WP/15/116

U.S. Total Factor Productivity Slowdown:
Evidence from the U.S. Statesby Roberto Cardarelli and Lusine Lusinyan

WP/15/116© 2015 International Monetary FundIMF Working Paper
Western Hemisphere Department
U.S. Total Factor Productivity Slowdown: Evidence from the U.S. States
Prepared by Roberto Cardarelli and Lusine Lusinyan1
Authorized for distribution by Nigel ChalkMay 2015
IMF Working Papers describe research in progress by the author(s) and are published toelicit comments and to encourage debate. The views expressed in IMF Working Papers arethose of the author(s) and do not necessarily represent the views of the IMF, its Executive Board,
or IMF management.
Abstract
Total factor productivity (TFP) growth began slowing in the United States in the mid-2000s,
before the Great Recession. To many, the main culprit is the fading positive impact of theinformation technology (IT) revolution that took place in the 1990s. But our estimates of TFP
growth across the U.S. states reveal that the slowdown in TFP was quite widespread and notparticularly stronger in IT-producing states or in those with a relatively more intensive usageof IT. An alternative explanation offered in this paper is that the slowdown in U.S. TFP
growth reflects a loss of efficiency or market dynamism over the last two decades. Indeed,
there are large differences in production efficiency across U.S. states, with the states having
better educational attainment and greater investment in R&D being closer to the production“frontier.”
JEL Classification Numbers: O47, E23, O30, R11
Keywords: Productivity, growth, stochastic frontier analysis, U.S. states
Author’s E-Mail Address: rcardarelli@imf.org; llusinyan@imf.org
1

The authors are grateful to Steven Yamarik for helpfully providing the state-level capital stock and investment
estimates, and to Nigel Chalk, Andrew Levin, Juan Sole, Jason Sorens, and Andrew Tiffin for helpful
discussions and comments.

Contents
Abstract ......................................................................................................................................2
I. Productivity Slowdown: The Debate ......................................................................................3
II. Empirical Analysis ................................................................................................................5
A. Is Productivity Growth Different Across U.S. States?..............................................6
B. Technological Progress vs. Efficiency ......................................................................8
C. Determinants of State-Level TFP Growth ..............................................................11
III. Conclusions ........................................................................................................................11
Figures
1. Deceleration in Average TFP Growth, 2005–2010 vs. 1996–2004 .......................................6
2. IT Specialization Across U.S. States .....................................................................................7
Boxes
1. Stochastic Frontier Analysis ..................................................................................................9
Appendixes
1. Data Sources and Description ..............................................................................................13
2. Empirical Results and Robustness Analysis ........................................................................17
Appendix Figures
A1. Average TFP Growth Across U.S. States .........................................................................15
A2. TFP and GDP Growth: The Case of Oregon ....................................................................16
A3. Average Technical Efficiency, 1996–2010 .......................................................................16
A3. Stochastic Frontier Analysis .............................................................................................18
A4. Stochastic Frontier Analysis with Conditional Inefficiency Effects .................................19
A5. Determinants of Total Factor Productivity .......................................................................20
References ................................................................................................................................21

3
I. PRODUCTIVITY SLOWDOWN: THE DEBATE
U.S. total factor productivity growth has slowed since mid-2000s. After growing at about 1¾
percent per year during 1996–2004, average total factor productivity (TFP) growth rate has
halved since 2005 (Chart). This suggests
United States: TFP and Real Output Growth(Percentage change; business sector)
that the reasons of the slowdown go
6beyond the effects of the Great Recession.
5
Understanding what is driving the4
3
slowdown is key to assessing the future2
potential growth of the U.S. economy
1(CEA, 2014).
0

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

But TFP growth depends on many factors besides advances in technology. In general, TFP
captures the efficiency with which labor
United States: The Declining Share of Young Firms
and capital are combined to generate("Young firm"=aged 5 years or younger)
output. This depends not only on
52businesses’ ability to innovate, but also on
Number of young firms(Percent of total number of firms)
the extent to which they operate in an
institutional, regulatory, and legal
37
environment that fosters competition,
Employment in young firms
33
removes unnecessary administrative(Percent of total employment)
burden, provides modern and efficient24
infrastructure, and allows easy access tofinance (for a literature survey, see for
1982
1987
1991
1995
1999
2003
2007
2011
example, Syverson, 2011, and Isaksson,
Sources: U.S. Census Bureau Longitudinal Business Database 1977-2011;22007). A few authors suggest that theand IMF staff calculations.
slowdown in U.S. TFP growth reflects amore secular loss of market “dynamism” given the importance of business churning,
2

In practice, TFP is usually obtained as a residual in estimates of a production function, once the contributions
from measured inputs have been estimated. Thus, growth in output not directly attributable to changes in laborand capital would be captured in TFP, including unobserved factor utilization and measurement errors.

