Industrial Hostages

Mr. Summers is a member of the staff of The Foundation for Economic Education.

With unemployment afflicting many communities, political leaders are proposing that businesses be prevented from closing their plants and moving to new locations. In several states, bills have been introduced which would require severance pay to laid-off workers and restitution payments to the surrounding community.

These proposals have been examined by several leading economists, most notably Richard B. McKenzie of Clemson University. Let us examine their findings, so we can better judge the merits of legal restrictions on business mobility.

Restrictions on business mobility are costly.

Suppose, for example, a manufacturing firm in the North is prevented from moving to the South, where taxes, wage rates, and other business expenses may be lower. This places the manufacturer at a competitive disadvantage compared with firms in less costly regions. His profit margins decline and his stockholders suffer losses. Eventually he may have to close.

In addition, there are hidden costs. With capital held hostage, other sectors of the economy can’t expand. New businesses, new products, and new jobs won’t appear because the needed resources are tied up in inefficient production processes. In the long run, restrictions on business mobility lead to greater costs, higher prices, and lower real incomes.

Less mobility means less competition.

When a business firm moves into a region, it competes with local businesses and bids up the wages of local workers. Restrictions on business mobility prevent firms from entering new areas, thereby reducing competition in those regions.

As time passes, competition is also reduced in areas companies wish to vacate. New firms are reluctant to enter a region that may, at some future date, prevent them from leaving. Taking hostages scares away potential employers.

Restrictions on business mobility increase the monopoly power of unions.

When businesses are prevented from moving, the threat of job loss is reduced, and unions can increase their demands. The industrial hostage is at the mercy of the union, while nonunion workers in other parts of the country are prevented from bidding for jobs.

In the long run, restrictions on business mobility are futile.

If business firms are prevented from moving to more hospitable locations, the profitable opportunities there will be exploited by others. New firms will open and existing firms will expand. These businesses will be able to undersell the industrial hostages. The hostage firms will have to contract or go out of business.

As the new firms grow and the hostage firms decline, employment patterns will shift in spite of the relocation rules. But, because of the dislocations caused by the restrictions on business mobility, the adjustment process will be far more costly than would occur in a free and open market.

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