US State Economic Freedom and the Labor Supply of Young Workers

Abstract

Matching panel data drawn from the National Longitudinal Survey of Youth 1979 to the state-level index of economic freedom published in Economic Freedom of North America 2010, this study examines the empirical relationship between the degree of economic freedom in US states and individual labor supply. OLS estimation identifies a positive correlation between economic freedom and annual hours worked. However, this relationship disappears when the model accounts for time-invariant person-specific fixed effects. Although states with higher degrees of economic freedom appear to generate higher productivity and therefore labor earnings potential among workers, most workers do not increase their hours of work in response.