Economic freedom, entrepreneurial activity, and the service sector
| Published date | 07 October 2013 |
| DOI | https://doi.org/10.1108/JEPP-Mar-2012-0015 |
| Pages | 144-159 |
| Date | 07 October 2013 |
| Author | Stephan F. Gohmann,Bradley K. Hobbs,Myra J. McCrickard |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
Economic freedom,
entrepreneurial activity, and the
service sector
Stephan F. Gohmann
Department of Economics, College of Business, University of Louisville,
Louisville, Kentucky, USA
Bradley K. Hobbs
Florida Gulf Coast University, Fort Myers, Florida, USA, and
Myra J. McCrickard
Bellarmine University, Louisville, Kentucky, USA
Abstract
Purpose – The purpose of this paper is to focus on t he impact of economic freedom on entrepreneurial
activity in the service sector. Specifically,the p aperexamines how economic freedom at the state level affects
employment among North American Industry Classification System (NAICS) six-digit service industries.
Design/methodology/approach – The paper uses a fixed effects model to predict the effect of
economic freedom on employment in each of the NAICS six-digit service industries. The paper uses
the significance of the economic freedom coefficients to determine which industries grow and which
shrink with increases in economic freedom.
Findings – The empirical findings reveal that economic freedom improves job growth for some, but
not for all industries. Employment tends to grow in the six-digit industries that are categorized as
finance and insurance, administrative and waste services, and professional and technical services.
Employment in many of the health care and social assistance industries as well as accommodation and
food services industries tends to fall with increases in economic freedom.
Originality/value – These results give a more detailed assessment of the influence of economic
freedom on employment growth based on micro-level data. The results can be used by policy makers
to better understand how changes in economic freedom influence the portfolio of industries that
develop in their states.
Keywords Employment, Freedom, Rent seeking
Paper type Research paper
1. Introduction
The positive relationship between increased economic fre edom and increased
economic prosperity for societies is well established in the empirical literature. The
evidence suggests that institutional frameworks suppor tive of economic freedom lead
to increased aggregate economic prosperity as measured by gross domestic product
at both state and national levels (Friedman, 1962; Barro, 1991, 1996). There are
also positive effects on job growth, particularly through entrepreneurship (Acs and
Armington, 2006; Friar and Meyer, 2003; Laukkanen, 2000).
Although it is generally found that economic freedom contributes to economic
prosperity at the aggregate level, deconstr ucting the observed aggregate effects
and exploring whether all industries exhibit higher levels of growth with increased
economic freedom may be insightful. This paper investigates the effects of economic
freedom on a significant sub-sector of the US economy – service industries. The service
rather than the manufacturing sector is selected for analysis f or several reasons.
First, the contribution of the manufacturing sector to economic activity as measured by
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/2045-2101.htm
Journal of Entrepreneurship and
Public Policy
Vol. 2 No. 2, 2013
pp. 144-159
rEmeraldGroup PublishingLimited
2045-2101
DOI 10.1108/JEPP-Mar-2012-0015
144
JEPP
2,2
the percentage of gross domestic product has progressively declined over time.
Manufacturing dropped from 21 percent of GDP in 1980 to 18 percent in 1990, and to
16 percent in 2000 (real 2005 dollars). By 2008, the manufacturing sector represented
only 13 percent of GDP. On the other hand, service industries have become an
important component of economic activity, representing 66.1 percent of GDP in 2009,
25 percent of all employment, and the majority of growth in employment (Swann,
2009). Although service firms typically hire fewer workers p er firm, a significant
amount of net new job creation originates from small firms. Second, entrepreneurial
decisions concerning firm location maybe mo re heavily influenced by the institutional
environment in the service sector. Finally,many services are inse parable in production
and consumption and lack the transportability of manufactured goods. This limits
the consumer catchment range of many service industries and further constrains the
location opportunities faced by these entrepreneurs.
The size and type of service industries vary significantly across states. There are
many potential explanations for this observation. One factor that has be en little
investigated is economic freedom. Although economic freedom is normally p ositively
associated with economic growth, it is possible that some industries find increasing
economic freedom threatening to profits and view infringements on economic freedom
by government in a positive manner. For instance, rent-seeking licensing behaviors
have been observed in industries as varied as airlines, banking, cosmetology, cell phone
services, sales and distribution of alcoholic beverages, and taxi cab services. States are
characterized by differing institutional frameworks surrounding businesses and we
posit that these differences will influence the observed service sector p ortfolio in a
given state. This paper extends the e arlier empirical analysis of the service sector by
Gohmann et al. (2008) by using a more detailed North Amer ican Industry Classification
System (NAICS) six-digit classification scheme for service industries. This allows
further clarification of the specific industries that respond favorably or unfavorably to
greater economic freedom, suggesting which entre preneurial activity may be classified
as either productive or unproductive (Baumol, 1990).
We examine the effects of economic freedom on a broad range of service industries
as defined by the NAICS at the six-digit level. We use data from the state-level
economic freedom index constructed by Ashby et al. (201 0) to estimate the effects
of economic freedom on employment patterns in service industries within the USA.
We find mixed results for specific industries. In short, service industries differ in
both the magnitude and the direction of response to changing levels of economic
freedom. Our findings imply a more complex relationship between economic freedom
and entrepreneurial activity than empirical studies based on more aggregated data
suggest. Differences in economic freedom affect not only the size but also the types of
service industries that develop within a state. Service industries that profit from
the growth of government may welcome governmental regulations that infringe upon
economic freedom. Consequently, it would be rational for entrepreneurs in these
industries to locate and expand their busin esses in states with an institutional
environment conducive to a growing government sector, increased takings, and
additional infringements on free exchange within labor markets in order to best
serve their interests. We argue that these findings are consistent with Baumol’s (1990)
conjecture that productive entrepreneurship and unproductive en trepreneurship can
coexist within an economy.
This paper is divided into five sections. Section 2 includes a literature review which
focusses on entrepreneurship and economic freedom. O ur empirical model is presented
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freedom
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