DO STATE BUSINESS CLIMATES STILL MATTER?—EVIDENCE OF A STRUCTURAL CHANGE

Abstract

Studies examining the effect of state and local government fiscal variables on states' employment and personal income growth find substantial effects during the 1970s. However, when similar models are estimated for the 1980s, the results reveal that the effect of government fiscal variables on subnational growth has waned. This paper pools cross-sectional and time-series data during the 1967-88 period to test for the presence of a structural change in the relationship between state and local fiscal behavior and subnational economic growth. Using a switching regression model, we uncover evidence of structural changes between 1976 and 1983. In particular, our results suggest that fiscal variables influenced manufacturing employment in states more significantly during the 1970s than during the 1980s. As well, the results indicate that government fiscal variables had little impact on employment changes in nonmanufacturing industries in either the 1970s or the 1980s.