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Hawaii's unemployment rate is the lowest in the nation (2.1%).

https://www.bls.gov/web/laus/laumstrk.htm

Yet they are almost last in economic freedom (#48).

https://www.freedominthe50states.org/overall/hawaii

Why?

Normally economic freedom correlates with low unemployment rates.

The 2nd place in unemployment, NH, scores #1 in economic freedom.

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    I'm not totally clear on what you're asking, in part because the flickr photo you shared doesn't seem to support the premise of your question. With an R^2 value of only 0.08, it seems that the 'economic freedom score' (however that is calculated) doesn't correlate very much at all with unemployment. It also might be that you're using different economic freedom measures. – Avi Mar 28 '18 at 23:30
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    This begs the question. It supposes that economic freedom creates low unemployment, and the simple answer is that it in fact doesn't. – user Mar 29 '18 at 7:55
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    @user - not it doesn't beg the question. Correllation != causation (and yes, ceterus parabus, there is actually some causation - see second link's abstract) – user4012 Mar 29 '18 at 13:25
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    The links are also inadequate as evidence of a link. "freedominthe50states.org" doesn't seem reputable or unbiased or like any kind of science. A Flickr image used to establish a fact is surely a joke. – user Mar 29 '18 at 13:52
  • I suspect that the answer might be a single word: tourists :-) Hawai'i has lots of people coming there to spend money, which provides lots of jobs - although mostly low-paying ones. At the same time its geographic isolation makes it difficult for the unemployed in other places to move there, limiting the supply of labor. – jamesqf Mar 29 '18 at 19:39
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I'm one of the authors of Freedom in the 50 States. We don't expect economic freedom to correlate with unemployment rates at all. Why not? Basic economics. Unemployment has to do with whether the labor market is in equilibrium, that is, whether all those looking for jobs are able to find a job at the wage rate prevailing in a competitive market. The labor market gets out of equilibrium when there are cyclical shocks. You'll find that unemployment rates still tend to be a bit higher in states that suffered a big housing bust in 2007-2009. They also tend to be higher in states with a high percentage of adults with less than a high school education, possibly because the minimum wage is higher than their productivity per hour.

We do expect states with more economic freedom to have higher growth rates, and indeed, Hawaii has a low income growth rate compared to the rest of the country. The average state grew 2.5% per year from 2000 to 2015, adjusting for state-level inflation, but Hawaii grew only 1.9% per year over that period. More Americans have been moving away from Hawaii than moving to Hawaii as well.

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While the paper and the website use the same words, and they are both attempts to answer "how happy would a libertarian be here?" they aren't measuring the same thing.

The paper uses a measure of quantifiable statistics including unemployment, so saying it correlates to unemployment is something of a tautology. It isn't fully because it includes a number of other economic stats like adult literacy, investment per capita, income of the poorest, and child labor that aren't obviously related. The entities ranked are nations.

The website appears to use a ranking of qualitative factors like Does the the state allow gay marriage (+), How restricted are gun rights (-), How much is required of schooling(-), How friendly to plaintiffs are the courts (+). It isn't clear that most of them are objectively related to economics. The entities ranked are US states.

Hawaii seems to aim to reduce unemployment and improve livability through state involvement, which often ranks negatively on the website, but appears to be working.

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Unemployment may correlate with economic freedom ceteris paribus, but it's not a 1-1 causality both ways.

For example, China or USSR had unambiguously extra low economic freedom, yet they had pretty full employment (formally, USSR actually had something called "parasitism" law meaning you get arrested if you don't work/study/retire; informally, the official USSR economic motto was "they pretend to pay us for us pretending to work" - sometimes more and sometimes less accurate).

There are a lot of ways the government can do to directly reduce unemployment which has nothing to do with general laws of economics:

  • Directly order and pay for make-work (as was done under FDR in USA and in USSR, or for that matter under Bush/Obama as part of 2008/9 Stimulus - remember the term "shovel ready"?).

  • Pump money into the economy as a consumer. If you pay for a product or a service, that employs people providing it. A large example of this is military-industrial complex - if you dig (not too far), many many many political and underlying economic decisions are made on the basis of "X decision will employ Y people making Z product in W state".

  • In less privatized economies, pumping money into under-performing state-owned enterprises to avoid their collapse and people being unemployed (with both USSR and later Russian government, and in China).

