Unbalanced Productivity Growth in US States: Evidence from Factor Prices

Despite being located within a well integrated economy such as the US, its states exhibit considerable heterogeneity, both in the composition of output and in sectoral labor productivity growth. In this paper, we examine the sources of uneven labor productivity growth across sectors in US states. In particular, we use the dual growth accounting framework to compare the relative roles of multi-factor productivity growth and factor accumulation in goods versus services from 1980 to 2007. We find that states exhibit a wide range of productivity growth rates with the goods sector showing much larger gaps. Underlying these gaps are large variations in wage growth and real user cost growth. Since 1998, the real user cost declines at almost two per cent annually. Incorporating human capital into the analysis makes wage growth and, hence, productivity growth lower, and on average negative in the last ten years. Scaling up the analysis to the national level, we also find that there are large differences between the growth rates of primal based measures of marginal product of capital and our calculations of real user cost growth. The anomalous behavior of particular industries such as mining and real estate services, and the declining relative price of investment goods can only partially explain these patterns..