2013

-1
-2
Some argue that the slowdown in TFP
TFP growth (with a range of estimates)-3
growth reflects the reduced ability of theReal output growth-4
U.S. economy to benefit from-5
technological advances. Gordon (2012 and2013) suggests that technological
Sources: BLS; OECD; Fernald (2014); and IMF staff estimates.
innovation has become marginally lessimportant for growth. Fernald (2014) argues that the recent subdued pace of productivity
growth is merely the return to more normal rates following nearly a decade of extraordinary
gains from the information technology (IT) revolution. A few others are more optimistic on
the room for technology to keep boosting TFP growth in the future, as they see still room for
positive knockout effects from past technological advances, especially in services (e.g.,
Baily, Manyika, and Gupta, 2013; Byrne, Oliner, and Sichel, 2013), or are confident on thecontinuing transformational nature of recent IT innovations (Bernanke, 2013).

4“creative destruction”, business startups, and young firms (Chart) to generate productivity
gains though more efficient resource allocation and greater innovation (e.g., Haltiwanger,2011). Furthermore, Haltiwanger, Hathaway, and Miranda (2014) show that the decline infirm formation and entrepreneurship has been especially pronounced in the high-tech sector
after 2002. The decline in dynamism is also evident in the U.S. labor market, with slower
geographic mobility and labor turnover only partly reflecting population aging and a higher
share of older firms (Hyatt and Spletzer, 2013; and Tarullo, 2014).3
The objective of this chapter is to shed light on the slowdown of U.S. TFP growth using
evidence from TFP estimated across U.S. states over the last two decades. In particular, we
focus on three main questions:

Has the TFP growth slowdown been similar across U.S. states? Fernald (2014) andearlier studies (Bauer and Lee, 2006; Daveri and Mascotto 2006) look at laborproductivity, which captures cross-state variation of both TFP and capital deepening.
Most likely reflecting data limitations, little is known about state-level TFP developments
in recent years.4



To what extent can aggregate U.S. TFP growth benefit from low-productivity states
converging to high-productivity ones? Higher aggregate TFP growth can be achieved byshifting the production frontier outward (through technological innovations) for all states,
but also by closing the gap between the “frontier” and “laggard” states (by tacklinginefficiencies that prevent all states to be on the production frontier). Identifying relative
contributions of these factors to TFP growth would provide further insights to
productivity prospects and policy options.



Can we exploit the variation of TFP growth and its main determinants across the U.S.
states to speculate on what factors and policies are most important for TFP growth? To
the extent that the cross-sectional (across U.S. states) variation in TFP experiences allows
us to robustly identify a few key factors associated with TFP growth, these could be thefocus of policy actions.

Our results suggest that TFP growth in the United States can benefit especially from policies
that promote investment in human capital and research and development. We find that theslowdown in TFP growth from mid-2000s has been widespread across the U.S. states anddoes not seem to be stronger in those states which rank higher in terms of production or
usage of IT. Our analysis suggests that the TFP slowdown across the U.S. states owes more
3

Hyatt and Spletzer (2013) argue that while the decline in employment dynamics is concentrated in recession
periods, from which it has never fully recovered, it remains an open empirical question whether the decline
indicates increasing labor market adjustment costs or better job matching.
4
Blanco, Prieger, and Gu (2013) and Caliendo and others (2014) are notable exceptions but they do not cover
the period after 2007, and while the former focuses primarily on the impact of research and development, thelatter examines aggregate implications of disaggregated (by region and sector) productivity changes and the roleof regional trade. Sharma, Sylwester, and Margono (2007) look at sources of state-level TFP growth over theperiod of 1977–2000.

5
to a declining efficiency in combining factors of production than to a diminishing pace oftechnological progress. We find that higher educational attainment, greater spending on
research and developments (R&D), and a larger financial sector are associated with lower“inefficiencies” across U.S. states. Our analysis of TFP determinants across U.S. states overthe last two decades suggests that human capital is a significant factor associated with TFP
growth.
II. EMPIRICAL ANALYSISOur empirical analysis is carried out in three stages. First, we estimate state-level TFP growthusing a standard Cobb-Douglas production function with time-varying and state-specificlabor shares. Second, we use a stochastic frontier analysis to assess the relative contributions
to TFP growth from common technological trends and state-specific technical efficiency.
Third, we analyze the determinants of TFP growth across U.S. states using panel data models
that relate TFP growth to human capital, innovation, infrastructure, taxation, and regulatory
framework.
There are a number of important caveats to analyzing TFP trends at U.S. state level.5 In
particular, there is no data on capital stock or services for U.S. states. We use data from
Garofalo and Yamarik (2002) and Yamarik (2013), who start from the net national capitalstock at the industry level (from the Bureau of Economic Analysis; for each one-digit
industry including services and agriculture) and allocate it to individual states’ industries
based on their share of national industry income.6 This approach assumes that the capital-tooutput ratio within each industry is the same across U.S. states, which could lead to anunderestimation of TFP in states where capital productivity is high, and therefore may imply
understating the actual variation in TFP across states. Also, our labor input variable isemployment in the private sector, rather than hours worked: this means that changes in labor
utilization (that is, in hours per worker) would be included in our TFP estimates. The
accurate measurement of TFP is an exercise traditionally fraught with measurement errors
and goes beyond the objectives of this chapter.7 Rather, our main objective is to exploit thevariation in our TFP estimates across U.S. states to assess whether they are significantly
associated with a few underlying factors that have traditionally been related to TFP growth.8

