Labor market freedom and geographic differentials in the percentage unemployment rate in the U.S.

Abstract

The present paper statistically examines whether it can be inferred that the greater the labor market freedom in an environment, the lower the unemployment rate in that environment, other things held the same. The hypothesis is predicated on the tenet that enhanced labor market freedom in a state leads to a more efficiently operating labor market and thereby diminishes the unemployment rate in the state. The empirical context is a panel dataset for all states in the U.S. The study period begins with the year 2008 and runs through the end of the year 2016. This nine-year time frame integrates the entirety of the Great Recession and more than 6 years thereafter. The study includes a number of control variables. The findings strongly support the hypothesis that the unemployment rate is a decreasing function of labor market freedom, whether expressed in the form of its three sub-indices or in the form of the arithmetic mean of those three sub-indices. Potential state-level public policy implications of the findings are also provided and discussed in this study.