In the United States the Federal Government regulates many aspects of labour relations. So for example it provides for a national minimum wage and anti-discrimination procedures. But over and above those Federal laws, each state also has the right to enact local laws that regulate employment. Any state could, for example, enact a minimum wage for the state that exceeds the national minimum wage. Although state labour law makes up only a fraction of American labour regulation, it is useful as a measure determining the differing degrees of state intervention between states.
All this makes America an ideal testing ground for the effect of labour laws on employment creation, because:
- Many of the economic conditions in states are determined by Federal legislation and circumstances that are shared by all states;
- Citizens of states are free to move from state to state to find work.
The American Chamber of Commerce thus maintains an index of labour regulation (The Impact of State Employment Policies on Job Growth 2011 ) that measures the levels of such state-wide employment regulation in each of the 50 states of the US. The Index examines six categories of regulation, namely
- Employment relationships and the costs of separation;
- Minimum wage and living wage laws;
- Unemployment insurance and workers’ compensation;
- Wage and hour policies;
- Collective bargaining issues;
- Litigation/enforcement climate.
A composite point (denoted by the abbreviation “ERI” for Employment Regulation Index”) is allocated to each state on the basis of individual questions relating to sub-topics (an ERI of 100 denoting the conceivably most heavily regulated state employment market).
The states are annually divided into three groups titled “Good”, “Fair” and “Poor”, each corresponding with the relative degree to which the labour regulation of each member of each group is conducive to job creation.
The authors then measure the economic impact of the regulation on the performance of each state as follows:
“Applying standard statistical techniques, we found that, when the ERI is inserted as an explanatory variable, our models demonstrate that higher levels of regulation (i.e., higher ERI scores) result in both higher unemployment and lower rates of new business formation, and that the effect is statistically significant at standard confidence levels. Moreover, the magnitude of the estimated effects is substantial. We estimate that, if each state were to achieve a “perfect” score on the ERI, the effect would be equivalent to a one-time boost of approximately 746,000 net new jobs”.
The outcome is indicated in the following table (The “but-for UR” is the notional unemployment rate that a state would achieve if it had a perfect score, ie maximum deregulation of those aspects governed by state employment law):
2009 EMPLOYMENT EFFECTS OF “PERFECT” ERI
Scores in all States
|STATE||ACTUAL UR||BUT-FOR UR||JOBS CREATED|
|National average / total||9.3%||8.7%||746,462|
Here are the states grouped according to the relative value of their respective ERI’s:
Alabama, Florida, Georgia, Idaho, Kansas, Mississippi, North Carolina, North Dakota, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia.
Alaska, Arizona, Arkansas, Colorado, Delaware, Indiana, Iowa, Kentucky, Louisiana, Maryland, Minnesota, Missouri, Nebraska, New Hampshire, New Mexico, Ohio, Rhode Island, Vermont, West Virginia, Wyoming.
California, Connecticut, Hawaii, Illinois, Maine, Massachusetts, Michigan, Montana, Nevada, New Jersey, New York, Oregon, Pennsylvania, Washington, Wisconsin.
But how do the actual job creation figures of the three groups compare? Here is the average employment growth of each group in the 5-year period from 2009 to 2014:
Quite clearly it would pay a state to be in the “Good” group. The average employment creation in that group is on average 4.5 times bigger than what it is in the “Fair” group, and 5.5 times that in the “Poor” group.
A more dramatic illustration of the value of low regulation is to compare the actual percentage of jobs created over the same five-year period by the “Good” group as opposed to the “Poor” group of states. The “Good” group’s employment growth was 4.4% over the period, compared to that of “Poor”, which was a measly 0.6%. In other words, the “Good” states proportionally created more than seven times as many jobs as the “Poor” states did. In actual numbers the “Good” states created 2 124 734 jobs (starting from about 47 million), while the “Poor” states created only 390 551 jobs (starting from a much larger 62 million).
What is amazing about these figures is how big an impact a relatively small difference in regulation makes. Imagine the difference that could be achieved if the edifice of Federal labour legislation were to be dismantled as well!