5For details on data sources and description, see Appendix 1.
For example, Sharma, Sylwester, and Margono (2007), LaSage and Pace (2009), and Blanco, Prieger, and Gu,(2013) use capital stock data constructed by Garofalo and Yamarik (2002) and Yamarik (2013), while Turner,
Tamura, and Mulholland (2013) construct alternative series of state-level physical capital covering 1947–2001,
which show very high correlation with the Garofalo-Yamarik series (for further discussion, see also Panda,
2010).
7
See, for example, Hauk and Wacziarg (2009) for a discussion of measurement error in growth regressions.
8
Two different robustness checks support our TFP estimates: first, the GDP-weighted average of state TFP
growth follows very closely national aggregate TFP growth estimates from a range of sources (including BLS).
Second, our state TFP growth estimates are strongly correlated with those from Caliendo and others (2014) who
construct state-level TFP by aggregating industry-level TFP estimates using the industry (revenues) shareswithin each state as weights.
66
A. Is Productivity Growth Different Across U.S. States?
The slowdown in TFP growth after mid-2000s has been widespread across U.S. states, butthere have also been some significant differences (Figure 1, Appendix Figure A1). While for
the U.S. as a whole the TFP growth slowed about 1¾ percentage points on average in 2005–2010 relative to 1996–2004, the state-level estimates range from a decline of over 3
percentage points in New Mexico and South Dakota to a relatively modest (below 1 percent)decline in ten states, with Oregon standing as a clear outlier in terms of a sustained high paceof TFP growth over the whole period (Appendix Figure A2).
Figure 1. Deceleration in Average TFP Growth, 2005–2010 vs. 1996–2004(Percentage change)

Source: IMF staff estimates.

7
Figure 2. IT Specialization Across U.S. States
IT Producing States(Index; U.S.-wide output share of IT-producing industries in total private industries=1)

IT-Intensive Using States(Index; U.S.-wide output share of IT-using industries in total private industries=1)

Source: IMF staff estimates.

There is little evidence that the TFP growth slowdown was significantly higher in those states
which are most intensively producing or using information technology. We measure the8extent to which a state is specialized in IT production and the degree to which it uses IT
given its industry composition and industry-level IT-intensity estimates (see Appendix 1).
Figure 2 shows the two measures of IT-specialization prior to the productivity slowdown,
and suggests that IT production was more geographically concentrated across U.S. states thanIT usage (as in Daveri and Mascotto, 2006). A series of statistical tests (similar to Stiroh,
2002, and Daveri and Mascotto, 2006) using various measures of IT-specialization show no
significant additional TFP deceleration for IT-producing or IT-intensive states relative toother states (see Appendix 2, Tables A1 and A2). In particular, the two states—New Mexicoand Oregon—with the highest degree of specialization in IT-production and a similar degreeof IT-intensity had very different productivity and growth outcomes.
B. Technological Progress vs. Efficiency
An alternative way to analyze TFP growth is to decompose it more explicitly into
contributions from technological progress and improvement in efficiency. Following thecommon approach in the stochastic frontier analysis (SFA), we assume that inefficiencies
potentially drive a wedge between actual production and the production frontier, given theexisting state of technology (Box 1). In this framework, technological progress (proxied by atime trend) shifts the production frontier upward for all states, while an improvement intechnical efficiency (captured by state-/time-specific variables) moves states towards the
production frontier.99Using SFA with a translog production function, Sharma, Sylwester, and Margono (2007) decompose TFP
growth for the lower 48 U.S. states over the period 1977–2000 and show that TFP growth mainly stemmed fromtechnological progress, while differences in efficiency change explained cross-state differences in TFP. Oil andcoal producing states underwent the greatest declines in efficiency, while those with larger financial sectors
experienced greatest increases. Also, human capital, urbanization, and shares of non-agriculture and financial
sectors were positively associated with efficiency. Jerzmanowski (2007) also finds that the TFP growth in the
U.S. between 1960 and 1995 was entirely due to the growth of technology while the average efficiency change
was zero.

