How Important are Human Capital, Physical Capital and Total Factor Productivity for Determining State Economic Growth in the United States, 1840-2000?

Abstract

This paper creates a new data set on the physical capital at the state level for the United States from 1840 through 2000. We combine these new data with state level human capital and income data to do standard growth accounting exercises and to estimate the contribution of aggregate input growth and total factor productivity (TFP) growth to income growth across the states of the United States from 1840 through 2000, a period that is longer than typical for the existing literature. We find that that 61% of output growth from 1840-2000 is accounted for by input growth. We conduct a variance decomposition to examine the role that aggregate input growth and TFP growth have in explaining the cross-sectional variance of income growth across states. As the results are sensitive to the treatment of the observed correlation between aggregate input growth and TFP growth, we construct plausible upper and lower bounds for the fraction of the variance in output that can be explained by variation in TFP and aggregate inputs. For the 1840 through 2000 period, we find that a the upper bound for TFP growth is 93% of the variance of income growth and the plausible upper bound for aggregate inputs is 82%. We find it interesting, however, that at the state level where the unit of observation is more homogenous, TFP continues to be an important determinant of the growth and the variation in output per worker. In addition, as our data is across states of the United States instead of across countries, one would expect less institutional heterogeneity in this study than in those using cross-country comparisons.

Keywords: total factor productivity, state economic growth, state level capital

JEL Classification: O47, O50, O51, O30, N10