Is There a Public Sector Union Premium on State Debt?*

Abstract

Please do not quote or cite without permission Significant attention became focused on public sector unions as a potential causal factor of state fiscal woes during the ‘Great Recession. ’ In this paper, we exploit the variation in state union density, coverage, and collective bargaining laws to explore the relationship between unionization and state government borrowing costs. If investors perceive public sector unions to be barrier to a state’s ability to make future debt payments, they may require a premium to hold debt. Using data from 1983-2008, we find that states with right-to-work laws for government employees, states that prohibit collective bargaining, and states that are not required to bargain with public sector unions pay significantly less in long-term borrowing costs than states without such laws. Overall, our results indicate that public sector collective bargaining laws may be responsible for an up to 50 basis point differential in borrowing costs across states, which translates to economically significant interest cost-savings