Special interest groups, labor market regulations, and labor market performance in the U.S. states

This paper uses data from the fifty US states from 2006-2015 to explore how labor market regulations and the strength of special interest groups’ (SIGs) influence in the political process might affect labor market performance. A dynamic panel data model is specified and estimated using a sequential two-stage (two-step GMM) method (Kripfganz and Schwarz (2019)), which addresses endogeneity and other estimation issues, and allows direct parameter estimates for the time-constant dummies measuring SIGs influence. We find that the performance impact of alternative measures of regulation depends on the strength of SIGs' influence and that neglecting to account for such influence, as in the sizeable empirical literature, may lead to misspecification problems serious enough to undermine the validity of conclusions drawn about the nature of the relationships between the regulations and labor market performance. We also find strong support for various hypotheses relating to the independent and combined effects of labor market regulations and SIGs' influence on labor market performance. Also, in most cases, these effects are significantly stronger in the states where the SIGs' influence is dominant, such as Alabama, Florida, Hawaii, and Nevada. An apparent implication of this study is that an analysis of labor market performance that ignores the role of SIGs is, at best incomplete.