Policies of U.S. States Have Negligible Impact on Employment Growth

State Groups by Tax Rank
Data Sources: U.S. Bureau of Labor Statistics, U.S. Census, Tax Foundation.
States Top % By Tax Rank
Data Sources: U.S. Bureau of Labor Statistics, U.S. Census, Tax Foundation.
States Bottom 5 By Tax Rank
Data Sources: U.S. Bureau of Labor Statistics, U.S. Census, Tax Foundation.

Annual Change in Distribution of Percents of State Populations That Are Employed

2000 2001 2002 2003 2004 2005
Range 15.6% 14.5% 13.9% 14.0% 14.1% 14.5%
Minimum 30.9% 31.3% 30.9% 30.5% 30.6% 30.7%
Maximum 46.4% 45.8% 44.9% 44.5% 44.7% 45.2%
2006 2007 2008 2009 2010
Range 14.4% 14.3% 14.8% 16.0% 15.6%
Minimum 31.1% 31.1% 30.6% 28.7% 28.3%
Maximum 45.5% 45.4% 45.4% 44.6% 44.0%


What is striking in the first chart above (employment change for groups of states defined by Tax Climate Ranking) is that the patterns of change are so similar across the groups.  One might easily imagine the changes are choreographed.

This much unity of change is not consistent with the oft stated assertion that state policies have a large impact on state level employment change.  It is much more consistent with the proposition that state level employment change is driven primarily by economic forces that transcend state boundaries.

This interpretation is supported by variations within Tax Climate Ranking groups (second and third charts).  If state economic policies produced large employment effects, one would expect states with very different Tax Climate Rankings to proceed along visibly different employment change paths, while states with similar Tax Climate Rankings would proceed along similar employment change paths.  This isn’t the case.

The differences among the patterns of change for the closely ranked top ten states and among the patterns of change for the closely ranked bottom ten states appear to be greater than the differences among the patterns of change for groups of states.

Other employment change charts using the same formats  (not included here) display very similar patterns.  Again, patterns of change across groups are very similar  and differences within groups are as large as differences across groups.

For those charts the same employment change data were sorted differently.  One set of charts displays patterns of change for ten groups created by sorting the employment change data on percent of total population employed in 2000 (on the assumption that different initial employment levels might correspond to different policy histories and thus produce divergent change patterns).  The second set displays patterns for groups created by sorting the data on change in the percent of total population employed from 2000 to 2010 (on the assumption that differences among states in how well they performed over the decade might reflect policy differences other than Tax Climate that would produce noticeable differences in patterns of change).

The last item above, the table showing the distribution of percents of state populations employed,  offers more evidence that state employment levels change in unison.  Over the course of the decade the highest percent of population employed and the lowest percent change together, producing an almost constant range between highest to lowest.  Again, this is much more in keeping with conclusion that economic forces that transcend states in scope, not state policies, drive employment change at the state level.

A Plausible Explanation

It would be very surprising to find policy differences across states large enough to produce large differences in patterns of employment growth.

First, the states are part of a national governmental system in which constitutional provisions limit the policy options available to states, state governments are very similarly organized, and policy makers generally agree on the beneficence of the free enterprise system.  These factors inhibit the development of large policy differences among states.

Second, when a state enacts a policy or set of policies that seem to provide it with investment and employment growth advantages over other states, those other states adopt those or similar policies very quickly.  Thus, large policy differences will not persist.

Third, U.S. states are exposed to economic forces that are global in scope.  Global financial and production corporations move large volumes of money and commodities  across state and national boundaries.  So do many local businesses.  Ownership often transcends state and national boundaries.   States are subject to the policy rules of numerous  bilateral and multilateral trade and investment agreements entered into by the U.S.

These global economic forces are certainly powerful enough to overwhelm the effects of policies limited in scope to state boundaries and to wash away the employment change differences among states that policy differences might otherwise produce.