  • Pay for extensive social safety net which drastically reduces the cost of employing someone). Just for giggles, let's take a progressive example instead of right wing one - Wal-Mart is often accused of this, the specific assertion being that although they employ tons of people but the only reason those jobs can exist is because the state (USA) pays heavily for the social safety net of very low paid Walmart employees.

What differs if that state direct involvement is done is economic growth (or, as per @Jason Sorens, income growth) - you can skew your laws to deliberately up the employment by inefficiently allocating economic resources and capital by the government (as was done by actors as diverse as Stalin's USSR to FDR's USA to Third Reich to Chavista Venezuela to social-democratic France to USA), but that has long term economic consequences in the lower economic growth.

Hawaii state spending is 16.5bn of 91bn of GDP (source), but it's hard to breakdown how much of that affects employment.


An additional, very important factor to note is how close/open the system is. Hawaii is a heavily tourist state, so their economy is also "artificially" sustained, both generally and employment wise, via that factor.

Tourism is the largest single contributor to the state's gross domestic product, representing about 21 percent of its entire economy. (2013 data from Google search).

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    I like this answer best. But is Hawaii doing make-work programs to keep the unemployment levels down? Just because they are a tourist state they have low unemployment? Florida is too but they are 22nd. – Chloe Mar 29 '18 at 17:45
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    @Chloe - re: tourism, I strongly suspect that (1) rich tourists to Hawaii employ far more people than cheapskate spring break students and retirees in Florida, but no way to prove that. (2) Due to remoteness, I suspect more of Hawaii-originated products are consumed by tourists; vs imported ones in Florida. – user4012 Mar 29 '18 at 20:41
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    @Chloe homeless and jobless are different. That article is about people with jobs not being able to afford rent. – user9389 Mar 29 '18 at 21:14
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    @user4012 It breaks standard economic models?? What does that even mean? It's an export like any other, nothing artificial about it... instead of being “artificially sustained”, they are just successful with this industry, period. – Relaxed Jun 30 '18 at 8:44
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    @user4012 You're thinking about the Dutch disease but that's primarily about natural resources. There is nothing “artificial“ about exporting tourism, especially considering the fact that Hawaii is not a country (crucially, it doesn't have its own currency). Otherwise, you would say that the tech industry “artificially“ sustains the Silicon Valley, tourism “artificially“ sustain Florida, etc. and that the US as a whole is not really productive, which makes no sense at all. Not that any of this breaks standard models or has anything to do with “economic freedom“. – Relaxed Jun 30 '18 at 14:50
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The other answers do a great job explaining why economic freedom might not be well correlated with unemployment, mine looks at the specifics of the situation in Hawaii.

Living in Hawaii is absurdly expensive. The cost of living in Honolulu is 88% higher than the national average. This article describes the problem in more detail, "According to the U.S. Census Bureau, 47 percent of Hawaii's residents spend more than a third of their monthly income on rent. That's greater than any other state. About one-quarter of renters put half of their income toward housing."

Furthermore, low paying hotel and restaurant jobs "accounted for 60 percent of Hawaii's job growth in 2017, according to data compiled by Moody's Analytics. Hotels and restaurants employ about one of every five workers in the state, double the proportion in the rest of the U.S." So there are lots of jobs available, but the money they bring in relative to the cost of living makes them unattractive. In a large part due to this phenomenon, "People are moving away from Hawaii even as employers here clamor for workers... [in 2017] the state suffered a net loss of more than 1,000 people. On Oahu, home to Honolulu and major military installations like Pearl Harbor, the population declined an average of 11 people per day."

So the cost of living makes Hawaii unattractive for the kinds of jobs available, making people leave the island. This leaves lots of openings for unemployed people on the island to take, making the unemployment rate very low.

How does this relate to economic freedom? From the original article on economic freedom "Hawaii does badly in almost every area of regulatory policy, but its two worst categories are land-use and labor-market freedom. It has among the strictest restrictions on residential building in the country." Restricting building keeps new residences from being built to lower the cost of living. The source from the question also describes cronyism and a 'general “unfair sales” law (you are not allowed to sell at prices that are “too low”).' Keeping competition from lowering prices could push up cost of living as well. Pushing cost of living up makes people leave and thus drives unemployment down.

Of course, there are other explanations for the cost of living being high, like tiny islands having limited land and the cost of shipping everything from the mainland which are unrelated to government action.

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    It's also expensive just to get there. Can't get to Hawaii with a $50 bus ticket. That tends to discourage transients and other marginally employable people from migrating from the continental US. – tj1000 Jun 30 '18 at 0:44

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