Evaluating and Improving the Metropolitan Economic Freedom Index

Abstract

AbstractThe Metropolitan Economic Freedom Index (MEFI) ranks cities based on their support of free market enterprise. In its current state, MEFI purports to measure three constructs (government spending, taxation, and labor market freedom) with three equally weighted variables for each one, assuming perfect substitutability of variables. This study investigates the statistical consistency of MEFI through Confirmatory Factor Analysis. Multiple models investigate current variable selection by providing a potentially better indicator of labor market freedom, aggregation assumptions by removing the requirements for fixed and equal weights, and statistical consistency by evaluating the fit between the data and models. Results indicate that the current MEFI model is not statistically consistent with the data, that weighting of variables should not be equal, that variable selection should be investigated, and that constructs should be re-imagined. The models investigated provide an initial starting point for redefining MEFI.