More Economic Freedom, More Jobs

by Veronique de Rugy

The current issue of Regulation has an interesting article called “More Economic Freedom, More Jobs.” In the piece, Lauren Heller and Frank Stephenson look at what could explain the large differences in unemployment rates among the states. While they acknowledge that the gradations can be partially attributed to demographics, hangovers from the housing crisis, or the oil-and-gas boom, they wanted to attempt to measure the impact that economic freedom can have on unemployment rates.

Their main finding, which is based on an article that will be published in Contemporary Economic Policy later this year, is that there is a strong negative relationship between economic freedom and unemployment across the states, even controlling many other factors that affect the labor market:

In our Contemporary Economic Policy paper, we examine the relationship between economic freedom and labor market outcomes from 1981 to 2009 (the most recent year available at the time we wrote the paper) while controlling for factors including natural resource endowments, demographic differences, and educational attainment. Since there is substantial variation across states in several of these factors, controlling for them is important to be sure that the relationships depicted in Figures 1 and 2 are not spurious, as well as to make sure that these factors are not camouflaging even stronger relationships than those depicted in the figures.

In order to be confident in our results, we also estimate several alternative specifications as robustness checks. These include controlling for “right to work” states, net federal tax inflows or outflows, geographic factors such as being located on a coast or border, and state-specific fixed effects to control for persistent (but hard to parameterize) factors present in each state. Regardless of specification, our findings show a strong relationship between economic freedom and unemployment across the states even after controlling for other factors affecting labor market conditions. Our estimates indicate that a one-point increase in a state’s EFNA rating is associated with a decrease of 0.6 to 1.4 percentage points in a state’s unemployment rate depending on specification.

Their finding is consistent with a large literature on the benefits of economic freedom. Better yet, as my colleague Matthew Mitchell has documented in several places (here and here), more economic freedom also means less of things we don’t want, like national insecurity, crimes, and infant mortality, and more of the stuff we want, like literacy. And Mitchell points out in a recent piece:

For an overview of the entire literature, check out Lawson and Hall’s recent article in Contemporary Economic Policy (here is a non-gated working paper version). They reviewed 198 articles using the EFW as an independent variable. In their words:

“Over two-thirds of these studies found economic freedom to correspond to a “good” outcome such as faster growth, better living standards, more happiness, etc. Less than 4% [MM: 8 articles] of the sample found economic freedom to be associated with a “bad” outcome such as increased income inequality. The balance of evidence is overwhelming that economic freedom corresponds with a wide variety of positive outcomes with almost no negative tradeoffs.”

I hope that Congress is listening, since after many years at the top, the U.S. has now fallen to 17th in the Economic Freedom of the World rankings.

On a side note, I would recommend reading the whole issue of Regulation this month. It has many more interesting pieces, one on the economic and fiscal upsides of legalizing marijuna, and a great piece about whether we could be seeing the end of publicly financed stadiums. Under the leadership of Peter Van Doren, the magazine has really become a must-read for anyone interested in the most recent academic papers or debates on issues of interest to libertarian- and free-market-minded readers. The magazine also does well to challenge the most libertarian among us, asking the hard and uncomfortable questions about what a truly free-market world would look like and how to address the most difficult issues we face as a society. (The issue of the magazine on global warming and the carbon tax, for instance, is a good example of that.)