Income non-convergence and rural-urban earnings differentials: evidence from North Carolina.

• Author: Renkow, Mitch

1. Introduction

   Considerable attention is currently focussed on the deteriorating social and economic condition of America's rural communities. Stagnant or worsening poverty rates, unemployment rates, and real incomes over the past decade - along with persistent and widening gaps between the economic performance of rural and urban areas - are well-documented indicators of the seriousness of this socioeconomic malaise [6; 8; 18]. Coming as it has after a period of relative prosperity - the so-called "rural renaissance" of the 1970s - the current crisis in rural America has generated a great deal of consternation among policymakers, social scientists, and other students of rural development.

   Current concerns over rural economic decline coincide with the observation by a number of researchers that the spatial dispersion of income - measured by the variance of income or earnings per capita across geographic units - has increased over the past decade or so. This pattern of income non-convergence has been observed across countries [1], regions of the U.S. [3], and states [5], and is distinctly at odds with the theoretical predictions of standard neo-classical growth theory. A considerable recent literature that accounts for the effects of schooling, human capital accumulation, learning by doing, and endogenous technical change within the context of endogenous growth models seeks to generalize the standard growth model and clarify the conditions under which incomes may be expected to converge or diverge over time [2; 14; 17].

   In fact, the recent increase in dispersion of income per capita and the widening disparity in the economic performance of rural and urban areas appear to be related phenomena. Consider Figure 1, which plots measures of income dispersion and rural-urban income differentials over time for North Carolina's 100 counties. There it will be observed that the coefficient of variation of earnings per capita (given by the solid line) fell during the first half of the 1970s, but has been rising steadily since 1976.(1) More striking is the remarkably similar behavior of the time series composed of the difference in earnings per capita between metro and non-metro counties (given by the dashed line). The strong correlation between these two series ([Rho] = .904) suggests that ascertaining the factors underlying the differential economic performance of rural areas vis-a-vis urban areas may hold the key to understanding the empirical puzzle embodied by the recent dynamics of income dispersion. Specifically, it begs the questions of what are the underlying forces determining real incomes, and how does the response to these forces differ between rural and urban areas.

   This paper quantifies the magnitude of rural-urban differences in the response of earnings to key economic variables. Using county-level data for North Carolina, an empirical model of earnings determination is estimated that allows direct measurement of the impact on per capita earnings of the local stock of human capital, macroeconomic forces, and local labor market conditions. The econometric results indicate that (a) returns to schooling are significantly lower in rural areas than in urban areas; (b) there is no appreciable difference in the impact of macroeconomic forces on rural areas vis-a-vis urban areas; and (c) earnings in rural areas are more sensitive to local labor market conditions. Further analysis suggests that while macroeconomic forces have been the dominant source of earnings growth in all locations, divergence in per capita earnings between rural and urban areas has been largely attributable to local differences in human capital stocks and local labor market conditions.

   The paper is organized as follows. The next section provides descriptive information on the study area. The following two sections describe the analytical framework for the empirical model, the data used, and some estimation issues. Next, the econometric results are presented and used to compute the contribution of key economic variables to observed trends in urban and rural earnings growth. The following section reassesses the link between rural-urban earnings differentials and income dispersion in light of our empirical findings. Concluding remarks are found in the paper's final section.

2. The Study Area

   By most aggregate measures, North Carolina's economic performance has outpaced that of the rest of the nation over the past two decades. Between 1969 and 1990 real per capita income in North Carolina grew at a rate that was approximately 20% greater than the national rate, and the primary components of real income - earnings, capital income from dividends interest and rents, and transfer payments - grew at rates that exceeded the national average by 20% to 50% [ILLUSTRATION FOR FIGURE 2 OMITTED]. Only the state's agricultural sector fared worse than the national average, with farm earnings falling by an annual rate of 4.2% (as opposed to a decline of 3% per year nationally).

   While economic growth has been impressive for the state as a whole, at a more disaggregated level the picture is considerably more mixed. North Carolina is composed of 75 rural counties and 25 metropolitan counties (as classified by the Bureau of Economic Analysis), with slightly less than half of the state's population living in rural areas. Table I provides information on the initial distribution of real income and income growth across counties over the period 1969-90. Two groups are of particular interest - the 10 counties that were initially better off and achieved income growth at rates in excess of the state average of 2.2%, and the 46 counties that started relatively worse off and achieved relatively low income growth. The first group comprises most of the state's major metropolitan centers and some adjacent counties. The second group is composed almost exclusively of rural counties, and primarily ones in which agriculture is a key industry within the county. The disparate economic performance of these two sets of counties - superior growth in a handful of "rich" urban counties and sluggish growth in a large group of "poor" rural counties - underlies the strikingly similar dynamics of earnings dispersion and rural-urban earnings disparities shown in Figure 1.

   An important element in understanding rural-urban differences in income dynamics is the behavior of local labor markets. Figure 3 reveals a persisting gap between rural and urban unemployment [TABULAR DATA FOR TABLE I OMITTED] that has grown wider since the mid-1970s. To the extent that laborers in rural areas are less mobile and/or less able to shift from one type of employment to another, one would expect negative labor market shocks to have a greater impact on earnings in rural areas vis-a-vis urban areas [21]. The empirical analysis that follows seeks to measure the strength of these and other factors in the determination of earnings in different areas.

3. Analytical Framework

   The analysis presented here concerns itself with per capita labor earnings...