Freedom in the 50 States

We also include government employment, which can crowd out employment in the private sector (see Table 1). To the extent that government-run enterprises are less efficient than private ones, government employment costs the local economy. Economists Jim Malley and Thomas Moutos used a cointegration framework on time-series data from Sweden and found that a 1.0 percent increase in government employment is associated with a 0.43 percent decrease in private employment. Economist Evi Pappa used U.S. state data and also found that aggregate employment does not increase at moments when government employment does, implying substantial crowding out in the short run and presumably in the long run as well.¹

According to the Malley-Moutos elasticity estimate, which they applied to state data from 2009, an aggregate disemployment effect occurred from an increase in government employment that year. Although that might be true, it seems like an aggressive assumption. After all, government employment is very high in Sweden; thus, its marginal effect there might be more negative than its marginal effect just about anywhere else.

Instead, following Pappa’s results, the freedom index assumes a net-zero effect on total employment from an increase in state and local employment. The private disemployment effect of a one-standard-deviation increase in the ratio of government to private employment, as of 2015, would be 3.81 million nationwide. Average wage per job in the United States in early 2016 was $49,630. The index assumes that compensation equals marginal productivity and that government jobs are only 90 percent as productive as private jobs. The victim cost of a nationwide, one-standard-deviation increase in the government employment ratio is therefore 3.81 million times $49,630 divided by 10, or $18.9 billion. We divide that figure by two because government consumption presumably captures some of the same dynamics, and we want to avoid double-counting.

Government employment data are available on a calendar-year basis from the Bureau of Economic Analysis.

The ranking here looks a lot like the ranking for government consumption, which makes sense because government consumption includes the government’s wage bill. The four states with the most public employment are all energy-rich states where the budget constraint is presumably laxer than in states like Florida, Massachusetts, and Nevada that depend heavily on sales and income taxes for their revenue. It is noteworthy that Texas has kept its government fairly small (14th on this variable), in part because its economy has diversified well beyond energy and in part because of voter ideology.