The 1980s divergence in state per capital incomes: what does it tell us?

During most of this century, state per capita incomes have converged. Researchers generally agree that incomes diverged between 1979 and 1988, but there is no consensus about what caused the divergence. This paper makes two significant contributions to the literature on the 1980s divergence and on the longer-term converging trend within the United States. First, it shows that the 1980s divergence was not primarily due to plunging oil prices, as is commonly argued. Instead, the most important reason for the divergence was a positive shock to some Northeast states, which had an unusually large effect on income. Second, this paper addresses the question of whether the 1980s divergence reflects a fundamental change in the long-term downward trend in income dispersion. The analysis suggests that state per capita incomes may be so close to their steady-state levels that they have stopped converging.