Forest

Ann Reg Sci (2003) 37:1–14

The e¤ect of industrial diversity on state unemployment rate and per capita income

Oded Izraeli, Kevin J. Murphy

Department of Economics, Oakland University, Rochester, MI 48309-4401 (e-mail: murphy@oakland.edu) Received: June 2000/Accepted: April 2001

Abstract. This paper examines the e¤ect of industrial diversification on state unemployment and per capita income. Diversification may provide a form of employment insurance to states during cyclic downturns. Thus well diversified states should experience lower unemployment. To the extent that specialization confers economic benefit, however, more concentrated states should have higher per capita personal income. We use two sets of panel data for seventeen states spanning a thirty-eight year period to test these hypotheses. When state heterogeneity is controlled for properly, our results show that a strong link exists between industrial diversity and reduced unemployment. The evidence that per capita personal income is associated with industrial concentration is much weaker. JEL classification: R23, J6

1. Introduction The e¤ect of industrial diversity in sub-national markets on unemployment rates has been the subject of numerous studies. In some studies1 it is mentioned that the interest in the subject is mostly due to the potential (negative) spillover e¤ect of the national business cycle (i.e., recession) on the sub-national economies. In other studies the tested hypothesis is that higher degrees of industrial diversity cause lower unemployment rates2 or more stability3. The empirical analysis in many of these studies was performed on a cross-section sample of sub-national markets, mostly cities (or SMSAs). The opportunity to lower unemployment through industrial diversity has also caught the attention of political leaders, especially during periods of recession. For example, in an article published in the Detroit Free Press

1 See studies by Nourse (1968), Hackbart and Anderson...