Labor productivity growth, a measure of output per unit of work, is closely tied to gains in wages and living standards, and it provides a direct measure of a country’s competitive position over time. The same holds true for states. Since the last business cycle peak in 2000, states boosted their average labor productivity growth to 2.3 percent. In Ohio, this growth came as a result of modest output growth accompanied by sharp employment losses. Although this has been a painful transition for the Fourth District, solid productivity gains have made the remaining firms and workers more competitive and may prepare the way for future growth.Labor productivity ; Economic conditions ; Federal Reserve District, 4th

Paul Bauer

Yoonsoo Lee

English

Research Papers in Economics

week is assumed to be equal to that of
one full-time worker who clocks 40
hours per week. 
At the state level, the number of hours
worked is not available, so we are forced
to use the number of workers instead.
How much of a difference does it make
when workers are used to measure labor
input rather than hours? We can explore
this issue at the national level, where both
measures of labor input are available. 
Although output per hour and output per
worker are broadly similar, they differ in
two significant ways. The first and most
obvious difference is the way the two
measures behave over the business cycle.
During economic downturns, firms tend
to retain workers but reduce their work-
ing hours, thus lowering output per
June 2005
Federal Reserve Bank of Cleveland
Labor Productivity Growth across States
by Paul Bauer and Yoonsoo Lee
ISSN 0428-1276
Labor productivity growth, a mea-
sure of output per unit of work, is
closely tied to gains in wages and 
living standards, and it provides 
a direct measure of a country’s 
competitive position over time. The
same holds true for states. Since the
last business cycle peak in 2000,
states boosted their average labor
productivity growth to 2.3 percent.
In Ohio, this growth came as a result 
of modest output growth accompa-
nied by sharp employment losses.
Although this has been a painful
transition for the Fourth District,
solid productivity gains have made
the remaining firms and workers
more competitive and may prepare
the way for future growth.
Growth in labor productivity is one of
the most keenly watched series at the
national level. Not only is labor produc-
tivity growth closely tied to gains in
wages and living standards, it also pro-
vides a direct measure of the country’s
competitive position over time. More-
over, trends in labor productivity growth
figure prominently in long-term eco-
nomic forecasts. For example, problems
such as the budget deficit and social
security funding become much less
onerous with even a seemingly small 
0.5 percentage point boost in annual
labor productivity growth.
Similarly, labor productivity at the state
level provides useful information on the
health of a state’s economy. However,
no official state labor productivity 
figures are available. To obtain timely
estimates, two hurdles must be cleared.
First, the national measure of labor pro-
ductivity is defined as output per hour,
but hours worked are not reported at the
state level—only the number of workers.
Second, gross state product (GSP), the
state-level counterpart to gross domestic
product (GDP), is available only annu-
ally and with a lag of up to two years. 
Neither problem is insurmountable. We
can construct a measure of state labor
productivity by looking at output per
worker rather than output per hour.
Although this alternative behaves some-
what differently in the long run and over
the business cycle than the more familiar
measure, the two are broadly similar. In
addition, although official estimates of
GSP are available only up to 2002, we
can obtain reasonable estimates of GSP
for 2003 and 2004 using state personal
income data and U.S. GDP, two series
that are published quarterly by the
Bureau of Economic Analysis with a
delay of only a few weeks.1
In this Economic Commentary, we first
compare labor productivity estimates
based on output per worker to the more
familiar output per hour measure. Then,
we estimate states’average annual labor
productivity growth for two periods:
1977–2000 and 2000–04. Concentrating
on the latter period, we look at how dif-
ferences in output and employment
growth affect labor productivity growth
across states. Since the last business
cycle peak in 2000, states boosted their
average labor productivity growth to 
2.3 percent—a gain of 1.2 percentage
points over 1977–2000—but exhibited a
wide variation across states. The Fourth
District states all raised their productiv-
ity growth rates during this period. In
Ohio, the gain resulted from modest 
output growth accompanied by sharp
employment losses—a painful way to
go, but one that may pave the way for
future growth by making the remaining
firms and workers more competitive.
■ Constructing Labor 
Productivity
Labor productivity is measured as output
per unit of labor. At the national level,
the standard measure of labor productiv-
ity growth is the output of private non-
farm business per hour worked. The
numerator—output of private nonfarm
business—omits government, a sector
