proposed to explain this
trend. The “Government Substitution” hypothesis contends that changes in public
policy can adversely affect the demand for and supply of union services by changing
the benefits of unionization or the costs of organizing, respectively. For example, as
Neumann and Rissman (1984, N–R hereafter) have argued, the provision of certain
social welfare payments by government substitutes for the private provision of
similar benefits by unions, resulting in a less attractive environment for unions. In
addition, another form in which government has arguably taken on the task of

1
Source: Hirsch et al. (2001, updated annually). Union density is defined as the proportion of the non-
agricultural labor force in the United States that are union members. This includes both private and public
sector members of the labor force.
C. K. Coombs (*)
Armstrong Atlantic State University, Savannah, GA 31419, USA
e-mail: coombsch@mail.armstrong.edu
100 J Labor Res (2008) 29:99–113

protecting workers from the undesirable behavior of employers is through social

legislation and judicial decisions that protect workers from unjust discharge.2 In
particular, the substitution hypothesis also includes the claim that a state’s adoption
of an exception to the employment-at-will doctrine subsequently induces an adverse
effect on union membership in that state, everything else the same.
One thing in common with the body of literature in this area is that each follows
Ashenfelter and Pencavel (1969, A–P hereafter) by analyzing the determinants of
union membership within the context of a demand and supply framework. And
because data on the relative prices of union membership are not easily attainable,
rather than estimating structural equations that describe the demand for and supply
of union services empirical work has been restricted to estimation of reduced-form
equations for explaining the determinants of union density.
The objective of this paper is to review the existing body of empirical literature on
the “Government Substitution” hypothesis. With that in mind we note that the
primary findings and implications are (1) each study brings something different to
the table by way of a unique specification, sample period, or empirical technique; (2)
the results indicate that the evidence about the hypothesis is mixed across studies
and (3); coupled with the sparse attention given to this topic over the past few
decades, we argue that future work on this topic is warranted with the objective of
ultimately reaching a consensus.3

Theoretical Considerations

Demand and Supply It is reasonable to explain the determinants of union

membership growth by distinguishing factors that have influenced workers’ choices
to become union members from those that have influenced the supply of union
services to workers. That is, one would differentiate the behavioral forces
influencing the demand for union services from the legal, economic, and behavioral
factors influencing the supply of such services. However, in previous studies on the
substitution hypothesis, difficulty of obtaining union prices has instead limited
empirical investigation to using a reduced-form approach as derived from a demand–
supply framework for union services.4 Evaluation into the possible effects of social
welfare expenditures or judicial decisions on union membership is guided by
assuming that the market clears and that we observe a new equilibrium level of
unionization, as the result of a shift of the demand curve for union services caused
by the questioning factor. Following this approach, assessment of other hypotheses
or determinants of demand and supply can be performed by developing appropriate

2
Some have regarded passage of the Taft–Hartley Act in 1947, with specific interest in the provision of
allowing each state to enact a right-to-work law, as a leading deterrent to union membership growth. For a
review of the literature on the effects of right-to-work laws on union membership, see Moore and Newman
(1985) and Moore (1998). Because these reviews encapsulate the major work in this area we do not
include a review of the literature on the effects of right-to-work laws on union membership growth.
3
In addition to the limited amount of empirical work generated on this topic, the last to address the issue
was Moore et al. (1989) using time-series data to 1983.
4
The ability to obtain accurate relative prices of union membership is hampered due to the components of
these prices, which include initiation fees, dues, and lost income from work stoppages.
J Labor Res (2008) 29:99–113 101

proxy variables and including them in the reduced-form equation for union
membership.

The Function of Social Welfare Benefits To imply that the distribution of

government transfer payments to those who have shown need makes those in need
better off is not a heroic statement. The question in the context of union organizing,
however, is one of does the provision of certain types of transfer payments make
incumbent or potential union members better off by not being organized? The ability
to answer this question relies on addressing at least two considerations: Are there
indeed certain social welfare benefits distributed by government that are potential
substitutes for the private provision by unions, and if so, can they be clearly defined?
And perhaps most important, do the members of the labor force understand that they
have access to “union-like” benefits without the associated costs? If we can assume
that individuals are aware of these substitutes, we can expect that if government
increases the distribution of these “union-like” benefits there will be an adverse
effect on union membership, everything else the same. The marginal worker, one
who is assumed to have the proper information, characterizes this behavior by
deciding that it is not optimal to organize or to remain organized.

