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Why do some states have higher unemployment rates?: The new Chamber of Commerce report doesn’t provide the answer

Issue Brief #296

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In a new report, the U.S. Chamber of Commerce purports to show that dismantling state regulations that are protective of workers would lead to large reductions in states’ unemployment rates by lessening costs on employers. It further describes such dismantling as a potential “free economic stimulus.” The chamber’s report is misleading on two counts. First, there is no evidence that what are keeping state unemployment rates high today are high employment costs. Unit labor costs economy-wide were lower in 2010 (when we had a 9.6% unemployment rate) than in 2007 (when the unemployment rate was 4.4%). Second, even if one gave the chamber the benefit of the doubt and assumed it is really talking about longerrun determinants of unemployment, its statistical approach is poorly constructed for untangling the true relationships between unemployment and its created index of employment regulation. Further, the finding does not stand up to a rudimentary check to confirm statistical robustness. In fact, the most robust finding to fall out of the chamber’s dataset is that strong employment protection is associated with higher state income.

Given the thinness of the evidence in the chamber’s report, it should have little bearing on debates about states’ labor regulations.

The Chamber of Commerce employment regulation index (ERI)

The centerpiece of the chamber’s report is an “employment regulation index” (ERI) that it has constructed for all 50 states. For the chamber, a perfect score in the ERI is a zero—meaning that the state has no regulations that exceed federal minimums in their stringency. Essentially, the chamber is advocating that states surrender their policymaking autonomy to achieve a better score on the index. Some things that harm (inflate) a state’s ERI? A high minimum wage, more-generous unemployment benefits, requirements that unemployed workers receive their benefits in a timely manner, requirements that employers pay employees’ last paychecks in a timely manner, requirements for meal and rest periods during the workday, and prohibitions on employees’ ability to construct work contracts that allow for reasonable collection of union dues (so called “right-to-work” guarantees).

This will strike many as an odd list of things that are bad for a state’s workers, but the chamber claims in its report to have found a durable statistical relationship between a low ERI and low unemployment. The chamber even goes so far as to call the complete surrender of state policymaking autonomy an opportunity for “free economic stimulus.” There are (at least) two problems with these claims over and above the basic problem that they ignore the costs to affected workers of removing all state safeguards connected to their employment.