Companies That Receive State Subsidies Are More Likely to Break Workplace Laws
States frequently give firms subsidy packages in return for establishing operations and creating jobs in their area. In a new study, Yale SOM’s Aneesh Raghunandan finds that state officials are then less likely to penalize those companies for corporate misconduct—and their leniency seems to encourage firms to ignore regulations.
In 2013, the state of Washington gave the aerospace company Boeing a massive subsidy package worth $8.7 billion, including tax breaks and reimbursements for worker training costs. That eye-popping price tag isn’t typical—the Boeing subsidy is believed to be the largest in U.S. history—but state subsidies have become more common over the last couple of decades, as government officials try to lure firms to set up shop in their area and create jobs. In return for handing out these perks, politicians hope to burnish their reputations as economy-boosting leaders and increase their chances of re-election.
Prof. Aneesh Raghunandan wondered if these subsidies had a hidden downside. When a governor brings a big company to their state, are officials more likely to look the other way if the firm violates workplace or environmental laws? After all, the state government is now invested in the company’s success and wants them to stay.
Subsidies have consequences for the taxpayers beyond just dollars spent. Bringing them jobs and getting them income is one thing, but then how are they being treated in the workplace?”
Raghunandan says that politicians “love to tout, ‘Look how many jobs were created on my watch, look at all the things I did while in office to lure companies to the state. They may not be incentivized to crack down on corner-cutting.” And the firms, figuring that they have extra leeway, might ignore some regulations to save money.
In a new study, Raghunandan confirmed that, indeed, companies that received state subsidies were more likely to commit violations, as measured by federal enforcement actions. And state enforcement actions didn’t rise in tandem, suggesting that these officials are “more willing to turn a blind eye,” he says. The most common types of violations were related to workplace misconduct, such as safety issues, forcing employees to work off the clock, and not paying the required minimum wage.
The research suggests that state subsidies come with non-financial costs that have been largely ignored. “They have consequences for the taxpayers beyond just dollars spent,” Raghunandan says. “Bringing them jobs and getting them income is one thing, but then how are they being treated in the workplace?”
Hey, I’m AInsights
Ask me questions about the article and its underlying research. Let’s chat!
Raghunandan gathered data on state subsidies from the database Subsidy Tracker, available from the nonprofit organization Good Jobs First. The study covered more than 18,000 identifiable subsidies to U.S. public firms collectively worth about $46 billion from 2004 to 2016, given to industries such as manufacturing, retail, construction, and agriculture.
The subsidies were widespread across the country and throughout the study period. “This isn’t something that’s necessarily concentrated to one state or one year,” Raghunandan says. “Subsidies happen everywhere, and their impacts are felt everywhere.”
Next, he looked up reports of corporate misconduct in Good Jobs First’s Violation Tracker database. These included details about enforcement actions taken by federal agencies such as the Occupational Safety and Health Administration (OSHA), Environmental Protection Agency (EPA), and National Labor Relations Board (NLRB). The majority of the misconduct was related to labor practices, such as safety or wage violations.
After a firm received a subsidy, the likelihood of the company committing a federal violation in that state rose from 2.2% to 2.9%, Raghunandan found. But there was no such increase in other states where the same firm operated. In other words, these companies were breaking laws more often in states where they had benefited from politicians’ largesse.
One explanation for this behavior is that companies anticipated that the state would give them special treatment, so if they got hit by a federal penalty, the overall cost of their misconduct was lower. Was that assumption correct?
To figure out if states were in fact being lenient, Raghunandan took advantage of a legal principle called dual sovereignty. Under this doctrine, both the federal and state government can penalize a company for the same behavior. For example, if a firm operating in California violates a workplace law, it could face enforcement from the California Labor Commissioner’s Office as well as the federal agency OSHA. If federal violations for subsidized firms increased, but state violations didn’t, that would imply that state officials were giving these companies a pass.
When he examined violations for all firms, not just subsidized ones, the levels of federal and state enforcement tended to track together. This confirmed that state officials generally did follow the dual sovereignty principle: they didn’t back off just because the federal government had already stepped in.
But when he looked specifically at subsidized firms, he saw no corresponding increase in state enforcement as federal violations rose. From the company’s point of view, even though they’re flaunting regulations more frequently, “the state’s not coming after me,” he says.
Finally, Raghunandan wondered if these patterns might change depending on the state’s political environment. The main person in charge of enforcement is the attorney general. In most states, the position is elected, not appointed by the governor. So in some cases, the attorney general and the governor are from opposing political parties.
One could imagine that if both are, say, Democrats, the attorney general would be inclined to support the governor and avoid cracking down on violations by subsidized firms. But if one was a Republican and the other was a Democrat, the attorney general has “no desire to protect the governor,” Raghunandan says.
And in fact, in states where there was a partisan split between the governor and the attorney gender, firms’ federal violations did not increase after they received subsidies. The companies might have realized that the attorney general wasn’t going to indulge them and thus curbed their misconduct.
But this check on corporate behavior isn’t always present. So what else can be done to reduce violations?
Some subsidy agreements already contain clauses specifying certain workplace rules, such as the average wage that must be paid. But the clauses often aren’t enforced. One possibility is to step up enforcement of these requirements and reduce the subsidy amount based on the number of violations, Raghunandan says.
Greater transparency could also help. Right now, the amount of information that government officials disclose about subsidies, as well as the ease of accessing that information, varies a lot from state to state. If those details were readily available to citizens and journalists and they became more aware of the risk of corporate misconduct, “you can then proactively mitigate that risk,” he says.