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Looking at the Urban-Rural Divide in Economic Growth


Tuesday, July 30, 2019

Is there an urban-rural divide in the U.S. when it comes to economic growth? And if so, what might be behind this disparity? A recent Regional Economist article looked at how rural and urban areas fared in terms of growing gross domestic product (GDP)—the measure of all goods and services produced in the economy.

To answer these questions, Economist Charles S. Gascon and Research Associate Brian Reinbold used data from the U.S. Bureau of Economic Analysis (BEA), which recently began providing annual real GDP data for U.S. counties.

Gascon and Reinbold divided U.S. counties into two groups: those that belonged to metropolitan statistical areas (MSAs) and those that were outside of an MSA. The authors acknowledged that counties belonging to MSAs can also have rural areas, but they noted that residents in rural parts of an MSA are often employed in urban areas.

“These two types of county clusters provide a succinct way to compare growth in urban (metro) areas and rural (nonmetro) areas,” they wrote.

The figure below shows the distribution of average annual real GDP growth rates for urban counties and rural counties between 2012 and 2015.

Chart showing annual growth rate of GDP for U.S. Metro and Nonmetro Counties for 2012-2015

The authors pointed out two features of this figure:

  • Annual growth rates across rural counties are more dispersed than those of urban counties, as seen by the lower peak and the fatter tails in the rural distribution.
  • Distribution growth across urban areas exceeds rural growth, with an average growth rate of 1.97% compared with 1.68% for rural areas. The median values show greater divergence—1.70% for urban counties and 1.18% for rural counties.

The Role of Industry Mix

One way to look at the difference in growth between urban and rural counties is to look at the industry mix between these two clusters, the authors noted. They broke down GDP into three major economic sectors:

  • Private goods-producing
  • Private service-providing
  • Government and government enterprises

The table below shows the share of GDP for each sector in both urban and rural counties.

Table 1

Composition of Average Real GDP by Sector: Metro and Nonmetro Counties
U.S. Metro U.S. Nonmetro Eighth District Metro Eighth District Nonmetro
Private Goods-Producing 17.9% 32.4% 20.0% 33.8%
Private Service-Providing 70.1% 51.9% 67.4% 51.5%
Government and Government Enterprises 11.9% 15.7% 12.5% 14.8%
SOURCES: Bureau of Economic Analysis and authors' calculations.

The authors pointed out the sizable difference in share of GDP generated by the private service-providing sector in urban and rural counties: In urban counties, about 70% of their GDP comes from this sector; in rural counties, this share is 52%.

“A key reason for this difference is due to what economists call agglomeration effects,” they wrote. “In other words, firms (particularly service firms) experience greater productivity by locating in cities where they have easier access to resources like airports and large pools of consumers.”

Though technological improvement may reduce agglomeration benefits, in many instances such improvements have increased those benefits, the authors observed.

“For example, urban hospitals can use a city’s amenities to attract physicians and then utilize telemedicine to provide services to rural areas,” they wrote.

The effect is not only a larger share of overall real GDP but also a faster growth rate for this sector in urban counties. The median growth rate of the service-providing sector was 2.12% in urban counties, compared with 1.17% in rural counties, according to the authors.

The table also shows that the government sector accounted for a bigger share of real GDP in rural counties (15.7%) than in urban counties (11.9%).

Relatedly, the authors noted that real output in the government sector declined across most U.S. counties during the period. See the figure below, which plots average annual real GDP growth by sector in all U.S. counties, including both urban and rural counties. The bigger economic presence of the government sector in rural counties partially explains their slower growth, the authors noted.

Average Real GDP Growth by Sector for U.S. Counties

The figure above also shows that the distribution of growth for the goods-producing sector is much flatter than the other sectors, the authors pointed out. Thus, the greater dispersion of economic growth across rural counties can be attributed to the bigger role that the goods-producing sector plays in those counties, they noted.

Conclusion

In their analysis, the authors found that urban counties grew faster than rural counties in the U.S. from 2012 to 2015. But they also noted some caveats: The BEA’s county-level GDP data are a prototype, and the incorporation of new sources could change the authors’ results. They added that their analysis covered only four years of data, making it difficult to extrapolate trends.

“However, our conclusion that rural areas grow more slowly than urban areas is corroborated by other studies,” the authors wrote.

Notes and References

1 The authors acknowledged that counties belonging to MSAs can also have rural areas, but they noted that residents in rural parts of an MSA are often employed in urban areas.

Additional Resources

Posted In Output  |  Tagged charles gasconbrian reinboldeconomic growthGDPregional economicsurban countiesrural counties
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