Accounting for Growth: North Dakota’s hardworking population

Yesterday, we looked at North Dakota’ erratic performance in per capita GDP over the last few years. We noted that, using a technique called “growth accounting,” we could break this growth down into the share coming from growth in human capital, physical capital, and Total Factor Productivity (TFP). This enables us to dig deeper, and see why North Dakota’s per capita GDP has performed so erratically.

Human capital

We estimate the total stock of human capital in each state by multiplying the number of people employed, by the average hours each worker works annually, by the average human capital — or skills — possessed by each worker arising from education, by the average skills each worker possesses arising from experience. We then divide this by the population to derive a per capita number, as it is per capita GDP we are interested in. Mathematically, if we use the growth rate of employment as a share of the population in place of the number of people employed, we can break down the growth rate of human capital per capita into its components.

Table 1 breaks down the unweighted growth rate of that per capita stock of human capital into the shares derived from the four components. What is immediately obvious is that the 4.8 percentage point decline in the average annual per capita growth rate of human capital in North Dakota from 2008-2014 to 2014-2023 — from growth of 3.7% annually to a decline of -1.1%, the fastest rate to the slowest nationally — is entirely due to a collapse in the growth rate of average hours worked annually, from 4.1% in 2008-2014 to a decline of -1.3% in 2014-2023.

Table 1: Growth Accounting for North Dakota, Human Capital

The growth rate of average hours worked annually slumping from the fastest in the United States to the slowest is a negative in our human capital calculation. However, fewer hours worked may mean more hours doing something else we enjoy more. Borjas notes that “the typical person employed in production worked 55 hours per week in 1900, 40 hours in 1940, and just under 34 hours in 2020” and argues that this is because, as wages have risen, the “income effect reduces hours of work” as workers can maintain their level of income while working for fewer hours, allowing them to purchase more leisure time. The ultimate aim of economic policy is to maximize utility — “a measure of happiness or satisfaction” — not GDP or even GDP per capita, which is a means to that end. With this in mind, despite its importance, analysis of average hours worked will be included only as necessary for the growth accounting exercise. At any rate, even with this average annual rate of decline in 2014-2023, North Dakotan workers, on average, worked the fourth most hours out of any state in 2023.

The collapse in the growth rate of average hours worked is not the whole story of human capital in North Dakota, however. The other sources of human capital growth all show improved rates between the two subperiods.

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