ACCOUNTING FOR DIFFERENCES IN AGGREGATE STATE PRODUCTIVITY

The purpose of this paper is to analyze the determinants of aggregate productivity at the state level by utilizing the new GSP data. State differences in aggregate productivity are modeled as a Hicks-neutral shifter term in an aggregate production function framework. The model attempts to account for variations in aggregate productivity resulting from state-to-state differences in industry mix, human capital characteristics, public investment in infrastructure. and metropolitan structure. In addition, a random-effects extension of the model is employed to capture the effects on state productivity of other important localized factors that are not directly entered into the empirical model. The Findings indicates that a state's industrial mix, infrastructure, education level, and metropolitan structure all effect productivity. Relative state productivity rankings that allow cross-state comparisons of overall productivity and identify the sources of productivity differences are developed. For comparison, the model is re-estimated using manufacturing data. An important finding is that the productivity rankings based on the aggregate state output differ markedly from rankings based solely on data for the manufacturing sector. This raises questions about making inferences about overall productivity based solely on manufacturing data.