NCPA - National Center for Policy Analysis


April 30, 2010

There is a link between economic freedom and employment growth, according to a new study published by the Federal Reserve Bank of St. Louis, called "Economic Freedom and Employment Growth in the U.S. States."  Other studies have come to the same conclusion; however, one of the things that makes this study different is its findings on labor markets, says Michael D. LaFaive, director of the Mackinac Center's Morey Fiscal Policy Initiative.  The authors write: "In addition, we find that less restrictive state and national government labor market policies have the greatest impact on employment growth in U.S. states." 

That conclusion doesn't bode well for Michigan, says LaFaive, which is known for having a relatively hostile labor climate and which over the last 10 years has seen its overall national economic freedom ranking tumble according to the periodic "Economic Freedom of North America" report, published by the Fraser Institute in Canada, and the "U.S. Economic Freedom Index" published by the Pacific Research Institute in California: 

  • The Fraser Institute's 2004 and 2008 editions show Michigan ranked 32nd and 39th, respectively, in economic freedom among the states.
  • The 2008 Pacific Research Institute index reports that Michigan's ranking fell from 27th in 1999 to 34th place in 2004, and to a dismal 43rd place in 2008.  

These years coincide with the progressive meltdown of this state's economy and job market, explains LaFaive. 

Certainly other factors have contributed to Michigan's decline, but just as surely, the state's troubles have been compounded by a series of economic freedom-destroying policy missteps, such as a $1.4 billion tax hike in 2007, says LaFaive. 

What can be done to reversing Michigan's decline?  LaFaive recommends the following: 

  • Require the state to stop digging a deeper economic freedom hole, beginning with the immediate and final entombment of Gov. Jennifer Granholm's latest tax hike proposal.
  • Repeal the Michigan business tax (and replacing its revenue with spending cuts and reforms), adopt a right-to-work law and rein in the state's out-of-control environmental regulators. 

Source: Michael D. LaFaive, "Federal Reserve Study: Economic Freedom Matters," Mackinac Center, April 29, 2010; based upon: Thomas A. Garrett and Russell M. Rhine, "Economic Freedom and Employment Growth in U.S. States," Federal Reserve Bank of St. Louis, Working Paper No. 2010-006A, March 2010. 

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