whose output can be hard to measure,
and farms, where output can vary a great
deal because of weather or crop prices.
Hours worked is used in the denomina-
tor rather than the number of employees
because it measures effort more accu-
rately. For instance, the effort of two
half-time workers putting in 20 hours perworker compared to output per hour.
During a recovery, this ratio reverts to its
normal pattern: Firms tend to be cautious
in hiring as demand rebounds, raising
output per worker relative to output per
hour. This occurred during the last busi-
ness cycle peak as output per worker
plunged in 2000 and 2001 but rebounded
sharply in subsequent years. 
Second, the two measures of labor pro-
ductivity differ because there is a long-
run trend toward fewer hours per worker,
a result of both growth in the number of
part-time workers and shorter average
workweeks for full-time workers.
The bottom line is that when we make
longer-term comparisons, as we do here,
the two series will yield similar results,
especially if one accounts for the trend
toward fewer hours per worker. But
when we consider year-to-year move-
ments in productivity, this differing
behavior over the business cycle must 
be kept in mind.
■ Labor Productivity 
Estimates
Figure 1 plots average annual labor 
productivity growth—measured by the
ratio of private nonfarm GSP to employ-
ment—from 1977 to 2000. By this 
measure, states averaged 1.1 percent
growth over this period, from a low of
–0.4 percent in Alaska to Connecticut’s
comparatively blistering 2.8 percent. In
the Fourth District, Pennsylvania led
with 1.3 percent, followed by Ohio 
(0.8 percent), Kentucky (0.4 percent),
and West Virginia (–0.3 percent).
During the period since the last busi-
ness cycle peak (2000–04), states’
average annual labor productivity grew
2.3 percent—an increase of 1.2 percent-
age points over the previous period—
but this gain was far from evenly dis-
tributed (see figure 2). This is not
entirely surprising, considering the 
differential impact of the economic
downturn on the states and their indus-
tries during these years. Delaware led
the nation with average annual labor
productivity growth that soared to 
8.6 percent; eight states experienced
declines, led by Alaska at –4.5 percent.
In the Fourth District, state labor pro-
ductivity growth exceeded that of the
nation from 2000 to 2004. In particular,
West Virginia rose from the second-
slowest growing state in 1977–2000 to
the sixth-fastest growing, at 4.4 percent.
Kentucky, at 2.4 percent, went from
sixth slowest to midpack performer.
Ohio and Pennsylvania, at 3.7 percent
and 3.2 percent, also turned in solid
numbers. Given that the current expan-
sion has not been kind to the Fourth 
District, particularly Ohio, the region’s
strong relative labor productivity growth
comes as a bit of a surprise. What is 
driving this turnaround in labor produc-
tivity, and why do the gains vary so
widely across states? 
■ Sources of Gain and 
Variation
Nationwide, the acceleration in labor
productivity growth has been attributed
partly to technological advances in
FIGURE 1 LABOR PRODUCTIVITY GROWTH,
1977–2000
WV
WY
ND
LA
WI
KS OH NE
UT AZ FL ID NV
WA
PA HI
VT TN VA
DC
GA
DE
NJ
MA
CT
NH RI NY NC CA SC CO MD MN IL OR ME SD AL TX MO NM MS IN AR MI IA KY OK
MT AK
–1
0
1
2
3
Annual growth rate (percent)
SOURCES: U.S. Department of Labor, Bureau of Labor Services; and authors’calculations.
FIGURE 2 LABOR PRODUCTIVITY GROWTH, 
2000–04
LA
OR
WY
RI
TX
NJ VT ID MS GA MO FL UT
AL
IL PA MT OK
OH IN KS NE
SC
NC
DE
MI IA WV CO WI AZ SD AR VA TN MN WA MD KY NV ME MA ND DC CT CA NY
NH HI NM AK
–5
0
5
10
Annual growth rate (percent)
SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis; U.S.
Department of Labor, Bureau of Labor Services; and authors’calculations.come from falling employment (while
GSP holds steady), this environment
will prove more painful for states than 
if employment were rising and GSP
were growing even faster. In the former
case, tax revenue is likely to fall and
demand for social services, such as
unemployment benefits, will rise. In the
latter case, the converse is true: Tax 
revenue is likely to rise while demand
for social services falls.
Figure 3 plots state employment growth
from 2000 to 2004. Reflecting the oft-
cited “jobless recovery,” only 15 states
managed employment gains during this
period, as average employment declined
0.2  percent. Nevada led the nation with a
rapid 2.1 percent average annual employ-
ment growth rate, but the rates tail off
sharply from there. Second-place Alaska
managed only 1.5 percent, and Michigan,
which trailed the nation, lost 1.9 percent
of its employment each year. Within the
Fourth District, Ohio lost 1.4 percent, 
second only to Michigan. Kentucky,
Pennsylvania, and West Virginia did 
better but still lost 0.6 percent, 0.5 per-
cent, and 0.4 percent, respectively. 
This weak employment performance,
particularly in Ohio, has been widely
noted and discussed. But what has been
going on with states’output has
received less attention. Between 2000
and 2004, the average state’s GSP grew
2.3 percent, and only three states
(Louisiana, Oregon, and New York)
saw GSP fall (see figure 4). 
Delaware led the country in GSP
growth. With almost a third of its 
