A Longitudinal Analysis of the Impact of State Economic Freedom on Individual Wages

Matching panel data drawn from the National Longitudinal Survey of Youth 1979 to the state-level index of economic freedom published in Economic Freedom of North America 2010, this study establishes an empirical relationship between wages at the individual level and the degree of state economic freedom. In OLS models, a one standard deviation improvement in the state economic freedom score is found to increase wages by 2.5 percent. Models that con-trol for both person-specific and state-level fixed effects reveal a wage increase of more than 8 percent. Significant variation in wage gains is found across the different areas used to con-struct the economic freedom measure as well as across broad worker characteristics like race and schooling level.