What do we know about the causes of regional growth part 3
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What do we know about the causes of regional growth? Part 3. ECON 4480 State and Local Economies. Reasons for Growth. We now have three reasons why growth rates can vary among regions: Technical progress may differ between regions. The growth of capital stock may vary between regions.

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What do we know about the causes of regional growth? Part 3

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What do we know about the causes of regional growth part 3

What do we know about the causes of regional growth?Part 3

ECON 4480 State and Local Economies


Reasons for growth

Reasons for Growth

  • We now have three reasons why growth rates can vary among regions:

    • Technical progress may differ between regions.

    • The growth of capital stock may vary between regions.

    • The growth of the labor force may vary between regions.


Reasons for growth1

Reasons for Growth

  • An implication of the neoclassical model is that capital and labor will move to the regions offering the highest rates of return.

  • This is known as interregional factor migration. ( a factor is a factor of production such as labor or capital).

  • If capital and labor are mobile, producers will seek the most profitable locations for new capital investments, and labor will move to regions that have high wages.


Neoclassical model

Neoclassical Model

Output growth

Growth of capital stock

Technical progress

Growth of labor force

Natural population growth

Net inmigration of workers

Local R&D, education

Inflow of technical knowledge

Local capital spending by residents

Capital inflow

Birth and death rate

Wage rate relative to other regions

Rate of return relative to other regions


Reasons for growth2

Reasons for Growth

  • Which regions are predicted to grow fastest?

  • The neoclassical model predicts that regions with a high capital/labor ratio have high wages and a low yield on capital investment.

  • For these regions, capital will flow out and labor will flow in. What will happen to output? If capital outflow is faster than labor inflow, output will decline.


Reasons for growth3

Reasons for Growth

  • On the other hand, what if a region has a low capital/labor ratio? Productivity will be low and therefore wages will be low.

  • In these regions, a small increase in capital will have a large effect on output. The yield on capital investment is high.

  • For these regions, capital will flow in and labor will flow out. What happens to output? If capital inflow is faster than labor outflow, output will rise.


Factor migration

Factor Migration

  • Does capital move faster than labor in practice?

  • The fact is that capital is much more mobile between regions than is labor.

  • Capital can easily flow to regions with higher growth rates.

  • Labor mobility is much slower to respond to higher wages because of home ownership, regional preferences, family ties, and so on.

  • It is certain that capital will move much faster than labor.


Testing the theory

Testing the Theory

  • Tests of neoclassical growth theory at the regional level are few and far between:

  • Borts and Stein (1964)

    • divided states into low-wage states and high-wage states.

    • The model predicts that labor will move from low-wage to high-wage states.

    • The model was not confirmed by the evidence for the study period 1919-1957.


Testing the theory1

Testing the Theory

  • Hulten and Schwab (1984)

    • Estimate the importance of technical progress, capital stock growth and labor growth for the growth of output using nine regions in the U.S.

    • Hulten and Schwab found that most of the regional growth differences can be attributed to differences in labor force growth and to a smaller degree capital stock growth differences.

    • Technical progress showed little difference between regions.


Testing the theory2

Sources of output growth for US regions (Hulten & Schwab)

Output growth due to…

Capital

Output

stock

Labor force

Other

growth

growth

growth

factors

Snowbelt regions

2.45

0.62

0.03

1.8

Sunbelt regions

4.94

1.63

1.69

1.69

Note: Other factors includes technical change

Testing the Theory

  • Labor was relatively mobile during the period.

  • Technical progress was distributed relatively evenly across regions.


Testing the theory3

Testing the Theory

  • The neoclassical model predicts that, with mobile labor and capital, incomes in low-wage regions will rise as capital flows in, and incomes in high-wage regions will decline as capital flows out.

  • In other words, the theory predicts that incomes among regions will tend to move closer to each other, or converge, over a long time period.


Convergence for real output per capita

Convergence for Real Output per Capita?

Converging

Regions in the NW and SE quadrants are moving towards (converging) to the national average output per capita. Regions in the NE and SW quadrants are moving away.


Conclusions

Conclusions

  • The original neoclassical growth model offers some important insights into the reasons for regional variations, but the model has serious weaknesses.

    • Mobility of capital and labor is assumed by the model. While capital is mobile, labor is not.

    • Evidence of the model’s prediction of convergence among regions is somewhat convincing.


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