GSP coming from finance and insur-
ance, Delaware’s growth appears to
have been bolstered by the effects of
the Gramm-Leach-Bliley Act of 1999,
which liberalized banking and insur-
ance legislation. Nationally, this legis-
lation has prompted a number of 
mergers and relocations, some of
which boosted output substantially 
in Delaware but added relatively little
employment. Ohio (0.8 percent) 
trailed the other Fourth District states,
whereas Kentucky (1.7 percent), 
Pennsylvania (2.5 percent), and West
Virginia (3.3 percent) produced near
the national average. 
Two states illustrate how the same labor
productivity growth can be achieved in
very different ways. Despite Ohio’s
anemic GSP growth, its sharp decline
in employment resulted in fairly strong
labor productivity growth—in the top
third of all states. In contrast, West Vir-
ginia experienced employment growth
near the median and output growth
among the top nine states. As a result,
West Virginia’s labor productivity
growth landed in the top six states. 
FIGURE 3 EMPLOYMENT GROWTH, 
2000–04
OH
IL
CO
IN AL
KS NY IA KY MO PA
WV NE WI LA NJ MN UT
ME
ND
RI
DC
MT
HI
WY
NV
AK NM FL ID AZ MD
MI MA MS NC CT OK GA WA SC TN OR AR NH TX DE CA SD VT
VA
–3
–2
–1
0
1
2
3
Annual growth rate (percent)
SOURCE: U.S. Department of Labor, Bureau of Labor Services.
FIGURE 4 OUTPUT (GROSS STATE PRODUCT)
GROWTH, 2000–04
OR
MA
CT
NM MS RI
KY NJ HI KS IN WA UT CO ID
PA
SD AR
ND
DC WV
IA
WY MT
DE
NV AZ NE FL VA MD WI MN NC SC VT ME AK OK TN MI TX AL GA CA MO IL OH NH
NY LA
–2
0
2
4
6
8
Annual growth rate (percent)
SOURCES: U.S. Department of Commerce, Bureau of Economic 
Analysis; and authors’calculations.
information technology such as comput-
ers and telecommunications. Therefore,
some of the variation may reflect the
fact that only some states have concen-
trations of these industries and the
industries that benefit from them. Of
course, states’fiscal policies, both tax
and public infrastructure, also influence
productivity growth rates.
To facilitate the study of labor produc-
tivity growth at the national level, the
Bureau of Labor Statistics decomposes
labor productivity growth into several
components. The main components are
capital deepening (an increase in the
amount of capital per worker), the
increase in the skills and experience of
the average worker, and technological
change (a residual category often called
“multifactor productivity growth”).
However, this cannot be done for states
because the decomposition requires at
least an estimate of capital and labor
quality for each state over time.
We can better understand how the gains
in labor productivity are being gener-
ated by looking at growth in GSP and
employment separately. This is an 
important consideration because it has
implications for the health of a state’s
economy and its finances. Although 
productivity gains achieved in isolation
are good—who wouldn’t want more 
output for a given input—if the gainsFederal Reserve Bank of Cleveland
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Paul Bauer is an economic advisor at the
Federal Reserve Bank of Cleveland, and
Yoonsoo Lee is an economist at the Bank. 
The views expressed here are those of the
authors and not necessarily those of the Fed-
eral Reserve Bank of Cleveland, the Board of 
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A closer examination of the relationship
between labor productivity growth and
employment growth reveals a negative
correlation between the two during
2000–04. Although a negative correla-
tion is frequently found during periods
of economic downturn, over the course
of an entire business cycle, there is no
statistically significant correlation
between labor productivity growth and
employment growth. Downturns tend to
see a lot of economic restructuring with
less productive capital and workers
becoming unemployed, thus boosting
the productivity of the remaining work-
force. As the recovery sets in, these
resources are put back to work in more
productive enterprises. The economist
Joseph Schumpeter called this process
“creative destruction” and considered it
a natural part of the market economy’s
evolution over time. Like a forest fire, it
prepares the way for future growth.
■ Summary
This Economic Commentary has shown
how measures of labor productivity can
be constructed for states and provided 
a first look at them. The data show that
this measure of productivity growth
varies widely across states. Examining
growth in GSP and employment sepa-
rately allows us to obtain a more com-
plete understanding of regional economic
performance. The period since the last
business cycle peak has been a painful
one for much of the Fourth District, but
solid productivity gains have made the
remaining firms and workers more com-
petitive and may help to pave the way for
future growth.
■ Footnotes
1. For full details, see Bauer and Lee’s
“Estimating GSP and Labor Productiv-
ity by State,” Federal Reserve Bank of
Cleveland, Policy Discussion Papers,
forthcoming. Estimates of GSP are
available on the Federal Reserve Bank
of Cleveland’s Regional Research and
Data Web site at www.clevelandfed.org/
Research/Regional/. 

Labor productivity growth across states

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