Geography, population density, and per-capita income gaps across US states and Canadian provinces

Abstract

We explain per-capita income gaps across US states and Canadian provinces by the following chain of causation. Geography determined where Europeans originally settled: in Northeastern USA, along those segments of the Atlantic coast where the climate was neither too hot (the US South), nor too cold (Canada). Higher population densities in this early settled region have prevailed to this day. This has in turn affected per-capita incomes because densely populated areas are conducive to skill accumulation; indicatively, many of the world’s top universities lie in this region. Our ordinary least-squares regressions show university education having a robust positive and significant effect on per-capita incomes. To control for endogeneity we run various instrumental-variable regressions: some where education today is instrumented with e.g. population density in 1900; and some where different sets of geography variables (e.g. temperature) are used as instruments. Our findings are consistent with the type of causal chain described.Geography; population density; income gaps; Canada; USA