Economic freedom, entrepreneurial activity, and the service sector

The purpose of this paper is to focus on the impact of economic freedom on entrepreneurial activity in the service sector. Specifically, the paper examines how economic freedom at the state level affects employment among North American Industry Classification System (NAICS) six-digit service industries.

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.

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.

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.