The Function of Exceptions to the Employment-at-Will Doctrine To the extent that

social legislation or judicial decisions do not compete with the central role of unions,
we would not expect to observe any significant effects on union membership
growth.5 However, because erosion of the doctrine of employment-at-will is
“codification of a just cause discharge and the availability of third party review of
personnel actions” (N–R 1984: 188), it is possible that union membership declined
faster in those states in which courts had created any one or more of the at-will
exceptions than in those states during which these exceptions were not adopted.
The most widely recognized exception is breach of public policy. In states that
recognize this exception, employees can not be fired because they refuse to violate
laws, exercise a legally protected right, or blow the whistle.
The implied-contract exception permits an employee to establish a contract right
not to be terminated at-will, based on informal employer promises of employment
security, such as those found in employment handbooks or through oral
representations. Employment security can also be implied via performance reviews
and promotions, and through the employer’s past personnel behavior.
One of the earliest exceptions to employment at-will is the implied covenant of
good faith and fair dealing exception. This exception requires that at the very least,
termination must be made for good cause.
Knowledge that an at-will exception exists in the state is a necessary, although not
sufficient, condition for a test of the substitution hypothesis. In addition, however, it
is also necessary that the marginal worker at least perceives he is eligible for the
protection granted by the decisions defining each exception. Because even for those
marginal workers who have knowledge that the state recognizes a particular at-will

5
Among the objectives of unions to its members are: raise wages, increase safety in the workplace, and
institute grievance and arbitration procedures. For a comprehensive review on “what unions do”, see
Freeman and Medoff 1984).
102 J Labor Res (2008) 29:99–113

exception, “if they are not protected, and if they are aware that they are unprotected,
then we have not truly examined the union substitution hypothesis” (Block et al.
1986: 274, B–M–C hereafter). Stieber (1984) claims that the applicability of an at-
will exception is limited because while the majority of employees seeking to utilize
its protection are “primary market,” or relatively higher-level employees, the effect
of unjust-dismissal is most felt by “secondary market,” or hourly and lower-level
salaried employees. To the extent that the marginal worker being investigated for his
choice in union status is a member of the “secondary market,” we would expect this
to be inconsistent with a test of the substitution hypothesis. As Stieber asserts,
employees of the “secondary market” are less likely to be plaintiffs in wrongful
discharge cases to which an at-will exception could provide protection.6 In making
this distinction, Stieber provides support by referencing a study of 92 wrongful
discharge cases in which only eight involved “secondary market” employees.7 The
same study noted that unions operated primarily in the lower level “primary
market.”8 Therefore, it could be argued that by being an employee in the “primary
market,” whether as an incumbent or potential union member, the individual not
only has knowledge of his protection but perceives himself as being protected.
Finally, Berger and Piore (1980) found that upper level employees tend to be white
and male, while “secondary market” employees tend disproportionately to be female
or members of minority groups, those arguably with a relatively lower demand for
union membership.9
The classification for determining a state’s “position” on the doctrine of
employment-at-will can prove to be quite arduous. There are considerations with
respect to how a state is defined as recognizing a particular at-will exception and
perhaps the method and timing in which information of this type of labor protection
is disseminated to a state’s labor force. In general, the goal is to find an opinion by
the state’s judiciary that provides evidence of a clear solution to the plaintiff’s
challenge. In any case, courts in only a few states have yet to rule in cases sought to
limit the applicability of employment-at-will, so there is a good deal of research in
this area.10

