Determinants of economic growth

Last night I was talking to the owner of a small business in Rhode Island, a state that is struggling with unemployment of 12.2 percent. As he described the economic hollowing out that has taken place in the state, with industries such as textiles and the jewelry business packing up for elsewhere, I asked what was stopping businesses from setting up in the state to take advantage of the labor pool.

He said that a better question was why any business would want to set up in Rhode Island, citing such factors as a minimum wage higher than the federal level, high taxation and strong government support for unions (he said that when a union contract expires that the old one is mandated by state law to remain in effect until a new one is negotiated, thus giving little incentive to reach new agreements unless they are even more beneficial to the unions).

I decided to try to test out some of these factors and their impact on unemployment. While it may be difficult to draw any firm conclusions based on the data given the myriad of factors that impact economic growth, the data might provide some food for thought.

The first factor that I looked at was the minimum wage. According to the Department of Labor, the 13 states shaded green in this map have a minimum wage higher than mandated by the federal government:

Using google's public data tool I calculated the average unemployment rates for the states with higher minimum wages against those that simply use the federal level. The result:

Higher than federal min wage: 10.25 percent
Federal min wage: 8.31 percent

Next I decided to look at union influence. For this I decided to look at right to work states against those without such laws using this map:

I found the following unemployment rates:

Right to work: 8.26 percent
Pro-union: 9.28 percent

Last I examined taxation. To measure this I used the fiscal burden rankings of the 50 states compiled by the Mercatus Center earlier this year. Here I simply decided the measure the top 25 against the bottom 25:

Top 25: 8.4 percent
Bottom 25: 9.31 percent

Since this methodology incorporates a lot of states that are middle of the road and not easily divided into either camp, I decided to look at the extremes and compare the top 10 against the bottom 10:

Top 10: 7.79 percent
Bottom 10: 9.1 percent

Lastly I decided to compare those states that were right to work, used the federal minimum wage and placed in the top 10 on fiscal burden against those that were pro-union, had a minimum wage higher than the federal level and were in the bottom 10 on the fiscal burden. The states that met the former criteria were South Dakota, Tennessee, Texas, Mississippi, North Dakota, Georgia and Idaho. In the latter camp, meanwhile, are Rhode Island, California, New Mexico and Connecticut.

Breaking down the unemployment numbers for these two groups:

More free market states: 8.13 percent
More government interventionist states: 9.8 percent

Perhaps these are all just coincidences, but I have my doubts.

Update: Ross Douthat with some related thoughts.

Update: Clarification in the comments section about the Rhode Island union contract law:

The law mandating that the current contract remain in force until a new contract is negotiated is at this point only a proposal which has indeed passed the senate in RI and is presently in the house for action. It is not yet in force, yet is indicative of the anti business climate that such a law would even be considered.