MSAs with less restrictive labor regulations have lower unemployment rates, on average. In Graphic 6 we break the 383 U.S. MSAs into four groups, or quartiles, based on their labor market freedom score. It shows that the 2017 unemployment rate in the MSAs with the least-free labor markets was 5.45%. That is more than one-third higher than average in the MSAs in the most-free quartile.
Graphic 6: MSAs with Higher Labor Market Freedom Have Lower Unemployment Rates
Graphic 7 contains unemployment data for the 14 Michigan MSAs. Their average unemployment rate exceeds the U.S. MSA average. Only four Michigan MSAs had unemployment rates below the U.S. average. In the columns, note the apparent connection between an MSA’s overall economic freedom and labor market regulation scores and its unemployment rate. As freedom and regulation scores fall, unemployment rates tend to rise.
Graphic 7: Economic Freedom and Unemployment Rates in Michigan MSAs, 2017
Drilling down even further, we next examine the minimum wage variable and its relationship to unemployment rates. The minimum wage is what economists call a price floor. The degree to which that price floor is binding in any local labor market depends on what the market-clearing wage in that area is. Because of that, to make comparisons across regions with different income levels, we cannot just use the raw dollar value of the minimum wage (currently $9.87 in Michigan). For example, the federal minimum wage of $7.25 is much more binding in a poor state like Mississippi than it would be in a rich state like Connecticut, where the prevailing wage for low-skilled labor is likely already above that level.
This subject is particularly topical in Michigan. In July, a Michigan appeals court judge reinstituted a $12 minimum wage law that had been amended by the state Legislature in 2018. The case stems from a 2018 ballot initiative. It remains an open question as to whether the decision will be appealed. There is also movement afoot in a separate effort to place on the November 2024 ballot a new, higher minimum wage of $15 in 2027.
To measure the burden of the minimum wage on the ability of employers and employees to voluntarily enter into agreements to exchange labor for money, we must adjust for income levels. The way that the economic freedom index does so is to measure annual full-time, minimum-wage income as a percentage of per capita personal income in each MSA.[*] One of the reasons that economic freedom may be particularly important for unemployment rates is that it directly impacts the cost of doing business. For example, higher minimum wages make it more expensive to hire low-skilled workers. For some employers, that will lead them to hire fewer workers, which would lead to a higher unemployment rate.
Indeed, Graphic 8 shows that the MSAs in the United States with the highest minimum wage burdens had a nearly 50% higher unemployment rate than those with the lowest minimum wage burdens.
Graphic 8: MSAs with Higher Minimum Wage Burdens Have Higher Unemployment Rates
Graphic 9 shows that half of the Michigan MSAs had a more burdensome minimum wage than the U.S. average. The average unemployment rate in those seven areas was 5.0%, compared to the U.S. average of 4.5%. In general, MSAs with the highest minimum wage burdens were largely those with the highest unemployment rates.
Graphic 9: Minimum Wage Burden and Unemployment Rates in Michigan MSAs, 2017
When state and local governments have larger bureaucracies, private employers have more competition attracting workers. Companies then must pay higher wages to keep employees, resulting in them hiring fewer workers than they otherwise might. When competing with government bureaucracies for employees, private firms essentially bid against their own tax dollars. This dynamic is borne out in the economic freedom score data. Graphic 10 shows that the unemployment rate was 40% higher in American MSAs with the largest bureaucracies compared to those with the smallest. Bureaucracies here are measured by the percentage of employment in an MSA that is made up of government employees.
Graphic 10: MSAs with Large Government Bureaucracies Have Higher Unemployment Rates
Graphic 11 shows the portion of state and local government employment as a percentage of total employment for each Michigan MSA.[†] Note that MSAs with the smallest bureaucracies have some of the lowest unemployment rates. The variation among some of these MSAs is wide. Bay City’s bureaucratic rank by this measure is more than two times larger than Ann Arbor’s.
Graphic 11: State and Local Government Employees as a Percentage of Total Employment and Unemployment Rates in Michigan MSAs, 2017
[*] Full-time income is computed by multiplying minimum wages by 40 (hours worked per week) and then by 52 (weeks in a year).
[†] The 2019 economic freedom index for MSAs used a state average figure to estimate government employment in each MSA, namely the percentage of total state employment that was state government employment. It added that figure to the number of local government employees in each MSA as a portion of its total employment, producing an estimate of both state and local government employment in each MSA. Because some MSAs have proportionately more state employees than others, this study collected data from Michigan for the actual number of state government employees in each county and used that data to calculate state and local government employment for each Michigan MSA. These statistics are not ranked with MSAs nationally for this reason.