6
Stieber provides several factors in limiting lower level salaried employees as wrongful discharge
plaintiffs. One is that attorneys are discouraged to represent low-income employees because they expect
smaller returns from cases under a contingent fee system. Another argument is that low-income employees
are less likely to have opportunities to be fired for “refusing to commit unlawful acts, or “blowing the
whistle on illegal conduct” (Stieber 1984: 8).
7
Harvard Law Review (June 1983). This study examines the structure of the U.S. labor market as
described by dual labor market theory. For a review of the dual labor market theory, see Amacher and
Sweeny (1981).
8
A “primary market” is divided into upper and lower tiers—the upper tier contains managerial and
professional employees, the lower tier contains blue-collar and non-managerial white-collar employees.
9
See Scoville (1971).
10
See Walsh and Schwarz (1996) for a comprehensive list of sources that have performed the task of
coding states with exceptions to employment-at-will. The authors also include their interpretation of the
reasons for discrepancies across classifications. A common issue for disagreement includes differing dates
of publication. Less common issues are use or nonuse of federal court decisions interpreting state law,
substantial ambiguities within many of the decisions, and the courts’ propensity to fail to acknowledge
rulings that contradict one another.
J Labor Res (2008) 29:99–113 103

The initial investigation into the effects of rulings that limit the applicability of
employment-at-will on union membership was provided by N–R. They used data
from the Bureau of National Affairs to determine a state’s precedent and provided no
explanation of the methodology used for codification. Autor et al. (2006) analyzed
the effects of wrongful discharge protection on employment and wages using an
intuitively appealing approach to determine when a state has adopted a particular at-
will exception. In short, because it would be in the best interest of the employer to
know of these exceptions, the employment lawyers, acting as the employers’ agent
will write awareness letters to their clients when major changes occur in the common
law. Within this framework, Autor et al. looked for the first major appellate-court
decision that provided evidence of the adoption of the particular at-will exception.
This codification scheme differs in theory from that of Dertouzos and Karoly (1992),
Morriss (1995), and Walsh and Schwarz (1996).11 We argue that the methodology
used to define a state’s recognition of a particular at-will exception and the theory on
the timing of dissemination of this knowledge by the firm are not independent. To
the extent that management opposes union organization and perceives a negative
impact of at-will exceptions on such, it is reasonable to assume that they would
desire to have knowledge of the existence of these exceptions as soon as possible.12
Therefore, when analyzing the effects on union membership of wrongful-discharge
doctrines, coding the initial precedent-setting case law will better suit the intended
purpose.

The Function of Everything Else Most of the empirical analysis into the study of the
United States’ labor force’s diminished attraction to union membership, or the
decrease in supply of union services offered by trade unions has centered on four
major hypotheses.13 While the significance and degree of influence from each of
these possible explanations varies across studies, our general conclusion is that a
more precise investigation into the substitution hypothesis is strengthened by the
ability to control for these other factors. In addition, as pointed out by N–R, during
this time-period when trade union membership was falling there were high and
variable rates of inflation and unemployment, normally factors that positively affect
union membership. If the general climate of the economy is excluded from the
analysis, actual results could overstate or understate the posited negative influence of
an increase in social welfare benefits on trade union membership growth.

11
The results of Autor et al.’s (2006) coding turn out to closely relate to those of Morriss (1995). Walsh
and Schwarz (1996) select cases that best communicate a court’s rationale for publicly declaring a new
doctrine. Arguably, these cases often follow the initial precedent-setting opinion by several years.
12
This interpretation is especially appealing if it is also true that management is in favor of legislative or
judicial action when it is appears that this would permit greater predictability of outcome and limit the size
of the damage awards. See Krueger (1991) for an interpretation of this analysis.
13
For empirical investigations into the “Structural” hypothesis see: Scoville (1971); Neumann and
Rissman (1984); Freeman (1985), and Farber (1985). For empirical analyses on the “Management
Opposition” hypothesis see: Dickens (1983); Freeman and Medoff (1984), and Freeman (1988). For
evidence on the “Union Organizing” hypothesis see Freeman and Medoff (1984) and Hirsch and Addison
(1986, pp. 29–74).
104 J Labor Res (2008) 29:99–113

