New study shows increased economic freedom leads to greater income mobility for workers and entrepreneurs
Johannesburg — Economic freedom enhances income mobility while the poor in unfree nations have fewer opportunities to escape poverty and build prosperity, finds a new study released today by the Free Market Foundation (FMF) in conjunction with Canada’s Fraser Institute, an independent, non-partisan public policy think-tank.
“Unfortunately, the South African government has adopted policies that have caused the country’s economic freedom rating to slide from 58th in 2000 to 84th in the most recent Economic Freedom of the World (EFW) report. In the same period the rating of Mauritius improved from 38th to 11th out of the 165 jurisdictions measured in the EFW ratings,” said Eustace Davie, a director of the FMF. “Mauritius has less government involvement in its economy, the top marginal tax rate is 15%, there is much greater freedom to trade internationally, and the Mauritian government has been reducing regulation in order to free up economic activity, hence its much-improved ratings and ranking.”
Many factors contribute to economic freedom but the most important for income mobility are rule of law and restrictive regulations. In uneconomically free nations, domineering government and crony elites use the rule of law, not to protect the freedom of all but entrench the privilege of their cliques while undermining the rights of everyone else.
Similarly, regulations are too often used to exclude people from work and opportunity, even in nations with a relatively robust rule of law. Government regulation may require workers to purchase occupational licenses or train to acquire credentials before they can work. South Africa ranks 52nd (Mauritius 29th) on Legal System and Property Rights and 87th on Regulation (Mauritius 31st) out of 165 jurisdictions.
“Government regulations impede the ability of workers to make themselves better off by slowing the upward mobility of workers,” said Vincent Geloso, an assistant professor of economics at George Mason University, senior fellow at the Fraser Institute and co-author of Economic Freedom Promotes Upward Income Mobility. The study shows that labour regulations across industries slow wage growth for low-income workers. And, particularly, inappropriate minimum wages and occupational licencing tends to hurt income growth among the poor more than among higher-income workers.
The same effect is also observed for would-be entrepreneurs who face barriers to entering certain industries because of regulatory costs and fees. “South Africa’s labour laws, which include a minimum wage, have particularly tragic consequences. They have resulted in an unemployment rate of close on 50% for all potential members of the workforce, and in the case of young people aged from 15 to 24, the ILO reports that the unemployment rate is 75%,” Davie says.
The Fraser Institute produces the annual Economic Freedom of the World report in cooperation with the Economic Freedom Network, a group of independent research and educational institutes in nearly 100 countries and territories. It’s the world’s premier measurement of economic freedom.
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The Fraser Institute is an independent Canadian public policy research and educational organization with offices in Vancouver, Calgary, Toronto, and Montreal and ties to a global network of think-tanks in 87 countries. Its mission is to improve the quality of life for Canadians, their families and future generations by studying, measuring and broadly communicating the effects of government policies, entrepreneurship and choice on their well-being. To protect the Institute’s independence, it does not accept grants from governments or contracts for research. Visit www.fraserinstitute.org