An Empirical Analysis of the Impact of the Three Labor Market Freedom Indices and Occupational Licensing on Interstate Living-Cost Differentials.

Author:Cebula, Richard J.
  1. Introduction

    Studying determinants of geographic differentials in the overall cost of living is motivated by both economic and public policy considerations. For example, given the considerable magnitude of these differentials in the United States, the pattern of internal migration should be expected to be significantly affected by livingcost differentials because, ceteris paribus, a higher living-cost level reduces real income and the standard of living. Several empirical studies have found that net in-migration is indeed a decreasing function of the cost of living (Cebula 1978, 1979; Renas and Kumar 1978, 1983; Gunderson and Sorenson 2010; Plantinga et al. 2013; Foley and Angjellari 2015). Thus, the pattern of economic growth and development appears to be affected by the pattern of geographic living-cost differentials in the United States. It would seem reasonable that identifying those factors that influence geographic living-cost differences should be of interest to both researchers and policy makers. (1)

    A number of authors have studied geographic living-cost differentials in the United States. Indeed, efforts to provide useful insights into the calculation of geographic living-cost differences or to generate new estimates thereof have been made by several scholars, including McMahon and Melton (1978), Cobas (1978), McMahon (1991), Raper (1999), Kurre (2003), and Curran et al. (2006). In addition, several studies have focused on identifying determinants of geographic living-cost differentials. These investigations have been conducted at the metropolitan-area level (Cebula 1980, 1989; Ostrosky 1983, 1986; Haworth and Rasmussen 1973; Hogan 1984; Curran et al. 2006), at the county level within states (Nord 2000; Kurre 2003), and at the state level (McMahon and Melton 1978; McMahon 1991). Alternatively, Kirk (1982) has looked for evidence of a convergence of living-cost levels among metropolitan areas, whereas Kurre (1993) even addresses the use of geographic living-cost differences as a teaching tool.

    This empirical study extends the literature on identifying factors that influence geographic living-cost differences in the United States. It does so in part by formally inquiring whether higher levels of labor market freedom per se in a state, a factor heretofore effectively ignored in the living-cost literature, by increasing the efficiency of labor market transactions in the production and/or distribution of goods and services, act to reduce the overall cost of living in the state. This study focuses on the living-cost impacts of the three different forms of labor market freedom indices identified or measured by Stansel, Torra, and McMahon (2015, chap. 3). Section 2 provides the basic model, which includes, describes, and focuses on these three different forms of labor freedom index, while also accounting for a number of literature-established control variables. Section 3 provides empirical findings in the form of two-stage least squares (2SLS) estimates involving all fifty states for the year 2014. Section 4 extends the analysis to include a measure of the extent of occupational licensing in each state, finding that this de facto dimension of the notion of labor freedom, since it arguably restricts labor market freedom, also influences (although positively) the overall cost of living (Friedman 1962). Section 5 concludes.

  2. Initial Baseline Framework: Labor Market Freedom Indices and Other Factors

    The framework for this empirical analysis is one in which the average overall cost of living index for state j (COSTj), which reflects a vector of prices for the goods and services transacted within state j, is treated as a de facto overall average measure of prices within the state. It is observed that the Council for Community and Economic Research publishes a regional cost of living index (COLI) on a quarterly basis; it is widely known as the ACCRA COLI because the council was formerly known as the American Chamber of Commerce Research Association. The value of COSTj adopted in this study for the year 2014 is the annual average in the year of all four of these quarterly indices.

    The general form of the baseline economic model is given by:

    COSTj = f(LABMKTFREEj, Controlj) (1)

    where COSTj is as described above, LABMKTFREEj refers to the degree of labor market freedom (which assumes three different forms, as described below) in state j, and Controlj refers to certain specific variables for state j that have been found in previous studies to influence geographic living-cost differentials in the United States.

    This study emphasizes the impact of the degree of labor market freedom on interstate living-cost differentials. There are several wellknown indices of labor market freedom. This study adopts the labor market freedom measures by US state generated by Stansel, Torra, and McMahon (2015). This series is the oldest of the labor market freedom indices. It has three components, each corresponding to a specific form of labor market freedom.

    The first form of labor market freedom index, MINWAGEj, involves the state minimum wage at the subnational level in state j. The fundamental idea in this case is that minimum wage legislation requiring higher wages than market forces would establish limits the ability of less-skilled and new entrants into the workforce to negotiate for employment they might otherwise be willing to accept. Hence, this legislation restricts the economic freedom of these workers as well as that of the employers who might otherwise have hired them. The second form of labor market freedom index for state j, GOVTEMPj, involves government employment and takes the perspective that economic freedom decreases as government employment increases beyond what is necessary for governmental productive and protective functions. Government is regarded as effectively expropriating funds to take an amount of labor out of the labor force, restricting "the ability of individuals and organizations to contract freely for labor services since employers looking to hire have to bid against their own tax dollars to obtain labor" (Stansel, Torra, and McMahon 2014, p. 12). Finally, the third form of labor market freedom index for state j, UNIONj, deals with union density. This index is predicated on the idea that workers should have the right to choose whether to form and/or join unions. It is observed that certain statutes and regulations governing the labor market (a) often force workers to join a union, even if they prefer not...

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