Causality As was described above, trade union membership on average has been
falling steadily since its peak in the mid-1950s. Therefore, if there is evidence in
support of the substitution hypothesis using a sample period after the mid-1950s, one
should address whether the relationship is a causal one or is due to omitted factors
that are correlated with an increase in social welfare and the decline in union density.
To the extent that government has increased its role in providing “union-like”
services for protection against the potential adverse effects from the consistent
decline in union’s presence in the workplace, we would expect to observe a negative
relationship. However, estimating the relationship between union membership and
government’s expanded role in providing labor protection is complicated by the fact
that welfare expenditures could be endogenous; government might tend to increase
welfare payments (some of which are “union-like”) because of the diminished
function of unions. This concern was first noted by B–M–C, who pointed out that
the expansion of social legislation, possibly a substitute for union services, was not
enacted until at least the mid-1960s, well after the growth in trade union membership
began its descent.14
It is also possible that organized labor, acting in its own self interest, has played a
role in supporting broad social legislation such as the determination of social welfare
expenditures in order to obtain its own legislative objectives. This practice could
also explain the potential problem of endogeneity, in which case causality could run
in both directions.15
While we take the position that treating social welfare expenditures as an
endogenous variable would improve the reliability of an analysis of the substitution
hypothesis, we point out that N–R provided an argument against treating exceptions
to the employment-at-will doctrine as such. They acknowledged that while several
state legislatures have introduced bills requiring “just cause” for dismissal, all have
failed. Also, Ehrenberg (1985) points out that the only federal attempt at “just cause”
legislation failed to come to vote. Moreover, Dertouzos et al. (1988) provided
evidence suggesting that the pattern of recognition of exceptions to the employment-
at-will doctrine by state courts is haphazard, unrelated to the wage level, un-
employment rate, region, or demographic characteristics of the state. In contrast,
however, it has also been argued that changes in a state’s legal environment are not
random but systematic, and several studies have considered the possible factors that
affect the likelihood that a state “moves” away from the common law interpretation

14
Block et al. (1986) observed the relationship between employment-at-will judicial decisions and NLRB
representation elections. While these judicial decisions by the state courts are not the same as social
welfare payments to workers the issue has been raised as to the timing of labor protection by government
relative to the timing of the steady decline in union membership. The authors also made note that during
the late 1930s and early 1940s, when trade unions in the United States experienced their greatest
expansion in membership, social programs such as unemployment insurance, minimum wage legislation
and Social Security were beginning implementation. While the positive correlation suggested preliminary
evidence that no union substitution effect existed during this period, it also provided an early indication
that the weakened position of organized labor did not initiate the conception of social welfare
expenditures.
15
See Kau and Rubin (1979) for empirical evidence that supports this hypothesis.
J Labor Res (2008) 29:99–113 105

of at-will employment.16 In this case, causal inferences will be improved by

simultaneously modeling the factors that determine the legal environment in a state
and the effect of the legal environment on union density in that state.

The Impact of Social Welfare Expenditures

Perhaps it was Reder’s (1951) comments on how the actions of government have
affected the types and extent of services offered by unions that motivated N–R’s
formal analysis almost 35 years later. The authors first provided evidence which
showed that during much of the 20th century less than 50% of the decline in the
percentage of workers organized could be accounted for by changing industry
composition. Subsequently they followed with the proposal that perhaps there were
deeper behavioral forces underlying the choice of union membership.
Using data for the period 1904–1980, N–R investigated time-series evidence on
the determinants of unionism in the United States. They pursued a reduced-form
approach in the spirit of A–P and considered variations in the rate of inflation, levels
of unemployment, the legal and institutional environment, and alternative sources of
supply of union services.17 The last factor was represented by government
expenditures on social welfare, expressed as a fraction of GNP and included
unemployment compensation, workers’ compensation, and education and veterans’
benefits.
Using estimates from a subsample (1904–1960), N–R forecasted union density
rates for 1961–1980. Although the coefficient on the welfare expenditure variable
was not significant (although negative), they found that it was only with the
inclusion of the welfare variable that the forecasts for that period compared
favorably with the actual union density rates. Coupled with their estimation of the
full sample period (1904–1980), in which the reported coefficient on the welfare
variable had a significant negative value, the authors concluded that the time-series
evidence was consistent with the hypothesis that government activities in the labor
market substitute at least partially for the services of unions.
Freeman (1986) challenged N–R’s interpretation of the evidence. He argued that
the negative effect on union density of welfare expenditures was weak enough that a
change in model specification, sample period, or measure of social welfare would
yield the insignificant results as found in the authors’ subsample. When using cross-

