Because of a growing concern with equalization in the provis:LOn of human services, the substantial variance among and within American states in per capita health-hospital and education expenditures has received much serious empirical analysis. The major policy implications of interstate analysis are clear and well known: how much and what kind of federal assistance is necessary to effect an equalization of service levels, and what kinds of state-local government adjustments ought to be required as a condition of receiving this assistance. The research question underlying these policy concerns is threefold: (1) What is the magnitude of the interstate variations? (2) What are the determinants of the interstate variations? and (3) How are local expenditure levels responsive to federal assistance (i.e., are grants stimulative, neutral or substitutive)?

The intent in this paper is to address these research questions in the context of an analysis of interstate variations in education and health-hospital expenditures. While past studies have generally dealt with per capita expenditures as the variable to be explained, and primarily with a set of demand or needs factors as the determinants, this analysis will consider the wage rate and employment level components of expenditures, and will examine both demand and cost factors as determinants, as well as the effects of federal assistance.