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The State of Minnesota’s Economy: 2019

Today, we launch our latest The State of Minnesota’s Economy report, drawing on data up to 2018. What do we find?

Watch the press conference:

Is MN‚Äôs economy prepared for COVID-19? ūü¶† In some ways, yes, MN will be better off than other states. In other ways, definitely not. TUNE IN for more.

Posted by Center of the American Experiment on Friday, March 13, 2020

How is Minnesota performing in terms of economic growth? How is it likely to perform in the future?

The picture that emerges is concerning. We find that Minnesota is a hard working but low productivity economy. Our state lags national averages on output per worker, output per hour worked, and per worker GDP and Personal Income. We are only able to achieve above average levels of GDP or Personal Income per capita because of our above average Labor Force Participation rate. This leaves Minnesotans 6.7 percent‚ÄĒ$4,376‚ÄĒworse off in per capita GDP terms than they would be if their rate of productivity matched the nation as a whole. Demographic trends present a challenge for the state, but Minnesota‚Äôs current economic policies of regulation and taxation are actually set to hinder any attempt to meet it. To generate a level of income commensurate to the efforts of working Minnesotans, these policies will need to change.

In its key growth drivers, Minnesota faces substantial challenges in coming years.

Minnesota’s high taxes are driving productive workers out of the state.

Minnesota faces a challenge with its Labor Force Participation rate forecast to fall to 64.6 percent by 2035. To keep per capita incomes growing, the state will need its remaining workers to become
more productive. Sadly, Minnesota’s economic policies run in the opposite direction. To improve the productivity of its workforce, Minnesota can try to retain the skilled workers it has and attract
new ones. Making this more challenging is the fact that the state‚Äôs top rate of income tax is higher in all but three other states. It is not just ‚Äúthe rich‚ÄĚ who are taxed heavily; Minnesota‚Äôs lowest tax rate is higher than the highest tax rate in 25 states. As a result, since 2011, the state has lost residents in every income category over $50,000 annually. Taking income as a proxy for productivity, Minnesota is suffering a net loss of its more productive workers.

Capital investment lags the national average.

Another way to improve labor’s productivity is to give workers tools to work with. Here, too, Minnesota lags the national average. In 2018, the average worker in our state had $100,917 of capital to work with, 5.8 percent below the national figure of $107,170.

Our state lags the national averages in terms of investment and entrepreneurship.

In 2017, the average American worker had $581 of venture capital behind him, in Minnesota that figure was just $185‚ÄĒ68.2 percent less. Between 2002 and 2018, Minnesota‚Äôs inflow of venture capital increased by 74 percent in real terms, compared with a 427 percent increase nationally. In 2014, new and young businesses made up 30 percent of all businesses in our state compared to 34 percent nationally. In 2017, employment in new and young businesses in Minnesota was 8.8 percent of all employment. Nationally, the figure was 11.3 percent. These are the results of Minnesota‚Äôs high corporate income taxes. We have the fourth highest rate of corporate income tax in the U.S.

On some economic indicators, Minnesota has impressive per capita numbers. However, when we look at per worker numbers the picture is more concerning.

For example, Minnesota’s GDP per capita was $65,640 in 2018, 14th highest in the U.S. and 4.6 percent higher than the national average of $62,641. By contrast, our GDP per worker was $123,348 compared to $131,571 nationally. Our state ranked 20th in the nation on this measure, 6.7 percent below the national average. Figures for Personal Income tell a similar story.

These poor per worker numbers are a reflection of the state’s below average labor productivity.

If we look at GDP per worker for the private sector, we see that in 2018 Minnesota‚Äôs workers produced an average GDP totaling $119,671‚ÄĒ8.1 percent below the national average of $130,261. On a GDP per hour worked basis, the story is the same. In the goods producing sector, Minnesota‚Äôs workers produced $82.45 of GDP, 4.7 percent below the national average of $86.52. In services, our state‚Äôs workers produced $67.63 of GDP per hour worked in 2018, 6.9 percent below the national average of $72.66.

Minnesota is able to achieve above average per capita outcomes with below average productivity thanks to the sheer hard work of its labor force.

In 2018, Minnesota’s Labor Force Participation rate was 69.7 percent, the third highest in the country. As we have a greater share of our labor force working to produce GDP or Personal Income, so we have a greater GDP or Personal Income to divide among the population. Minnesota’s above average figures for household incomes reinforce this point. Median household income in Minnesota was $71,817 in 2018, 18.8 percent above the national average of $63,179. However, households with two workers accounted for 34.0 percent of households in Minnesota that year compared to just 28.6 percent nationally. Minnesota also had a smaller portion of households with one worker or no workers.

Minnesota needs lower taxes.

Policies from state lawmakers designed to tax Minnesota’s residents even more are exactly what our state does not need. Quite the contrary. Our state faces the economic headwind of an aging population. We need to maximize the share of the younger labor force which is working. But we have minimum wage policies blocking young workers from the labor market. We have excessive rates of personal taxation pushing the state’s productive workers out and deterring them from coming here from elsewhere. We have high rates of business taxation which deter investment, entrepreneurship, and small business formation.

To boost the productivity of Minnesota’s workers so they can generate more output and enjoy the higher standards of living they deserve, these policies need to change. Until then, our economic performance will continue to lag.

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

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