9
Box 1. Stochastic Frontier Analysis
For a given state s, assume,
where is output of the state, ∙ is production function of inputs and technological change t, ∈ 0,1 is the level of
efficiency, with
1 indicating that the state is achieving the optimal output with the technology embodied in the
production function ∙ , andis a random shock. For a log-linear production function with two inputs (labor and capital), a
time trend to proxy a common technology, andlndenoting inefficiency, such that,,the point estimates of technical efficiency (TE) can be derived via| , whereis the model error
term comprised of the two independent, unobservable error terms. The coefficient on the time trend represents the change
in the frontier output caused by technological change. Furthermore, Kumbakhar and Lovell (2000) show that a change in
TFP, defined as output growth unexplained by input growth, can be expressed as
∆

∆

∆

1

∆

∆

output elasticities
where ∆is technological change, ∆is change in technical efficiency, andwith respect to labor (capital), withspecifying returns to scale (1 is the case of constant returns to scale).
Specifications forvary, and in our analysis, we use two versions of time-varying inefficiency (having looked at otherspecifications as well, including time-invariant inefficiency and “true” fixed-effects models, see, Belotti and others, 2012).
Time-varying inefficiency with convergence (or decay specification):
period in the sth panel, andis the decay parameter, such that when

, whereis the last0, the degree of inefficiency decreases overtime (i.e., converges ‘down’ towards the base level of inefficiency in the last period), and when0, the degreeof inefficiency increases over time.
Time-varying conditional inefficiency:, whereis a vector of explanatory variables associated withtechnical inefficiency of production in state s. Parameters of the stochastic frontier and the model for the technicalinefficiency effects are simultaneously estimated with a maximum likelihood method (Battese and Coelli, 1995).

10

There is, however, large variation in efficiency
rates across states. On average, over the whole
period, Delaware was found to be quite close
to the production frontier, while Oklahoma,West Virginia, and Montana were thosefurthest away from it (Chart and Appendix
Figure A3). Staff estimates that if all stateswith lower-than-average efficiency converged
to the average efficiency, average aggregate
output per worker would have been about 3
percent higher than its actual level in 2010.

U.S. States: Sources of TFP Growth
1.5

60
Technological change 1/
59

1.0

58
0.5

57

Technical efficiency (RHS) 2/

Source: IMF staff estimates.
1/ Growth rate; 2/ average actual output in percent of production frontier.

Production Frontier, 1996 vs. 2010
(Thousands of real 2005 dollars)

160

Actual in 1996
Actual in 2010

140
120

DE

100

DE
OR
NC

80
SD

60
SD

40
0

50

DC

AK

NY
DC

CA
NY

CA TX
MT
OK
OR
MT

TX

OK
WV
WV

100

WY

150

Capital per worker
Source: IMF staff estimates.
Investment in human capital and R&D appear
to reduce estimated inefficiencies. Using an SFA model which allows for conditional
inefficiency effects (Battese and Coelli, 1995), we test whether we can attribute the variation
in inefficiency across states to differences in a number of productivity-friendly underlying
factors (Appendix 2, Table A4).11 We find statistically significant and robust results showingthat states with greater human capital (as proxied by years of schooling, especiallyelementary and tertiary educational attainment) tend to be have smaller inefficiencies.12
A greater share of total R&D spending in GDP also tends to lower inefficiencies, in addition
to (potentially) contributing positively to technological progress. Possibly reflecting the roleof financial intermediation in resource allocation, states with a larger financial sector tend to10

2003-10

2002-10

2001-10

2000-09

1999-08

1998-07

1997-06

1996-05

56

1995-04

0.0

Output per worker

Our results show that technological change has
been relatively stable, while technicalefficiency has slowed. Rolling-window
estimates of the SFA model over the period
1995–2010 suggest that the production frontier
has been shifting up at a relatively constantrate of about 1 percent per year (the solid blackline in Chart), close to the estimates found in
the literature (e.g., Jerzmanowski, 2007)(Appendix 2, Table A3). The estimatedtechnical efficiency declined over time, withthe average state moving slightly away fromthe frontier (the dashed blue line in theChart).10

Technical efficiency estimates are on a lower side of the estimates found in the literature for the U.S. states:for example, mean efficiency in Sharma, Sylwester, and Marganon (2007) is estimated at 76 percent.
11
Note that this exercise is looking at the factors that may explain the shortfall of actual output from production
frontier which may or may not be the same factors that are associated with TFP growth discussed in thefollowing section, since TFP growth includes changes in both technical efficiency and production frontier.
12
In particular, a one year increase in average years of schooling is associated with about 10 percent decrease intechnical inefficiency.

