Following the enactment of the National Labor Relations Act in 1935, labor unions in the United States gained enormous authority. Unions began negotiating agreements with employers that required all workers to pay union dues even when some workers did not wish to be covered by a union. In 1947, the Taft–Hartley Act reaffirmed states’ constitutional right to establish right-to-work (RTW) laws. Employees in unionized workplaces in RTW states are protected by union-negotiated collective bargaining agreements but are not required to join the union or pay dues. Currently, 26 states have passed RTW laws. Prior research has found that RTW laws increase the attractiveness of a state’s labor force to emerging industries and encourage economic growth. Research has also shown that RTW laws increase employment, innovation, and economic efficiency and reduce corporate borrowing and unions’ bargaining power.

Our study examines the effect of RTW laws on venture capital (VC) investment, which invests the funds of institutional investors and wealthy individuals into new projects with high growth potential. VC is a major source of funding for start-up businesses, especially projects requiring a high level of learning and innovation. Additionally, prior research has found that VC enhances innovation, improves productivity, and fosters strategic alliances between firms. Unions and venture capitalists are powerful stakeholders with divergent interests, especially when venture capitalists possess majority control over the companies they invest in, as they often do. RTW laws diminish the bargaining power of labor unions, thereby restricting their capacity to negotiate for higher wages. This decreases costs and boosts firms’ profitability, so VC investors may increase investment in states with RTW laws.

Our research analyzes state-level data on VC investment in the United States between 1980 and 2020. Our findings demonstrate that adopting RTW laws increased VC investment by 68–82 percent. Furthermore, RTW laws increased VC investment more in states with a high union presence, suggesting that these laws reduce the bargaining power of unions. Our research rules out other explanations for our findings. First, it confirms that VC investment was not already increasing in states that passed RTW laws relative to other states. Second, it analyzes VC investment in states near RTW states and confirms that local economic conditions did not drive our findings. Third, it presents evidence that the relationship between RTW laws and VC investment did not arise from venture capitalists investing in states with many high-tech firms.

Our findings are relevant to policymakers because they suggest that RTW laws contribute to a more favorable economic climate for entrepreneurship and business expansion. By reducing the influence of unions and associated costs, RTW laws can enhance labor market flexibility and reduce operational expenses. These factors make states more attractive to VC investment, which is essential for fostering innovation, job creation, and economic growth. Policymakers should consider these advantages when formulating labor and economic policies, as RTW laws can drive long-term economic prosperity.

Note
This research brief is based on Helena Sarkodie et al., “Right-to-Work Laws and Venture Capital Investment,” Journal of Banking and Finance 172 (March 2025).