The effect of industrial diversity on state unemployment rate and per capita income

Abstract.

This paper examines the effect of industrial diversification on state unemployment and per capita income. Diversification may provide a form of employment insurance to states during cyclic downturns. Thus well diversified states should experience lower unemployment. To the extent that specialization confers economic benefit, however, more concentrated states should have higher per capita personal income. We use two sets of panel data for seventeen states spanning a thirty-eight year period to test these hypotheses. When state heterogeneity is controlled for properly, our results show that a strong link exists between industrial diversity and reduced unemployment. The evidence that per capita personal income is associated with industrial concentration is much weaker.