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More workers will help us prosper, if they’re the right kind of workers

Minnesota’s population is ageing. An increasingly small share of workers in the state’s economy will generate economic headwinds which will slow economic growth. In the most recent edition of Minnesota Economic Trendsstate economists Steve Hine and Cameron Macht argue that increased immigration is a solution for this problem, with immigrants replacing the retiring Baby Boomers in the labor force. But, as I wrote in the Star Tribune a while back, that depends on a couple of things…

Minnesota’s labor market has become a source of concern (“An ill-timed plan to pinch immigration,” Aug. 9). But not for the reasons you might think.

The state’s Department of Employment and Economic Development (DEED) points to a New York Times article about Utah, saying the newspaper “easily could have been writing about Minnesota.” The article said that in Utah, “the biggest economic concern in the state is no longer a lack of jobs, but a lack of workers. Businesses all over the state are struggling to expand because of a labor shortage.” “This may constrain the healthy rate of growth the [Twin Cities] region has witnessed since 2010,” DEED writes elsewhere.

But let’s pause for a moment before ringing the economic alarm bell.

According to DEED, “Essentially, the supply of available workers in the Twin Cities Metro Area is too low to meet the demand.” Perhaps. But where we have a supposed mismatch between quantity of something supplied and quantity demanded, we have a mechanism in place to remedy that mismatch: the price mechanism.

What DEED is actually saying is that demand is greater than supply at the current price. At a higher price, demand and supply would be brought back into equilibrium. The price in question is wages. Increased demand for labor relative to supply is one of the things that increases workers’ pay. As of April, average wages of private-sector workers are up 7.5 percent from a year ago.

We hear a lot these days about how wages are too low, are stagnant and don’t allow workers to make ends meet. It’s strange then that the economic forces remedying this are painted as harbingers of doom.

In fact, increased labor inputs is just one of three sources of growth of GDP per capita. That is what matters for the economic well-being of Minnesotans.

Obviously, if more people enter an economy, that economy’s total output will rise (until diminishing returns set in). But the increased output will have to be divided among an increased population. Individuals within that population might be no better off than they were before. That all depends on the relative productivity of the new entrants.

If the new workers are more productive than the average, output per person will rise. If they are less productive than average, output per person will fall.

This bears on the national debate around the RAISE Act immigration proposal. If such legislation increases the share or number of immigrants with above-average skills, it can be expected to increase per-capita GDP. Policies that remove immigrants with above-average skills — such as requiring college grads to leave the country — will reduce per-capita GDP. Meanwhile, if the other sources of growth increase, per-capita income can expand without any rise in the labor force.

The second source is the increase of capital per worker — more or better machinery, for example. If each worker has more capital to work with, he or she will be more productive (again, until diminishing returns set in).

The third source of growth is productivity. This is how efficiently the other inputs — labor and capital, primarily — are combined. It also reflects the quality of technology. Entrepreneurship and innovation might sum it up.

This has been shown, both theoretically and empirically, to be the main driver of long-run growth. “[E]mployers in the Twin Cities will need to get creative in order to sustain economic vibrancy,” DEED observes. Quite so.

Per-capita income is what matters for the well-being of individuals. Adding people is good for per-capita income growth as long as those people are more skilled and productive than the current average. But if we really want to make Minnesotans better off, it is entrepreneurship we will have to rely on.

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

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