Economic Freedom and Employment Growth in U.S. States

Abstract

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.

The Relationship Between Economic Freedom and Economic Dynamism

“…Consistent with our results, they also find that the relationship is only present between the size of government and labor market freedom and not discriminatory taxation. Garrett and Rhine () find that states with more economic freedom have greater employment growth, whereas Ashby () shows that individuals migrate to states with greater government consumption, but less labor market regulation . Ashby and Sobel (), Apergis, Dincer, and Payne (), Compton, Giedeman, and Hoover (), and Wiseman (Forthcoming) use the index to study the relationship between freedom and income inequality.…”

Well-being and economic freedom: Evidence from the States

“…The unemployment rate often is used to capture the general condition of an economy (e.g., Ovaska & Takashima, 2006). Population density, in particular, is useful to control for the regional variation between the heavily populated areas such as the Northeast and the less densely populated states (e.g., Garrett & Rhine, 2011).…”

“…We use the latter measure because we wish to focus on the effects of economic freedom at the state-level without any confounding effects from federal government activity. Garrett and Rhine (2011) used the sub-national measure in their analysis of the effects of economic freedom on state job creation for this very same reason. The freedom index is measured on a 10-point scale; the closer the state's score is to 10 the greater the level of economic freedom.…”

“…Heckelman and Stroup (2000) suggested that while reliance on an overall measure of freedom may give rise to specification bias, this problem is mollified by also using the subcomponents in the analysis. This is the approach taken in Garrett and Rhine (2011) and this study. Though the use of the freedom index (or any other index) is not flawless, we believe that the issues raised are adequately addressed in our estimation methodology.…”

Economic Freedom and State Bond Ratings

“…Heckelman and Stroup () suggest that reliance on any one overall measure of freedom may give rise to specification bias. Garrett and Rhine () and Belasen and Hafer (), for example, use the subcomponent measures along with the overall measure of freedom.…”