Accounting for Growth: North Dakota’s economic rollercoaster

The importance of per capita economic growth

What matters for economic welfare is per capita income. This is a general measure of welfare, telling us how much, per person, is available to be consumed, invested, or put to some other use. If we want to increase economic welfare, we should pursue policies that increase per capita Gross Domestic Product (GDP).

North Dakota’s recent record on per capita GDP growth is striking. As Figure 1 shows, from 1997 to 2009, North Dakota experienced steady growth relative to the United States generally, so much so that GDP per capita in the Peace Garden State was higher than the national level by 2009. North Dakota then experienced a surge of real, per capita GDP growth, and by 2014 it was 41.3% higher than for the United States. Since then, however, per capita GDP in North Dakota has declined, and in 2024 it was 7.0% lower, in real terms, than in 2014.

Figure 1: Per Capita GDP, 2017$

What accounts for the surge in per capita GDP in North Dakota from 2009 to 2014? What accounts for its subsequent decline? To answer this, we need to examine the components of real per capita GDP growth which we do in our new report, “Accounting for Growth in North Dakota: Performance and Prospects.”

Per capita economic growth comes from three sources. These are an increase in the amount of labor provided by a given population and the quality of that labor, which we can call “human capital;” an increase in the tools those workers have to work with, which we can call “physical capital;” and “Total Factor Productivity (TFP)” (“The effectiveness with which factors of production are converted into output”), which is also known as Technology (“the way inputs to the production process are transformed into output”).

Determining how a country or state is performing with regard to these sources is vital for identifying policies that will boost real per capita GDP growth. Policies that increase employment or skills raise human capital; policies that stimulate increased capital investment elevate the amount of physical capital; and policies that spur increased innovation and entrepreneurship catalyze TFP growth.

Economists use a technique called “growth accounting” to break down the observed rates of change in real per capita GDP, such as those shown in Figure 1, into the shares derived from changes in human capital, physical capital, or TFP, by subtracting weighted values for human and physical capital growth from per capita GDP growth with the residual being assigned to TFP. To enable such an analysis for the states, we have created estimates of human and physical capital for each state from 2008 to 2023, which are available as the American Experiment United States Tables. The results of a growth accounting exercise performed using these estimates are shown in Table 1. We can use these estimates and the underlying data to answer the questions of what lies behind North Dakota’s erratic recent performance in GDP per capita growth and what could be done to improve it.

Growth accounting

Table 1 presents the results of our growth accounting exercise for North Dakota, broken down into three periods: the entire period which our estimates cover, 2008-2023, in Row 1; the period of strong per capita GDP growth, 2008-2014, in Row 2; and the period of decline, 2014-2023, in Row 3. It shows the mean annual growth rates of per capita GDP in Column 1; the mean (weighted) annual rates of per capita human capital growth in Column 2; the mean (weighted) annual rate of per capita physical capital growth in Column 3; and the mean annual rate of per capita TFP growth in Column 4. Columns 5, 6, 7, and 8 show how North Dakota’s rates rank among the 50 states.

Table 1: Growth Accounting for North Dakota

Over the period 2008 to 2023, North Dakota’s average annual rate of per capita GDP growth — 2.7% — ranked highest out of 50 states. A per capita increase in human capital of 0.3% annually accounted for just 9.4% of this per capita GDP growth. Nevertheless, this was the fastest growth in the United States. The average annual rate of per capita physical capital growth — 1.4% — was, again, the highest out of the 50 states and contributed 50.2% of North Dakota’s per capita GDP growth. The state’s annual average rate of TFP growth per capita — 1.1% — ranked 5th out of the 50 states and contributed 40.4% of North Dakota’s per capita GDP growth. Over the long period, per capita GDP growth in the state is overwhelmingly a story of physical capital and TFP growth: Human capital growth played a relatively small part.

To explain the change in performance from the period 2008-2014 to 2014-2023, as shown in Figure 1, we need to compare the second and third rows of Table 1. Row 2 shows us that in the period 2008-2014, North Dakota’s growth rates were the best in the United States for per capita GDP and all three of its components. For the period 2014-2023, Row 3 tells a very different story. The state’s average annual rate of per capita GDP growth fell by 7.8 percentage points, from growth of 7.4% to a decline of -0.4%: North Dakota went from having the fastest growth in the United States to the slowest.

North Dakota’s average annual rate of per capita human capital growth also fell from top to bottom ranking between the two periods. The decline of 1.5 percentage points, from growth of 1.1% to a decline of -0.3%, accounted for 18.5% of the overall decline in the average annual rate of per capita GDP growth.

The same is very nearly true for per capita physical capital growth. Here, the average annual growth rate of 3.5% fell by 3.6 percentage points to a decline of -0.1%. This saw the growth rate of North Dakota’s stock of physical capital per capita fall from the fastest in the United States to the 48th fastest, accounting for 45.7% of the overall decline in the average annual rate of per capita GDP growth.

Per capita growth of TFP in North Dakota also declined steeply between our two periods. The average annual growth rate fell by 2.8 percentage points, from growth of 2.8% to stagnation, accounting for 35.8% of the overall decline in the average annual rate of per capita GDP growth. While the state’s rate of per capita TFP growth was the highest in the United States in 2008-2014, this slumped to 49th in 2014-2023.

Between the two short periods, the transition from rapid growth in 2008-2014 to stagnation in 2014-2023 is largely a story of collapsing rates of physical capital and TFP growth. Together, this accounts for 82.7% of the 7.8 percentage point decline in the average annual rate of per capita GDP growth between the two periods.

What explains these changes in the rates and rankings of the components of per capita GDP growth? We can use the data that underpin our estimates of human and physical capital to examine more closely the causes of the decline in North Dakota’s real per capita GDP growth.

This article is based on our report “Accounting for Growth in North Dakota: Performance and Prospects.”