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

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Author Information : David S. Lucas, Syracuse University
Christopher J. Boudreaux, Florida Atlantic University

Year of Publication : Research Policy (2020)

Summary of Findings : National regulation has negative effects on job creation in states with low economic freedom but not in states with high economic freedom, which suggests that state policies influence the effects of national regulations.

Research Questions : Does national regulation reduce or improve net job creation?
Do the effects of national regulation depend on state policies?

What we know : There is significant debate about whether regulation helps or hinders net job creation. Research studies have found conflicting findings on this. Regulation is a very important issue for local economic activity, especially among new firms and small businesses. So the extent to which regulation hinders firms' ability to create jobs and spur local economic growth is a key question for policymakers and businesses alike.

Novel Findings : We show that the effects of regulation are not "constant" across states. Instead, the same national regulatory rules can have negative effects in some areas but not in others. Our novel finding is showing that regulation has negative effects in counties in states with low economic freedom, but is not negative in states with high economic freedom. This reveals an important value of decentralized government and the federalist system that the United States has--namely, that states can influence the effects of national policy in their local economies. We also found that these effects are most pronounced for mature firms and firms in metropolitan counties (rather than more rural areas).

Implications for Policy: We tend to think of national regulation and state policy as distinct factors for local economic growth, but our work shows that they are interdependent. State policymakers can play an active role in shaping the effects of national rules in their geography.

Implications on Research: Scholars have tended to claim that regulation is either “good or bad” for job creation and entrepreneurial activity. Our work shows that the effects of regulation will not always be either good or bad but rather depend on the state policy environment they are applied in.

Full Citations : David S. Lucas and Christopher J. Boudreaux. “National regulation, state-level policy, and local job creation in the United States: A multilevel perspective.” Research Policy, Volume 49, Issue 4, 2020.

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 under-appreciated influence on the costs of national regulation, demonstrating the interdependence of policies for local economic development.

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National regulation has negative effects on job creation in states with low economic freedom but not in states with high economic freedom, which suggests that state policies influence the effects of national regulations.National regulation, state-level policy, and local job creation in the United States: A multilevel perspective

David Lucas

David Lucas is assistant professor in the Department of Entrepreneurship and Emerging Enterprises.
David Lucas
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