2 In Economic Freedom of the World, Gwartney and Lawson (2009) derive a single economic freedom index number for each country that places each country on a continuum from 0 to 10, where 10 represents the highest degree of reliance on free-market capitalism. The index considers five categories: the size of government, property rights and the legal system, trade freedom, sound money, and minimal regulation.

We extend earlier models of economic growth and development by exploring the effect of economic freedom on U.S. state employment growth. We find that states with greater economic freedom-defined as the protection of private property and private markets operating with minimal government interference-experienced greater rates of employment growth. In addition, we find that less restrictive state and national government labor market policies have the greatest impact on employment growth in U.S. states. Except for labor market policies, we find that state employment growth is influenced by state and local government policies, but not the policies of all levels of government, including the national government. Our results suggest that policy-makers concerned with employment should seriously consider the degree to which their own labor market policies, as well as those of the national government, may be limiting economic growth and development in their respective states.

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