Static and Dynamic Externalities, Industry Composition, and State Labor Productivity: A Panel Study of States

Abstract

Endogenous growth models have reignited interest in regional economic growth. Recent regional growth studies focus on dynamic externalities related to localization and urbanization economies. Yet, these studies typically attempt to observe externality‐induced productivity effects indirectly through examination of employment growth. Also, issues of regional differences in concentrations of nationally productive industries and distinguishing between static and dynamic externalities have received little attention. This study directly relates measures of externalities to productivity differences, decomposing them into those due to differences in industry composition and those due to average productivity differences in each industry. A two‐step procedure is used to distinguish static from dynamic externalities.

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