State Growth Empirics: The Long-Run Determinants of State Income Growth

55 Pages Posted: 19 Oct 2007

See all articles by Paul W. Bauer

Paul W. Bauer

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Mark Schweitzer

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Scott Shane

Case Western Reserve University - Department of Economics

Date Written: May 2006

Abstract

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.

Suggested Citation

Bauer, Paul W. and Schweitzer, Mark and Shane, Scott A., State Growth Empirics: The Long-Run Determinants of State Income Growth (May 2006). FRB of Cleveland Working Paper No. 06-06, Available at SSRN: https://ssrn.com/abstract=1022341 or http://dx.doi.org/10.2139/ssrn.1022341

Paul W. Bauer (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101
United States
216-579-3021 (Phone)

Mark Schweitzer

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Scott A. Shane

Case Western Reserve University - Department of Economics ( email )

Cleveland, OH 44106
United States

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