AK

WY

200

11
be more efficient. In the following section, we test the impact of these factors on TFP growthwithin a panel data framework.
C. Determinants of State-Level TFP Growth
There is a vast empirical literature on the many factors that can affect TFP growth. (e.g.,
Isaksson, 2007). Our focus here is on whether the variation of TFP growth across U.S. statesover the last two decades can be associated with cross-state variation in education, R&D andinnovation, infrastructure, tax policies, and other institutional and regulatory characteristics.
To investigate these relationships, we use a number of econometric specifications, including
fixed-effects regressions with three-year averages and a mean group model, which allows forparameter heterogeneity and cross-sectional dependence.13
Our results confirm the previous findings that investment in human capital andR&D/innovation are important factors associated with TFP growth (Appendix 2, Table A5).
In particular:

Education. The average years of schooling in the U.S. increased from 13.1 in 1996 to
13.8 in 2010 (albeit slowing in 2004–06), but substantial variation remains across states:
the average years of schooling vary from below 12.5 years in Mississippi and West
Virginia to over 14.5 years in the District of Columbia and Massachusetts. We find astrong positive relation between the indicator of human capital and TFP growth.



R&D and innovation. Total R&D expenditure in the U.S. was about 2½ percent of GDP
per year in 1996–2010, about three-quarters of which performed by business sector.
Business R&D has however been declining (as share of GDP) in 2000–05 and at
2 percent of GDP in 2012 is close to its 2000 peak. New Mexico has the highest total(7.5 percent of GDP) and government (4.4 percent of GDP) R&D spending, while thehighest business R&D is in Michigan (4.2 percent of GDP). We find some support for apositive impact of both business R&D expenditure and, more importantly, of government
R&D spending and TFP growth. Including interaction terms for both types of R&D
expenditure, however, makes their combined effects statistically insignificant.
III. CONCLUSIONS

Our analysis of TFP trends across U.S. states suggests that there is scope for policies totackle inefficiencies and help boost productivity. In particular, our findings show that theslowdown in TFP has not been confined to IT-producing or IT-intensive user states, and ifanything, the estimated pace of technological progress has remained broadly unchanged since
mid-1990s. Instead, there are signs of increasing inefficiencies and slower catching-up,
which may be associated with divergence in educational attainment and R&D spending.
13

As part of robustness tests, we have also estimated fixed-effects model with five-year averages, dynamic
panel data models using system-GMM estimator, and various modifications to the specifications reported inAppendix 2, Table A5, including to control for the impact of possible outliers.

12
While mindful of the differences between empirical associations and causal relations, thesefindings suggest that policies that promote investment in human capital and innovation may
boost aggregate TFP growth.

13
Appendix 1. Data Sources and Description
Output: Gross domestic product by state in chained (2005) dollars private industries is fromthe BEA. Data on NAICS–based private (and total) industries for 1997–2012 are extended
backwards by splicing with SIC-based series for 1987–1997. Private industries account on
average for more than 85 percent of total gross state product.
Labor input: Employment in the private sector is constructed as the sum of farm
employment and private nonfarm employment from the BEA. Data on NAICS–based private(and total) industries for 1990–2012 are extended backwards by splicing with SIC-basedseries for 1987–1989.
Capital input: Net private capital stock data by state, in chained 2005 dollars, are fromYamarik (2013) up to 2007, with the extension for 2008–2010 provided by the author.
Yamarik (2013) tests the soundness of the state-level capital and investment (derived from
capital stock through the perpetual inventory method) data by estimating a Cobb-Douglas
production function and a Solow growth model and finds that estimates of the output
elasticity for capital are plausible and close to the national income share. Net private capitalstock for the United States is from BEA (rebased from 2009 to 2005 as a base year).
Labor and capital shares: Following Gomme and Rupert (2004) and Blanco, Prieger, andGu (2013), labor share of GDP is the ratio of private sector compensation of employees tothe difference between private sector output and ‘ambiguous labor income’. The latter is thesum of taxes-less-subsidies and proprietor income. To smooth the series, a three-year moving
average of the labor share is used. Capital share is one minus labor share.
IT-producing states: Specialization in IT-production is assessed as the share of ITproducing "Computer and electronic product manufacturing” industry (NAICS code 334) intotal private industries in a given state s relative to the same share for the U.S. as a whole. In
particular, a synthetic index following Daveri and Mascotto (2006) is constructed as/, whereis the output in sector i in state s,
is total private industries’ output in state s, is the
U.S. total output in sector i, and is total U.S. output in private industries. A state ischaracterized as “IT-producing state” if the value of the index is bigger than or equal to one.
Following Stiroh (2002), in order to obtain an exogenous indicator of specialization prior to
the productivity slowdown, the index is calculated as the average of 2002–04.
ICT-producing states: Specialization in ICT-production is assessed as the share of NAICScomposite “Information, Communication, and Technology” sector in total private industries
in a given state s relative to the same share for the U.S. as a whole. ICT aggregate includes
primary ICT sectors (directly involved in manufacture of ICT equipment, software, services,
repair, etc.) and secondary sectors that indirectly or partially involved in ICT industry
activities or significantly dependent on ICT industries. For the construction of the synthetic
index, see above.

