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Minnesota’s economy: we can do better

This op-ed appeared January 1, 2018 in the Pilot-Independent.

Minnesota’s economy is a source of pride for many in the state and there is much to be proud of. Our state boasts one of the highest standards of living in the country. Our hard working and highly educated workforce, for one, are sources of real economic advantage. Minnesota was recently ranked as the best governed state in the US, in part owing to its economic performance.

But the idea that our economic performance in recent years has set some national standard is not supported by the facts. In our new report, The State of Minnesota’s Economy: 2017, we examine the last sixteen years’ worth of data and find that our performance is lackluster.

Take Minnesota’s GDP growth, one of the most commonly cited performance metrics. Since 2000, Minnesota’s economic growth rate has lagged that of the nation as a whole. In 2016, our state’s economy was 2.5 percent smaller than it would have been if it had grown at the same rate as the US generally since 2000. Comparing growth since 2000 among the fifteen Metropolitan Statistical Areas (MSAs) with the largest GDP in 2016, the Twin Cities ranks 12th.

Personal income is another popularly cited measure. On a per capita basis, Minnesotan’s personal income was 5.7 percent above the national average in 2016. But that has been driven by government redistribution, not productive economic activity. Since 2000, 47 percent of the increase in personal incomes has come from increases in transfer payments, not labor or capital earnings. This trend has been worse in Minnesota than nationally. While the increase in transfer payments was 60 percent nationally from 2000, in Minnesota it was 69 percent.

Our state’s unemployment rate is well below the national average and the labor force participation rate is well above it. However, in each of the last five years, the rate of job growth in Minnesota has been below the national average. Between 2000 and 2016, Minnesota’s growth rate of new jobs ranked 28th out of 50 states. Compared to the fifteen MSAs with the largest GDP in 2016, job growth in the Twin Cities ranked 11th between 2000 and 2015.

And what new jobs there have been have come, primarily, in lower productivity sectors of the economy. Mining and logging, for example, generated $447,603 per job in 2016 and Information $319,596. But in the previous sixteen years, Minnesota lost 23 percent of its jobs in mining and logging and 27 percent of those in Information. In contrast, Health Care jobs generate an average of $88,761 of GVA annually, but jobs there have increased by 61 percent since 2000. Educational Services jobs generate an average of $58,239 of GVA annually, and employment in that sector has risen by 61 percent over the same period.

Most concerning is Minnesota’s poor performance in productivity. This is vital to economic wellbeing. As the economist Paul Krugman has written “Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”

Yet, looking at GDP per worker, in 2004, the average Minnesotan worker produced 95 percent of the output of the average US worker. In 2016, that figure was 92 percent. In terms of GDP per hour worked, Minnesotan’s working in goods production produce 6 percent less GDP per hour worked and those in services produce 8 percent less GDP per hour worked. Quite simply, we will not maintain above average incomes with below average productivity.

What can Minnesota do about this? With the share of the state’s population working set to decline over the next 20 years, growth in GDP per capita will depend on making those workers that remain more productive.

First, governmental barriers to employment in high productivity sectors such as mining should be removed. Second, tax rates that have turned Minnesota into a net exporter of high productivity domestic migrants should be reduced. Third, corporate tax rates that reduce investment in Minnesota should be cut. Fourth, tax credits should be made available to fund research and development. And fifth, the state’s workforce needs the skills to be productive in an ever-changing economy. That means schools should maintain their focus on education as their primary goal and vocational education should be a lifelong thing.

Minnesota’s economy is not in bad shape, but it could be doing better. With the growing challenge of an aging population to deal with, it will need to.

John Phelan is an economist at the Center of the American Experiment in Golden Valley.

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