16
Dertouzos and Karoly (1992) find evidence that exceptions to the employment-at-will doctrine have
resulted in a reduction in equilibrium employment levels when including the predicted values based on a
logistic model of the probability of a doctrine existing in a state during a particular year using various
economic, social, and legal factors that have influenced the judicial decisions. See Krueger (1991) for
evidence of factors that affect the likelihood that a state enacts unjust-dismissal legislation. Included as a
possible factor is union density but the coefficient is positive and not significant. Kesselring and Pittman
(1993) find evidence that a more unionized state increases the likelihood of judicial protection in that state,
although the authors’ definition of protection does not include narrow interpretations, which reduces the
number of states defined as “protection” states.
17
While Ashenfelter and Pencavel (1969) examined the behavior of the rate of growth of union
membership, Neumann and Rissman (1984) examined the percentage of the workforce that is organized.
106 J Labor Res (2008) 29:99–113

country data for 1970 and 1980, Freeman found a significant positive correlation
between the level of government welfare spending and changes in union density.18
Although Freeman did not control for issues such as international comparability of
union importance or international differences in the particular expenditures counted
as social welfare, he asserts that unions have actually managed better in countries
with a greater welfare state during this time period.19
The issues raised by Freeman on N–R’s study were also systematically addressed
by Moore et al. 1989, M–N–S hereafter) in what is arguably the most comprehensive
analysis of the government substitution hypothesis to date. To consider potential
structural instability, M–N–S used time-series data for two alternative sample
periods using three different models: A–P; Bain and Elsheikh (1976, B–E hereafter);
and N–R.20 The sample periods used were 1929–1983 and 1936–1983. The latter
period was chosen based on Mancke’s (1971), and supporting, evidence of a major
structural change in U.S. labor markets following the passage of the Wagner Act in
1936.21 Further, within each model, to account for the potential bias associated with
reverse causation, M–N–S examined the possibility that union density and welfare
expenditures are jointly endogenous by specifying a simultaneous equations model.
Finally, in order to provide a more accurate test of the substitution hypothesis, they
used only those types of programs which clearly compete with traditional union
services. The authors’ measure of welfare is in contrast to N–R’s welfare measure in
three ways: (1) they excluded expenditures on general education, (2) excluded all
expenditures on health and medical programs from veteran’s programs, and (3) they
included total expenditures by the Occupational Safety and Health Administration.
For the six regressions, M–N–S found relatively weak support for the substitution
hypothesis. Even with the removal of simultaneity bias the coefficient on their social
welfare expenditures variable was the correct sign and significant in the B–E and N–R
specification during the 1936–1983 sample period only.22 One could argue, however,
the evidence that does appear is found in the more plausible models. For example,
for the post-Wagner Act era, 1936–1983, the welfare variable had a highly sig-
nificant negative coefficient in two of the three models estimated. As the authors
pointed out, “since the tumultuous period from 1929 to 1935 can hardly be regarded
as normal, we are prone to place a greater weight on the post-Wagner Act findings”
(M–N–S 1989: 541). Additionally, as was previously noted, the dependent variable

18
Freeman used two measures of social welfare: (1) the share of GNP spent on social welfare in a country,
and (2) the ratio of current disbursements of government to GNP in a country.
19
Casting further doubt into Freeman’s findings is the fact that his rank correlations appear to be
erroneous. After replicating rank correlations using Freeman’s data, we found evidence to suggest that the
rankings were positively correlated between the change in union density in a country and current
disbursements of government as a percentage of the country’s GNP but not social welfare expenditures as
a percentage of the country’s GNP. The importance of this finding is noteworthy if one perceives that the
latter measure is a relatively closer comparison of “union-like” services.
20
Like A–P, B–E examined the behavior of the annual percentage change in trade union membership.
21
Sheflin et al. (1981) also found evidence that a structural shift occurred in 1937 in both the A–P and B–E
models.
22
Because each specification included a lagged dependent variable on the right hand side of the equation,
M–N–S performed Durbin’s H tests for the presence of autocorrelated residuals. The authors found no
evidence of autocorrelation. See Durbin (1970) for more detail on this test.
J Labor Res (2008) 29:99–113 107

