A Tale of Two States—Bringing Back U.S. Productivity Growth

IMF Blog, September 25, 2014

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U.S. total factor productivity (productivity gains from the more efficient use of capital and labor, and technological progress) grew at about 1¾ percent a year during 1996–2004.
The growth rate halved from 2005–13.
The slowdown began well before the financial crisis.
Together with lower labor force participation, this slowdown has meant lower potential growth: potential output falling from above 3 percent to around 2 percent in the span of a decade.

Both states have the highest share of computer and electronic production in the United States and similar information technology usage by businesses.
Productivity outcome contrast (2005–2010): a $100 investment in capital and labor in Oregon would have yielded a $25 payback, while a similar investment in New Mexico would have paid only $5.
The divergence implies factors beyond specialization in information technology explain productivity differences.

The moderation in total factor productivity growth has been widespread across U.S. states, but the magnitude varies greatly.
The decline in productivity growth across states ranges from over 3 percentage points in New Mexico and South Dakota to below 1 percentage point in states like Washington, Oregon, Nebraska, and Maryland.
There is almost no relationship between the extent to which states produce or use information technology and the change in productivity growth.
Productivity comprises two components:
- Moving outwards the production frontier (innovation/technology).
- Closing the distance to the frontier by becoming more efficient in combining inputs.
There is large variation in efficiency across U.S. states.
On average, U.S. states have been moving somewhat further from the production frontier, falling short of deploying new technology and creating value added.
Counterfactual: If every state had been able to keep up with the average efficiency of the country, real GDP per worker in 2010 would have been 3 percent higher than it actually was.
- This translates into $400 billion in additional consumption, investment, and exports.
- Equivalent to over $1,000 for every American man, woman, and child.

States that perform better on productivity tend to have:
- More years of schooling.
- Better educational attainment.
- More research and development spending.
- A bigger financial sector.
These same factors help explain differences in productivity growth across U.S. states over the past two decades.
Empirical contrasts: Over the past 15 years in Oregon, the average years of schooling have increased three times as much as in New Mexico.
- Business research and development spending in Oregon is 1½ percent of GDP more than that in New Mexico.

Public policy should focus on facilitating investment in:
- Human capital.
- Innovation and knowledge creation.
- Improving financial intermediation.
Emphasis on policies that improve both the production frontier (technology and R&D) and the efficiency of combining inputs to close the gap to the frontier.

Source: A Tale of Two States—Bringing Back U.S. Productivity Growth (Roberto Cardarelli, Lusine Lusinyan, September 25, 2014).