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Topics: Household income in the United States, Per capita income, Endogenous growth theory Pages: 55 (11750 words) Published: December 7, 2014
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06 06

State Growth Empirics: The Long-Run
Determinants of State Income Growth
by Paul W. Bauer, Mark E. Schweitzer, and
Scott Shane

FEDERAL RESERVE BANK OF CLEVELAND

Working papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System.

Working papers are now available electronically through the Cleveland Fed’s site on the World Wide Web: www.clevelandfed.org/research.

Working Paper 06-06

May 2006

State Growth Empirics:
The Long-Run Determinants of State Income Growth
by Paul W. Bauer, Mark E. Schweitzer, and Scott Shane

Real average U.S. per capita personal income growth over the last 65 years exceeded a remarkable 400 percent. Also notable over this period is that the stark income differences across states have narrowed considerably: In 1939 the highest income state’s per capita personal income was 4.5 times the lowest, but by 1976 this ratio had fallen to less than 2 times. Since 1976, the standard deviation of per capita incomes at the state level has actually risen, as some higher-income states have seen their income levels rise relative to the median of the states. A better understanding of the sources of these relative growth performances should help to characterize more effective economic development strategies, if income growth differences are predictable. In this paper, we look for statistically and economically significant growth factors by estimating an augmented growth model using a panel of the 48 contiguous states from 1939 to 2004. Specifically, we control for factors that previous researchers have argued were important: tax burdens, public infrastructure, size of private financial markets, rates of business failure, industry structure, climate, and knowledge stocks. Our results, which are robust to a wide variety of perturbations to the model, are easily summarized: A state’s knowledge stocks (as measured by its stock of patents and its high school and college attainment rates) are the main factors explaining a state’s relative per capita personal income.

For helpful comments and suggestions, the authors would like to thank seminar participants at the Case Western Reserve University and the Federal Reserve Bank of Cleveland. Particularly useful suggestions were offered by Mark Sniderman, Chris Taber, and Lance Lochner. Data collection was greatly aided by persistent research assistants: Bethany Tinlin, Brian Rudick, and Christian Miller.

Paul W. Bauer and Mark E. Schweitzer are at the Federal Reserve Bank of Cleveland. Scott Shane is at Case Western Reserve University. Correspondence may be sent to mschweitzer@clev.frb.org.

I.

Introduction
Can states use economic development policy to boost the average personal

income levels of their citizens? This is certainly a major aim of most state economic development policies; yet neoclassical growth theory does not offer much hope of success for such policies. It predicts that capital mobility alone will lead to fairly quick convergence in per capita personal incomes across U.S. states. Unlike nations, U.S. states lack barriers to the flow of information, labor, and capital across boundaries that could preclude convergence (Barro and Sala-i-Martin, 1991; 1992). In fact, many researchers have noted that the tendency toward convergence over time in the per capita income of U.S. states supports the neoclassical view, at least when compared to the international results (Caselli and Coleman, 2001).

However, this convergence is not complete, and it appears to have stalled since the mid 1970s (see...

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