National regulation, state-level policy, and local job creation in the United States: A multilevel perspective

Abstract

The relationship between national regulation and job creation remains highly debated. The “public choice” perspective holds that regulation hinders job creation through compliance costs and regulatory capture. Meanwhile, the “public interest” view suggests that regulation can facilitate employment growth by promoting innovation and fair competition. We offer a contingency perspective, i.e., that national regulation's effects vary across heterogeneous state political institutions. Drawing on the political science theory of market-preserving federalism, we argue that state-level economic freedom moderates the effects of national regulation on local net job creation. Using U.S. data, we find support for this moderating hypothesis. National regulation destroys jobs on net in states with low economic freedom. However, national regulation has no effect in states with high economic freedom; this effect holds for tax freedom and labor market freedom. The moderation is concentrated among mature firms rather than young firms, and in metro counties rather than non-metro counties; furthermore, it is robust across multiple regulatory measures and instrumental variables approaches. Our work reveals that state political institutions have an underappreciated influence on the costs of national regulation, demonstrating the interdependence of policies for local economic development.