Economic Growth in Kentucky: Why Does Kentucky Lag Behind the Rest of the South?

Kentucky has consistently been one of the poorest states in the country between 1939 and the present. On top of this already low level of income, Kentucky has experienced fairly slow growth in output in recent years. Between 1997 and 2004, Kentucky had an average annual growth in real gross state product (GSP) of 1.6 percent, ranking 43 rd in terms of growth in GSP relative to the rest of the states.

In contrast to Kentucky’s relatively stagnant growth, many of Kentucky’s neighbors, especially to the south, have experienced relatively rapid growth in average earnings in recent years. In 1969, Georgia, Kentucky, North Carolina and Tennessee all had levels of average earnings that were 77-82 percent of the average earnings in the U.S., while Alabama had average earnings that were approximately 70 percent of the national average. By 2004, Kentucky’s average earnings remained at approximately 80 percent of the national average while average earnings in Georgia, North Carolina and Tennessee had grown to 90 percent of the national average, and average earnings in Alabama had grown to over 85 percent of the national average. In other words, while relative average earnings in Kentucky has been flat for the past forty years, average earnings in a number of southern states similar to Kentucky have experienced fairly rapid relative growth since 1969.

In this report, we examine whether there are identifiable factors that can explain why Kentucky remains mired at the bottom of the income distribution. We start by first estimating a standard growth regression using data from all the states in the continental U.S. to examine what factors are most important in explaining why some states have grown faster. For this part of the report, we draw on data from a number of sources covering the period from 1969 to 2004. Next we compare the growth of these factors in Kentucky with the growth of these factors in our comparison states: Alabama, Georgia, North Carolina and Tennessee. This comparison will allow us to identify which of these factors explain why these other states have grown faster than Kentucky. Finally, we examine various policies in our comparison states to see if we can identify specific policies that can explain why a given state experienced differential growth in one of these factors.