are poor Colorado counties “catching up” to rich ones?

Macroeconomic growth models predict that, all else equal, per capita income in poor places will “catch up” to rich places. This is due to the idea that higher economic returns in relatively poor places for similar investment levels is attractive to capital, and it will flow from rich places to poor places. We see this a lot in the international arena, with factories moving to China and Vietnam, where lower wages make the same machines more profitable.

In the United States we saw catch-up in the 1960s through 1980s, as capital left the relatively rich north for lower wage regions in the south. This drove up the demand for labor in the south, increasing wages. Meanwhile, less labor demand in the north meant stagnant wages. In this case southern incomes started to approach northern ones.

Begininning in the 1990s, however, the pace of catch-up slowed in the US. By the 2000s it essentially stopped. In the following chart I use US Department of Commerce income data to examine this phenomenon in Colorado. On the horizontal axis, I show county-level income per person in 2000. On the vertical axis I show the annual average county per capita income growth rate. The “catch up” hypothesis predicts that places with higher initial per capita incomes will have lower subsequent annual growth rates (this would be characterized by a downward sloping relationship).

In this chart we see VERY weak evidence of “catch up” in Colorado counties. Although the line appears downward sloping, in effect it is not significantly different than zero. Here, if we consider two counties with a $1,000 difference in per capita income, the poorer county grew, on average, only about 0.06 percentage points faster per year. Under these growth rate differences it would take a VERY long time for the poorer county to catch-up to the richer one.

Is the model a failure because it incorrectly predicts catch up ? Not necessarily. As I mentioned above, the catch up hypothesis relies on economics’ infamous “all else equal” condition. Clearly, this is not the case in Colorado. Counties differ in educational attainment of workers, natural resources, transportation infrastructure, population size, amenities, economic structure, and in many other attributes that have been shown to positively impact growth. Bottom line: policy can make a difference..

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