Tuesday, November 23, 2010

Unemployment rate and economic freedom

Does increasing economic freedom raise the unemployment rate? To answer the question, I collected data on the unemployment rate and Index of Economic Freedom in 2010. I randomly chose 26 countries from various income groups. In the sample are Hong Kong, New Zealand, Switzerland, Australia, Canada, U.S., Denmark, Chile, UK, Netherlands, Spain, Norway, Mexico, France, Turkey, Italy, Tunisia, Brazil, India, Indonesia, China, Russia, Syria, Bolivia, Venezuela and Zimbabwe. Based on the sample data, I estimated the rate of unemployment as a function of economic freedom as measured by the Heritage Foundation.

As it can be seen from the graph, economic freedom does affect the unemployment rate. In fact, the influence of economic freedom accounts for almost 37 percent of the variation in the unemployment rate. Partial regression coefficient suggests that a 1 point increase in the Index of Economic Freedom would reduce the rate of unemployment rate by 0.1452 percentage point. The coefficient is highly significant with p-value equal to 0.001. Thus, one could hardly blame greater economic freedom and labor market deregulation for the rise of the unemployment rate.

Economic Freedom and Unemployment Rate
Source: Index of Economic Freedom, 2010.

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