Energy Prices, Factor Reallocation, and Regional Growth

The governors of northeastern states have recently cited the disparity in energy costs as contributing to the adverse economic condition in the Northeast. This paper develops an economic methodology to explain how energy prices could affect profits and wages in a state. The changes in profits and wages affect the growth of capital and employment, which in turn affect the growth of output. Applied to the 1963 to 1972 period, tests of this model support the hypothesis that energy prices do affect regional growth. In order to ascertain the importance of energy prices as a determinate of regional growth rates, simulations are run on the model under a hypothetical scenario which assumes that energy price differentials among states are eliminated. This simulation shows that the economic growth of states would be increased substantially where energy prices are currently high, and vice versa. Tables are presented to show for each state the annual growth of capital, labor, and manufacturing output with the energy prices as actually existed. Changes in these growth rates due to hypothetical changes in energy prices, are also shown.