PRODUCTIVITY GROWTH IN GOODS AND SERVICES ACROSS THE HETEROGENEOUS STATES OF AMERICA

I. INTRODUCTION The study of income and productivity convergence, and structural transformation are central and recurring themes in economic growth research. The U.S. states have been a fertile testing ground for many intellectual advances in these areas. The closed economy assumptions of the underlying models notwithstanding, the states offer compensating advantages such as being subject to the same macroeconomic policy while simultaneously exhibiting considerable heterogeneity along many dimensions of interest to growth researchers--demographics, composition of output, quality of workforce, tax policy, natural resource endowments, geography, etc. At the same time, knowledge on multifactor productivity (MFP) growth, which is central to many growth models, remains sparse for U.S. states. This is mainly due to lack of data on capital accumulation beyond the manufacturing sector. This is unfortunate, as an emerging body of work has begun to draw attention to the fact that the convergence of state-level incomes has slowed down over the past two to three decades. In the absence of adequate data at the state level, it becomes difficult to further analyze this problem within a multisectoral framework. In this study, we seek to rectify this shortcoming by constructing and analyzing productivity growth for the broadly defined privately produced goods and service sectors at the state level and undertake both growth accounting and convergence analysis for the period 1980-2007. (1) Our primary innovation is the use of the dual growth accounting method, which relies on factor prices rather than factor stocks to construct MFP growth. To get a sense of the underlying heterogeneity in sectoral labor productivity growth, consider the convergence plots displayed in Figure 1. In Figure 1(A), we plot labor productivity growth in the nonfarm nonmining private sector between 1980 and 2007 against initial labor productivity. There is some evidence of absolute convergence, although weak. In Figures IB and 1C, we repeat similar plots but now for the goods sector and for the private service sector separately. Here, we see markedly different patterns. While convergence in the goods sector is apparent, for services it is quite the opposite. Moreover, if one inspects the values on the vertical axes, one can also infer large differences across states. This is particularly true for goods where the difference between Oregon (OR) and Montana (MT) was almost 7% annually. As a result even though Montana had slightly higher labor productivity in 1980, by 2007 Oregon's productivity was at least five times higher. Even for the service sector, where the range is much smaller, the difference between Connecticut (CT) and Michigan (MI) was almost 2% annually. As a result, though both states began with almost similar values, Connecticut's labor productivity in services was 60% higher than Michigan's by 2007. Clearly these are large underlying regional differences. These very different patterns motivate some of the questions that we try to answer in this study. Using our constructed series of MFP growth, and its constituent variables, we examine the sources of variations in labor productivity growth. First, we conduct an in-depth growth accounting exercise to explore the relative importance of MFP growth versus factor accumulation for the two broad sectors across U.S. states. This allows us to undertake traditional growth accounting exercises and also examine the sources of variations across states. As the dual accounting approach relies on the construction of real wage growth and real user cost growth, we also investigate the sectoral patterns for these two variables. Second, we conduct convergence analysis at the sectoral level for labor productivity growth, MFP growth, as well as factor price growth. We show that while the goods sector shows convergence, both absolute and conditional on initial human capital, we see no such evidence for the service sector. …