News & Updates

Convergence is Back! (It Never Really Went Away)

by | Apr 11, 2018 | Economy

Convergence refers to the tendency of states with below average levels of economic activity to enjoy somewhat higher growth rates than other more prosperous states. Convergence occurs because less well-performing states tend to make up ground over time relative to more prosperous states as innovations and technology diffuse throughout the economy.*

If convergence is real, states that have relatively high levels of economic productivity—such as Minnesota—should tend to have relatively low levels of economic growth, all other things being equal.

The subject of convergence has emerged in recent discussions about Minnesota’s economic performance. Conservative groups—such as the Center of the American Experiment—argue that Minnesota’s below average growth cannot be due to convergence, because convergence no longer occurs.

State-level GDP convergence refers to the tendency of low per capita GDP states to enjoy higher rates of GDP growth than high per capita GDP states. If we focus on an extremely short time period—from one year to the next, for example—convergence can be minimal to non-existent for brief intervals. However, if we examine longer time periods, it is clear that GDP convergence has never entirely disappeared—and at times is quite robust.†

The rate of per capita GDP growth from each year of the 21st century through 2016 (i.e., from 2000 to 2016, from 2001 to 2016, etc.) is generally higher among low per capita GDP states than among high per capita GDP states.‡ In other words, per capita GDP among the fifty states—at least to some degree—converged.

However, the strength of this convergence has waxed and waned over the course of the century. For example, GDP convergence was “statistically significant” during the period from 2000 to 2016; in other words, we can be 95% confident that low per capita GDP states had on average a somewhat higher rate of per capita GDP growth than high per capita GDP states during the period from the beginning of the century to the present–and that this relationship is not due to coincidence or random chance.

During the middle part of the last decade (approximately 2003 to 2008), GDP convergence was relatively weak; while convergence was still occurring, it was not strong enough to be statistically significant. However, during more recent periods GDP convergence has been statistically significant. In each year since 2011 (i.e., 2011 to 2016, 2012 to 2016, etc.), GDP convergence has been statistically significant.

In short, GDP convergence is a real and quantifiable economic trend in the 21st century. High per capita GDP states like Minnesota generally do have lower rates of per capita GDP growth than other less well-off states. Convergence is a contributing factor in explaining why Minnesota per capita GDP growth has been below the national average during selected periods.

While convergence can impact GDP growth, it is not the only factor at work; thus, high per capita GDP states can buck the tendency toward convergence and enjoy above average GDP growth. For example, Minnesota has enjoyed above average GDP growth over the last decade, overcoming the trend toward convergence and undermining conservative claims that Minnesota’s economy is slumping. More on this in part two of this series.

*An excellent explanation of economic convergence—with an emphasis on per capita GDP convergence—can be found in chapter 20 of “Principles of Economics” by Rice University. Using international data, this text provides a more complete discussion of the reasons for per capita GDP convergence, as well as a discussion of factors that can disrupt the tendency toward convergence.

Convergence is more likely to be evident over long periods than over short periods. Isolated events, such as a boom or bust in the price of a particular commodity or a natural disaster that impacts a particular region, can temporarily mask the long-term tendency toward per capita GDP convergence. The tendency toward per capita GDP convergence is more likely to be evident when examining longer periods, when the effects of short-term events are diluted by the passage of time.

Annual real per capita GDP information used in this analysis is based on North American Industrial Classification System (NAICS) data from the U.S. Bureau of Economic Analysis. This information for each U.S. state is available for the period from 1997 to 2016.

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