State and local policy, factor markets and regional growth

A large and growing literature to explain how state and local policies affect factor markets, firm location and economic growth has developed in three distinct threads. These threads have variously emphasized how policy and natural amenities affect regional economic growth or firm location; how variations in policy and natural amenities can lead to persistent wage differentials across regions; and how regional variation in factor inputs, including public capital, affects output. In this article, we expand the modeling framework of Roback and Gyourko and Tracy to integrate these threads into a single inquiry about how state and local policies—including the provision public capital—affects factor markets and economic growth. Using the model as the basis for estimation, we find that state and local policies have a more profound influence on the private capital-to-labor ratio in a region than on private output. Furthermore, the evidence suggests that the growth of government—either in the form of services or public capital—discourages private sector growth.