14
IT-intensive user states: IT-intensity is assessed as the share of the sectors identified inJorgenson, Ho, and Samuels (2010, Table 1) in total private industries in a given state s
relative to the same share for the U.S. as a whole. IT-using industries are those with morethan the median share of IT-intensity index, defined in turn as the share of IT-capital input(and IT services purchased) in total capital input of a given industry. For the construction of
the synthetic index, see above, except the reference year here is 2005 reflecting data
availability in Jorgenson, Ho, and Samuels (2010).
Educational attainment: Average years of schooling. The main data source, Turner et al.
(2006) has been extended after 2000 with the data from the OECD Regional Database using
elementary (6 years), secondary (12 years) and tertiary (20.52 years) attainment series tocalculate the average years of schooling. The data for the total U.S. are from the Census“Table A-1. Years of School Completed by People 25 Years and Over, by Age and Sex:
Selected Years 1940 to 2012.”
Innovation indicators (R&D expenditure): The OECD Regional Database for state-level
data on R&D expenditure by sector, R&D personnel by sector, employment in high-tech
sectors, patent applications (by sector) and ownership. The data are annual covering theperiod of 1990–2010/2011. The original data source is the U.S. National Science Foundation(NSF)/Division of Science Resources Statistics (SRS).
Infrastructure: State and local government expenditure on infrastructure (as a share ofGDP), including spending on highway and air transportation, housing, water, and sanitation,from Sorens, Muedini, and Ruger (2008).
Tax burden: Tax burden is state and local revenues from all taxes (but not current charges),as a percentage of personal income, from Sorens, Muedini, and Ruger (2008).
Tax structure: Own-source revenue is defined as total government revenue from own
source, as a percentage of GDP, from EFNA (2013).
Government size score: The score covering three indicators (all in percent of GDP)—
general consumption expenditures by government, transfers and subsidies, and social security
payments—is from EFNA (2013).
Poverty rate: Percentage of state population in poverty from Sorens, Muedini, and Ruger(2008).
Financial sector share: Financial sector specialization is assessed as the share of “Financeand Insurance” industry (NAICS code 52) in total private industries in a given state s relative
to the same share for the U.S. as a whole. For the construction of the synthetic index, seeabove.

-1
OregonWashington

Source: IMF staff estimates.
Idaho

Wisconsin

NevadaWashington

Texas

Illinois

MarylandVermont

Nebraska

KentuckyArkansas

Tennessee

California

Iowa

Alabama

Massachusetts

Minnesota

Colorado

Utah

Indiana

Virginia

North Dakota

New Hampshire

North Carolina

ArizonaSouth Dakota

Ohio
FloridaWyoming

HawaiiLouisiana
AlaskaLouisiana
Ohio
New Mexico

MichiganMontana
Rhode Island

New Jersey

Oklahoma
FloridaMichiganConnecticut

Missouri
New Jersey

West Virginia

Maine
Wyoming

Georgia

District of Columbia
South Carolina

Maine

DelawareSouth Carolina

Arizona

KansasPennsylvania

NevadaPennsylvania

Rhode Island

Iowa
AlaskaGeorgia
Missouri

Texas
Oklahoma

New York

0West Virginia

1

Connecticut

2
Mississippi

2005–2010

Kentucky

4

Minnesota

ArkansasSouth Dakota

Wisconsin

Illinois3

California

Tennessee

Alabama

Montana

Colorado

Delaware

Massachusetts

Vermont

Indiana

New York

New Hampshire

Mississippi

District of Columbia

HawaiiMaryland

Idaho

Utah

KansasVirginia

North Carolina

North Dakota

New Mexico

Oregon0

Nebraska

15

Figure A1. Average TFP Growth Across U.S. States(Percentage change)

4

3

1987–2010

2

1

16
Figure A2. TFP and GDP Growth: The Case of Oregon
Change in Average TFP Growth Across U.S. States(Percentage change)

Average TFP growth 2005-2010

5

Contribution to GDP Growth: Oregon vs. U.S.
(Percentage change)

7

4

OR

3

6

TFP

5

Capital
Labor

4

2
1

NE

HI

0

AK

-1

LA

VA
ND
NC
NY
CA
US
TX
AZ
RI

WA
KS

OH

ID

2

SD

1

NM

0

-2
0

1

GDP

3

2
3
4
Average TFP growth 1996-2004

5

6

U.S.

OregonU.S.

Oregon

1995-2004

1995-2004

2005-20102005-2010

Source: IMF staff estimates.