for the N–R model is a stock measure while the A–P and B–E models used a growth
measure.23 Consequently, each of the two models providing evidence in support of
the substitution hypothesis used alternative dependent variables. Therefore, at the
conclusion of the M–N–S study, and in conjunction with the previous work
performed on the “government substitution hypothesis,” the authors suggest that
additional tests should be conducted.
For each of the previously reviewed studies of the effect on trade union
membership from social welfare expenditures, empirical analysis was concentrated
in the treatment of time-series data on the aggregate level. Yet, testing the
“government substitution hypothesis” using cross-sectional state data over time
offers advantages to that of using time-series data. One is that we are able to allow
for pronounced differences not only in union densities across states but also
substantial differences in the relative level of expenditures on welfare across states.
To the extent that testing the substitution hypothesis using time-series data suffers
from multicollinearity, previous results finding little or no evidence to support the
hypothesis could be driven by the failure of having too little variation in the data.
Moore and Newman (1988, M–N hereafter) also tested N–R’s argument that
government social welfare expenditures have served as substitutes for the services
normally provided by unions using state level data for 1950, 1960, 1970, and 1980,
and to reduce the problem of multicollinearity, the cross-sectional data for each year
was pooled. In addition, M–N also collectively examined the relative importance of
two other hypotheses argued to have influenced the decline in union density: (1) the
“structural” hypothesis, and (2) the “management opposition” hypothesis.24 Using
aggregated state level data, M–N were able to include two measures for testing the
substitution hypothesis: (1) the per capita government social welfare expenditures,
argued to emulate the N–R variable, and (2) a measure of the expected
unemployment compensation benefits. Once again, the authors find only what they
consider weak support for the substitution hypothesis. Their welfare expenditures
variable never gains significance, but results for the pooled OLS equation show that
the provision of more liberal unemployment compensation tends to substitute for
union services.25

23
A–P offer explanations for using the annual percentage change in union membership as the dependent
variable rather than the change in the ratio of union membership to the labor force. These include: (1) to
reduce the problem of measurement error in the union membership data and to (2) eliminate a possible
source of spurious correlation with the percentage rate of change of employment in the unionized sectors
of the economy. Bernstein (1954) used “real membership,” both as a stock and flow measure, claiming it
is reasonable to assume an association exists between membership and various factors when using a
sufficient number of time periods. Although the results were not reported, A–P also used Bernstein’s
measure of union membership growth and reported that the basic conclusions were unaffected.
24
A list of the literature on these alternative hypotheses was provided in an earlier footnote.
25
M–N use two alternative methods of decomposition to determine the relative importance of the various
hypotheses in explaining the decline in union membership over time. Perhaps due to the weak support for
the government substitution hypothesis, the authors do not provide any interpretation of the figures
associated with the welfare variables. At any rate, the effect of the 3.5 (dollars, in thousands) average
increase in the expected unemployment compensation benefits is predicted to reduce the level of
unionization by slightly less than 1% (0.0725) over the time period 1950–1980, everything else held
constant.
108 J Labor Res (2008) 29:99–113

The study by M–N joins the previous studies on the government substitution
hypothesis as a reference point for further work. Empirical issues still remain that
require attention. For example, applying pooled OLS allows us to look at dynamic
relationships with considerably more variation than a single cross-section, giving us
relatively more precise estimators and test statistics with more power, everything else
constant. However, like using a single cross-section, pooled OLS does not solve the
problem of omitted variables. Moreover, if the omitted variable is correlated with
any of the included independent variables, then pooled OLS will be biased and
inconsistent.26 In the future, analysis on the government substitution hypothesis
should cover ways of dealing with the presence and nature of unobserved effects.
Finally, it is our opinion that improvements can still be made in defining those
welfare expenditures that are more closely regarded as a substitute for the services
provided by unions. For example, to the extent that job training for its members has
historically been a major interest to unions, the ability to collect data and analyze the
effect of job training expenditures in a state on union density would be a valid test of
the substitution hypothesis.27 Also, state level unemployment compensation varies
across states, across several dimensions such as: weekly benefit amount, waiting
period, duration, and extended benefit coverage. Inclusion of this form of labor
protection on the state level, whereas prior testing included federal expenditures
only, could improve the robustness of the results. Finally, the safety and health of its
members have been important concerns for union organizers in the past. As a form
of public policy, the Occupational Safety and Health Act of 1970 was a major step
toward recognizing those concerns. To the extent that the policy provides a substitute
for the safety and health measures historically provided by unions, we would expect
a negative effect on union density following the passage of OSHA. Whereas M–N–S
included federal-level expenditures, allowing for the variation associated with the
quantity and types of inspections performed by the Occupational and Safety Health
Administration on the state level could also improve the robustness of results in a
test of the substitution hypothesis.

