Economic and Labour Productivity Growth: A Regional Analysis of the States of Australia and the USA

Abstract

One of the main underlying sources of economic growth is productivity. An economy can grow by either accumulation of its inputs, namely labour and capital, or improvements in productivity. The latter implies that more can be produced with the same amount of inputs, generating a greater amount of income that can be distributed among the economy's population. With rising per capita incomes, an economy can provide higher living standards and well-being. This thesis analyses variations in economic and productivity trends among the states of Australia and the USA. It investigates whether disparities in GSP per capita, labour and multifactor productivity among the states have declined (converged) or widened (diverged), during this period. The analysis is undertaken at a national level as well as for specific industries to identify the sectoral sources of the various trends. Further, in an interstate analysis the performance of individual states is examined to identify those that may have had a major role in accounting for the observed trends. The analysis employs both cross - section and time - series techniques. Contrary to earlier studies, this thesis finds that lately the interstate dispersion of per capita incomes and productivity has stopped decreasing. In Australia, once the Mining sector (which is a special case) is excluded from the analysis, the levels of GSP per capita and labour productivity in the various states are found to have neither converged nor diverged. Convergence trends among the US states observed prior to the 1990s have not only slowed down but even reversed into divergence. Divergence in labour productivity started during the 1980s in the service industries and was followed by the Manufacturing sector (and here in particular by the Electronic and Electrical Equipment industry) during the 1990s. There appears to be a belt of states in the West (and a few states in the North-East) which started off relatively poorly but managed to catch-up with the richer states due to an above average growth performance in labour productivity and multi factor productivity. Some of these states did not only manage to catch-up with richer ones but continued to surge ahead, causing the observed increase in the interstate dispersion in recent years. Policy makers, especially those in the states that are falling behind need to develop policies that will lead to an increase in the rate of productivity growth. In order to achieve this they must foster industries, which are conducive to higher growth rates and adopt policies that would increase the productivity of the labour force. These policies will need to create an environment in which productivity enhancing innovation can be sustained. States need to engage in research and development activities to ensure the invention and the adoption of new technologies.