The Decline in Income Growth Volatility in the United States: Evidence from Regional Data
We use US regional and state data to determine which regions have contributed most to the apparent decline in income growth volatility in the United States. We study changes in the variance of income growth in each region, changes in the covariance of growth between regions and changes in regional income growth shares. We establish that there has been a significant decline in the income growth volatility in thirty eight US states, and it is this, rather than changes in income shares, that is mostly responsible for the decline in the aggregate growth volatility. Further, we find that the twelve states that show no significant decline in their income growth volatility, are states with policies that make them unattractive to new businesses. We suggest that state level industrial policy may be a good, albeit partial, explanation for the decline in income growth volatility of the United States.
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