Figure A3. Average Technical Efficiency, 1996–2010Technical efficiency estimates derived from a time-varying inefficiency model withconvergence:
one-factor model, yββ / x / , βt v
u , with per-worker output andcapitaltwo-factor model, yββ x ,β x , βt vu
OK
WV TX100
MT
AL

MS
KY
PA
CA
AR
OH
MO
FL
KS
WI
MI
CO
TN
ID
SC
ND
GA

DE

DC AK

RI

80

CT

HI

60
40
20
0

OR IN
MN

AZ ME

UT

VT

IL

NJ
SD
NV
LA
NH
MD
WY
WA
VA
NM
MA
NE
NY
NC
IA

One-factor modelTwo-factor model

Source: IMF staff estimates.

17
Appendix 2. Empirical Results and Robustness Analysis
Table A1. Dummy Variable Tests of Post-2005 TFP Slowdown(Dependent variable: log change in TFP),
, , where ={1 if year≥2005; 0 otherwise}
Tests of whether deceleration in TFP growth was stronger in IT-producing than non-IT-producing states.
(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

Post-2005 dummy-1.70***(-10.08)-1.77***(-8.17)-1.73***(-7.90)-1.74***(-7.90)-1.55***(-6.67)-1.89***(-4.12)-1.64***(-6.66)-1.70***(-4.18)Constant

1.83***(19.56)

1.84***(18.09)
yes
yes
yes

yes
yes

yes
yes

yes
yes

yes
yes

Weighted least squaresyesyesState fixed effects
yes
Oregon excluded
Excluding IT-producing states
Only IT-producing states
Excluding ICT-producing states
Only ICT-producing states
Observations
765
765
765
R-squared
0.13
0.16
0.38
Notes: Robust t-statistics in parentheses; *** p<0.01, ** p<0.05, * p<0.1.

yes
yes
yes
750
0.37

570
0.31

195
0.46

525
0.30

yes
240
0.45

Table A2. Tests of Post-2005 TFP Slowdown for IT-Intensive States(Dependent variable: log change in TFP)∙,
, ,where D={1 if year≥2005; 0 otherwise}andis a {0,1} dummy variable or a continuous IT-intensity index
Tests of whether TFP growth in IT-intensive states has decelerated more than in non-IT-intensive states.

Post-2005 dummy
IT-intensive index
Post-2005 dummy x
IT-intensive index
IT-intensive dummy
Post-2005 dummy x
IT-intensive dummy
Constant

(1)

(2)

(3)

(4)

-2.12
(-0.69)-1.48(-1.06)0.35(0.11)-1.53(-0.50)-1.73***(-4.89)-1.63***(-4.58)3.32**(2.33)
yes-0.20(-0.07)-0.30(-1.47)-0.09(-0.21)2.00***(11.40)yes-0.20(-0.45)Weighted least squaresyesyesState fixed effects
yes
yes
Observations
765
765
765
765
R-squared
0.17
0.38
0.17
0.38
Notes: Robust t-statistics in parentheses; *** p<0.01, ** p<0.05, * p<0.1. Results remain robust to alternative (but potentially outdated)measures of IT-intensity summarized in Daveri and Mascotto (2006).

18
Table A3. Stochastic Frontier Analysis(Dependent variable: log real GDP),,Time-varying inefficiency model with convergence
1995-04(1)
Log labor
Log capitalTime trend
Constant
Eta
Observations
Number of states

1996-05(2)

1997-06(3)

1998-07(4)

1999-08(5)

2000-09(6)

1990-10(10)

1996-10(11)0.61***(14.98)0.45***(11.69)0.01***(6.51)
6.36***(12.95)0.60***(14.71)0.47***(11.90)0.01***(6.02)
6.20***(12.21)0.60***(13.97)0.47***(11.33)0.01***(4.27)
6.24***(12.18)0.62***(11.17)0.45***(9.29)
0.01***(2.70)
6.52***(10.94)0.62***(21.82)0.45***(18.15)0.00(0.92)
6.40***(15.00)0.60***(16.11)0.49***(14.72)0.01***(6.97)
5.95***(13.24)0.02***(5.38)

0.01***(2.69)

0.00(0.37)-0.01*(-1.65)-0.01** -0.01*** -0.01*** -0.01*** -0.01***(-2.16)(-3.74)(-3.33)(-3.86)(-3.39)0.01***(7.13)-0.00(-1.41)

510
51

510
51

510
51

510
51

1,071
51

765
51

510
51

0.63***(12.07)0.45***(9.93)
0.01***(3.37)
6.49***(11.49)2003-10(9)0.60***(14.72)0.45***(12.08)0.01***(3.57)
6.36***(12.92)510
51

0.61***(12.52)0.47***(10.95)0.01***(3.74)
6.27***(11.61)

2002-10(8)0.57***(14.42)0.48***(13.60)0.01(1.55)
6.06***(12.56)510
51

0.61***(13.59)0.47***(11.64)0.01***(2.75)
6.21***(11.95)

2001-10
(7)

459
51

408
51

Notes: z-statistics in parentheses; *** p<0.01, ** p<0.05, * p<0.1. Eta=decay parameter (see Box 1). Regressions include time fixed effects.
See Appendix 1 for the definitions and sources of variables.

