For centuries, scholars have studied economic growth and development with the aim of explaining what makes some places prosperous and others less so. We recently expanded the large body of studies by examining the relationship between economic freedom and labor market outcomes in the 383 local economies or metropolitan statistical areas (MSAs) in the United States.
We found that areas with more economic freedom typically perform better than those with less freedom on key metrics such as unemployment rates, job growth, and population growth. Politicians would do well to exercise restraint. State and local governments should reduce or eliminate obstacles to peaceful and voluntary association between workers and employers, and between buyers and sellers generally.
Some background is fine. For many years, the Fraser Institute in Canada has produced quantitative measurements of the degree of economic freedom in countries and states (or provinces in Canada). The state-level index is based on three main areas: government spending, taxes, and labor market restrictions. We follow a similar methodology but go to the local level. In our study, each domain has three variables, such as spending as a percentage of personal income and union density. They are objectively assessed based on the data, and then each area is ranked accordingly.
We have found that eight of the top 10 freedom values in our index are for Florida metropolitan areas. The other two were from Texas. In fact, the top 16 results went to MSAs in those two states.
At the other end of the spectrum was California. Six of the ten lowest-performing metro areas in our study were in the Golden State. Two more were in New York and one each in Hawaii and New Jersey.
We categorized the 383 MSAs into four groups (quartiles) from the least free 25 percent to the least free, and then examined how they fared economically. Metropolitan areas with the most economic freedom experienced 2.5 times faster job growth and 10 times faster population growth than those with the least freedom. Those areas with the least freedom also had unemployment rates one-third higher than the areas with the most freedom.
Metropolitan areas with the highest minimum wage burdens had nearly 50 percent higher unemployment rates than those with the lowest burdens. Metropolitan areas with the largest shares of state and local employment had 40 percent higher unemployment rates than those with the lowest.
It may be tempting for the serious skeptic to dismiss such research on the grounds that they are simplistic correlations. After all, Naples, Florida and Dallas, Texas also have more sunny days than, for example, Grand Rapids, Mich.
But scientists around the world have had access to data like ours at local, state and national levels for years. They are sensitive to wrong conclusions that might be drawn from the data and go to great lengths to control key variables that could affect their results.
Most often, these researchers demonstrate positive links between economic freedom and economic outcomes that people, policymakers, and politicians claim they want, such as faster economic and population growth and more entrepreneurship.
One of these papers, entitled “Economic Freedom and Income Levels in the United States,” found that a 10 percent increase in economic freedom was associated with a 5 percent increase in inflation-adjusted gross government product per capita, or the value of all goods and services that are manufactured within the geographic boundaries of a state. As the amount of production per person increases, so does the general standard of living and income levels, which can benefit everyone. There are hundreds of other papers with similar results.
The bottom line from all of this is that policymakers who want to give people more opportunities to enjoy the blessings of economic prosperity must make economic freedom their top priority. This means that politicians should refrain from crowding out private employment with government employment, reduce the burden of minimum wages and taxes, and curb unnecessary government spending.
A huge body of research shows that areas that keep government intervention to a minimum (i.e., those with greater economic freedom) tend to perform better on a variety of policies, including lower unemployment rates, higher job growth, higher population growth, and many, many others.
Michael LaFaive is Senior Director of Fiscal Policy at the Mackinac Center for Public Policy, a commercial research and education institute in Michigan. Follow him on Twitter @lafaiv.
Dean Stansel, Ph.D., is an economist at the Bridwell Institute for Economic Freedom at SMU’s Cox School of Business in Dallas, Texas. Follow him on Twitter @deanstansel.
