Economic Freedom and Service Industry Growth in the United States

The growth of an economy depends upon entrepreneurial activities leading to the formation of new businesses and the production of new goods and services. In turn, institutions influence entrepreneurial activity. Public policy is an attribute of the institutions under which entrepreneurs operate. One element of the institutional environment is the degree of economic freedom under which entrepreneurs form and operate their business activities. The degree of economic freedom affects not only profit opportunities for entrepreneurs, but also the level and the type of economic activities they pursue. We examine how the entrepreneurial activity and level of employment in U.S. service industries respond to changes in the degree of economic freedom among states. Our findings suggest that the relationship between entrepreneurial outcomes and economic freedom varies significantly by industry. In some industries, such as business and personal services, increases in economic freedom lead to growth in the number of firms and the level of employment. However, the reverse is true for other industries, such as health, social, and legal services.