The Impact of a Low-Wage Strategy on State Economic Development

Abstract

The American states have pursued several different approaches to create jobs and foster economic development, including reducing the social cost of labor. I show that state labor costs are markedly lower in 1995 than in 1970, based on a factor analysis of wages and state regulations affecting unions and the cost of labor. Corporate low-wage strategies, international and interstate competition for business, and the growing weakness of labor unions are posited to account for this. But regression analysis shows that lower labor costs have had no significant impact on rates of job creation since 1980, have reduced unemployment only slightly, and have been less effective in the latter respect than either tax cuts or other economic development policies. Moreover, reducing labor costs can have adverse consequences, such as rising income inequality, slower growth in gross state product and productivity, and a less competitive position for states in the international economy.