The Impact of Judicial Decisions

Similar to the conclusion that more work needs to be done on the effect of social
welfare expenditures on union membership, mixed evidence on the subsequent
impact of a state’s judicial decisions on union membership in the state also suggests
that the issue is not settled. Possible explanations for the lack of reaching a unified
conclusion include: differing definitions for the exceptions to the employment-at-
will doctrine, variation in the time periods analyzed, alternative definitions for the
dependent variable, and different variables included in the model. The first two
explanations indicate it is possible that across studies, a given state will differ in its
codification as recognizing a particular at-will exception.

26
See Wooldridge (2002) for a complete description of this issue.
27
See Worthen (2002), who argues that organized labor is affected by the Workforce Investment Act in at
least three ways. One is that WIA offers job training to program participants.
J Labor Res (2008) 29:99–113 109

The effect of a state’s recognition of an at-will exception on various economic

outcomes in that state has been widely covered in the econometric literature.
Examining the costs to employers, Dertouzos and Karoly (1992) analyzed the
possible effects of wrongful-termination legislation on employment outcomes in
both the short and long-run. Observing essentially the same time period, Miles
(2000) findings of no significant effects of protective labor legislation on
employment were in contrast with Dertouzos and Karoly.28 Autor et al. (2004, 2006)
conclusions were in contrast with Miles. They found evidence that the adoption of
the implied-contract exception has had a negative impact on employment, but the
size of the negative impact was quite smaller than Dertouzos and Karoly’s
estimation. Both Miles and Autor (2003) did find significant growth in temporary
employment following a state’s adoption of at-will exceptions. Shaughnessy (2003)
found that following an increase in temporary employment in a state, in the presence
of an at-will exception in that state, relative to states that do not recognize any at-will
exceptions, wages declined as much as 3.3%. Finally Morriss (1995) examined the
impact of at-will exceptions on employees and found that the public policy exception
significantly reduced the likelihood of an employee being discharged.
To observe the effects of employment-at-will exceptions on state unionization
rates, N–R pooled cross-sectional data. Over the time period 1964–1980, nineteen
states had recognized the public policy exception and twelve states recognized the
implied-contract exception. Although not specifically cited, it appears that N–R used
data from the Bureau of National Affairs to define a state’s codification on the at-will
exceptions. Because there is no specific citation, we do not have information on the
degree of interpretation for each at-will exception for all states. That is, we do not
know if the at-will exceptions are “narrowly” or “broadly” defined. Presumably, the
“broader” a state’s interpretation of an at-will exception, the more situations there are
in which employees could successfully challenge employers’ termination decisions
and/or the more extensive are the potential remedies available to plaintiffs.
To measure the influence of these exceptions on union density, N–R included
both an indicator and a trend variable for each situation. That is, the latter variable
was a time trend taking the value one in the year that a state first had a particular
exception, two in the following year, and so forth. Although the coefficients on all
variables reported the correct sign, only the models including either the implicit-
contract exception indicator or its’ trend counterpart were significant. N–R explain
that the public policy exception may possibly represent a principle of what most
people would regard as fair and decent behavior on the part of the employers toward
employees. In this case, inclusion in the model would not be a test of the substitution
hypothesis. The fact that most courts do not look at it this way, however, would
arguably suggest otherwise. In contrast, however, evidence of strong significance
shown under the specification with the implicit-contract indicator does imply that
union membership in a state was adversely affected following this particular form of
labor protection in that state.

