Abstract: Education and labor mobility are key drivers in the production of human capital, fundamental to economic development. In the U.S., the varying skill production efficiencies of state-specific education systems and the dynamics of worker migration shape human capital of states, influencing economic outcomes at both the state and national levels. This paper develops a novel dynamic spatial general equilibrium model with overlapping generation framework in which heterogeneous individuals accumulate human capital and move across states. Calibrated to the U.S. economy, the model illustrates how variations in education efficiency lead to substantial crossstate income disparities and shows that internal migration can notably boost output in states with lower education efficiencies. At the national level, free mobility of workers yields a 6.9% output gain. Moreover, the model suggests that variations in human capital account for 46.6% of the state variation per capita output. Applying the calibrated model to analyze the Obama Administration’s Race to the Top initiative finds that the $4.1 billion grant spurred a 0.2% increase in U.S. GDP, mostly benefiting the grant-winning states and their neighbors. Additionally, alternative grant allocation experiments show that strategic reallocation of education grants, considering state skill production efficiencies, could further increase national GDP gains without necessarily worsening state income disparities.