19
Table A4. Stochastic Frontier Analysis with Conditional Inefficiency Effects(Dependent variable: log real GDP), with,,whereis a vector of explanatory variables associated with technicalinefficiency of production in state s

Frontier
Log labor
Log capitalTime trend

Constant

Mean inefficiency
Schooling

(1)

(2)

(3)

(4)

(5)

(6)

(7)

0.44***(23.01)0.60***(32.21)0.01***(6.83)

0.43***(22.74)0.61***(33.00)0.01***(8.74)

0.50***(19.85)0.51***(20.57)0.01***(3.40)

0.43***(23.04)0.61***(33.26)0.01***(8.98)

0.43***(21.13)0.60***(30.03)0.01***(8.20)

0.43***(22.07)0.62***(32.09)0.01***(11.11)0.40***(22.59)0.63***(36.59)0.005***(4.06)

4.55***(15.08)4.42***(12.50)5.48***(18.48)

4.41***(17.53)

4.49***(10.85)

3.99***(18.09)4.27***(19.83)-0.12***(-15.57)-0.11***(-15.35)-0.11***(-14.43)-0.09***(-10.59)-0.05***(-3.71)

Log schooling
GR dummy

0.07***(5.37)

Tertiary educ.att.
Elementary educ.att.

0.05***(3.02)-0.01***(-12.60)-0.01***(-4.47)

Gov R&D spending

0.08***(5.50)

0.07***(5.45)

0.06***(3.99)-0.02***(-4.43)

Total R&D spending-0.02***(-5.51)

Poverty rate

-0.01***(-6.18)0.01***(7.32)

Financial sector shareConstant
Observations
Number of states-0.71***(-7.69)0.05***(4.09)

1.97***(8.72)
1,071
51

1.92***(6.57)
1,071
51

0.83***(13.31)561
51

1.84***(11.50)1,071
51

1.57***(4.45)
856
51

0.58***(3.05)
900
50-1.37***(-20.72)
2.47***(9.72)
714
51

Notes: z-statistics in parentheses; *** p<0.01, ** p<0.05, * p<0.1. GR dummy is the Great Recession dummy variable (=1, if year>2007; 0
otherwise). See Appendix 1 for the definitions and sources of variables.

20
Table A5. Determinants of Total Factor Productivity
Mean Group Estimator

Fixed-Effects Estimator
Dependent variable: TFP growth
(1)
(2)
(3)
(4)
Schooling

Dependent variable: log TFP
(6)
(7)
(8)

0.42**(2.02)

Log schooling
Tertiary educational attainment
Business R&D expenditure(5)

5.50**(1.98)

9.64***(2.69)

0.08(0.48)

7.45*(1.83)

5.00***(4.23)

5.15***(4.02)

4.71***(4.23)

3.91***(2.94)

0.26(1.15)

0.61***(2.61)

0.53**(2.55)

0.50**(2.50)-0.02*** -0.02*** -0.02***(-3.96)(-3.62)(-3.77)2.04*** 1.97***(3.41)(3.35)-6.38*** -6.31***(-3.11)(-3.11)-0.01(-0.28)-0.01**(-2.26)0.77(1.29)-4.46**(-2.23)0.16*(1.70)
0.36**(2.48)

Total R&D expenditure

0.40*(1.69)

Government R&D expenditure-0.52*** -0.48***(-2.86)(-2.64)0.36**
0.38**(2.01)(2.16)-2.83*(-1.81)Business x Gov. R&D expenditure
Log schooling x Business R&D exp.
Time trend
Own-source taxes (% GDP)Tax burden (% GDP)
Capital expenditure (% GDP)
Government size score
Constant-4.49(-1.65)-3.76(-1.39)-12.75* -23.50**(-1.78)(-2.53)

Combined effect (for interaction terms)
Log schooling
Government R&D expenditure

yes

yes

-0.02
(0.08)
0.25(1.57)
yes

yes

yes

yes

yes

346
0.40
51

204
0.48
51

346
0.42
51

346
0.42
51

Business R&D expenditure
Time fixed effects
State-specific time trend
Three-year averages
AnnualObservations
R-squared
Number of states

5.68**(2.05)
0.06(0.28)
0.21(1.34)
yes-5.68*(-1.92)-5.86*(-1.83)-4.65*(-1.69)0.04*(1.65)-3.38(-0.99)

yes

yes

yes

yes

yes
1,071

yes
950

yes
950

yes
950

51

50

50

50

Notes: t-statistics in parentheses; *** p<0.01, ** p<0.05, * p<0.1. See Appendix 1 for the definitions and sources of variables.

21
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