DO STATE BUSINESS CLIMATES STILL MATTER - EVIDENCE OF A STRUCTURAL-CHANGE

Studies examining the effect of state and local government fiscal vari ables on states' employment and personal income growth find substantia l effects during the 1970s. However, when similar models are estimated for the 1980s, the results reveal that the effect of government fisca l variables on subnational growth has waned. This paper pools cross-se ctional and time-series data during the 1967-88 period to test for the presence of a structural change in the relationship between state and local fiscal behavior and subnational economic growth. Using a switch ing regression model, we uncover evidence of structural changes betwee n 1976 and 1983. In particular, our results suggest that fiscal variab les influenced manufacturing employment in states more significantly d uring the 1970s than during the 1980s. As well, the results indicate t hat government fiscal variables had little impact on employment change s in nonmanufacturing industries in either the 1970s or the 1980s.