28
It is possible, however, that there exists two influential differences between the two studies, which
include: the codification of states that recognize an at-will exception, and the degree of recognition
(“broad” versus “narrow”) for these exceptions.
110 J Labor Res (2008) 29:99–113

While N–R shed some light on the role of unjust-dismissal protection and union
membership growth, the specification used and timing of their analysis suggested
more importantly that the matter was not settled. The authors study included data up
to 1980, just prior to the period when the U.S. as a whole witnessed its’ major
growth in the at-will exceptions. In addition, and most likely due to its’ recent
vintage at the time of their study, N–R do not include the covenant of good-faith and
fair dealing exception. Future exploration into the contributions of social legislation
to the growth of union density should include a sample period beyond 1980 and the
good-faith exception.
For the period 1978 to 1985, B–M–C seek to provide an empirical explanation for
the observed changes in the outcomes of NLRB representation elections. The
regression analysis was run on pooled election data for all election cases closed over
this period and included all three previously mentioned types of legal protection.29
Also included as control variables—the percentage of the employees in the state that
were unionized, the unemployment rate in the state, and whether or not the state had
a right-to-work statute. The first control variable could take either a positive or
negative sign, depending on the countervailing forces of a saturation effect and any
widespread attitudes toward unionization in the state.30 The second control variable
is included to pick up any cyclical impacts on voting and the right-to-work control
was included to also capture any statewide attitudes toward unions.
The results of B–M–C’s probit models do not provide any support for the
substitution hypothesis. In fact, the implied-contract exception argued by N–R to be
the most obvious form of union substitute, actually takes the opposite sign and is
significant in both models.31 It might have been helpful, however, if B–M–C did not
include the right-to-work control and instead used a fixed-effects model where a
dummy variable for each state was included.32 This is because the authors actually
included two controls for a state’s attitude toward unions and the results are
contradictory to each other. The sign on the coefficient for the union membership
variable is negative, indicating a state’s pro-union attitude, and the sign of the
coefficient for the right-to-work variable is positive, implying a state’s negative
attitude toward unions.
Because the empirical research on the impact of at-will exceptions on union
density is limited to two studies, whose results are at odds, we contend that
additional research is warranted. Moreover, the argument to move forward is

29
Only single-union, non-decertification elections were included in the analysis to mitigate the influence of
non-measurable factors. The codification for the at-will exceptions used by B–M–C was based on Dichter
et al. (1985).
30
B–M–C run a probit model where a union win takes the value of one and a union loss takes the value of
two for the dependent variable. Therefore, the saturation effect, implying an increase in the probability of a
union defeat, would be evidenced by a positive sign on the coefficient for this variable. In contrast, if the
general attitude toward unions in the state was positive, we would expect a negative sign on the
coefficient.
31
Four regressions were run—three models with each independent exception, and a fourth model
including all three exceptions.
32
See Greene (2000) for the fixed-effects model. See Hausman (1978) for a test comparing the random-
effects and fixed-effects estimators.
J Labor Res (2008) 29:99–113 111

accentuated by the fact that the major growth in recognition of any of the three
exceptions to the employment-at-will doctrine occurred in the mid-to-late 1980s.
This implies that no formal analysis in this specific area has taken place during the
time when the U.S. was experiencing its most dramatic departure from employment-
at-will.

Conclusion

The topic of trade unions and the pattern of its growth has received a great deal of
empirical attention. In earlier periods, when union density was growing, it was
viewed that unions not only positively impacted the standard of living of its
members, but induced better management and higher productivity in the workplace.
Given the dramatic decline in union density in the U.S. over the last five decades,
plausible explanations must point to areas of reason that in the aggregate, dominate
the positive impact. One of the possible explanations is that the provision of “union-
like” services from government has caused the attractiveness of union membership
to decline. In general, it is to be expected that an appropriately controlled
specification will permit isolation of the behavior of the marginal worker on which
“union-like” services might have an impact, ceteris paribus. To date however, the
existing body of empirical work on the government substitution hypothesis varies in
several areas: sample periods, econometric techniques, definitions of “union-like”
services, and most importantly, results.
Our review suggests that there is still a need for additional work to be done. Few
of the studies bear a close relationship to any other. Those that do are contrasting in
results. Consequently, it has been quite some time since this topic has last generated
any empirical analysis. The recent availability of relatively higher quality data offers
the opportunity for further econometric analysis, and thus for broadening the forum
of the debate on the government substitution hypothesis.
In sum, we believe that the evaluation of influences of social welfare on union
membership, through expenditures and judicial decisions, should be treated as an
open rather than settled matter. The development of new data and more subtle
econometric approaches will permit work in this area to move in a manner toward
reaching a consensus.

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