The missing economic boom
Last week, state officials announced the unemployment rate for June. The 1.8 percent level recorded was the lowest ever logged, not just for Minnesota, but for any state in the…
One thing has become common during this pandemic and that has been massive layoffs. The beginning of the lockdown period (April and May) especially was characterized by higher than average unemployment rates among states as well as the nation. However, despite these dark times, a positive trend has emerged. According to new data, the covid-19 pandemic has overseen a rise in entrepreneurship, especially among laid-off workers.
According to the Wallstreet Journal,
To adapt to the pandemic and the job loss it unleashed, more Americans are becoming their own bosses, setting up tiny businesses to work as traveling hair stylists, in-home personal trainers, boutique mask designers and chefs. A man in Maryland started a mobile car-washing business.
Many new entrepreneurs previously worked at salons, gyms and restaurants, in the kind of face-to-face jobs erased when state orders closed swaths of the economy in the spring. The economy has since mounted a split recovery, with some Americans thriving while many others continue to struggle. A cohort of the laid-off, stuck on the descending arm of that recovery, are using their ingenuity to get off it.
According to data by the Bureau of Labor Statistics, self-employment was recovering faster than payroll employment during the period from February to October. This is a generally established economic phenomenon; in economic downturns, people tend to get creative either due to necessity or opportunity erupting from disruptions in the market. The same has been true in this period.
Research shows well-documented evidence that new and young businesses are crucial to growth. That is the case for Minnesota. According to DEEDs Commissioner, Steve Grove, in Star Tribune,
Small businesses account for a whopping 47% of the jobs in the state — a trend that’s mirrored nationally. What’s more, new businesses are responsible for nearly all net new jobs and 20% of gross job creation in our economy, according to a study published by MIT.
Minnesota however has a poor record track when it comes to business creation. As Steve Grove continued,
According to data from the U.S. Labor Department, Minnesota ranked 48th in the rate of new entrepreneurs per capita in 2019 — and has only exceeded the national average for four years of the last 20. We also rank low on start-ups that lead to early job creation, coming in 40th last year.
Fortunately, however, Minnesota ranks very well on the rate of new business survival rate. In 2019, Minnesota ranked 4th for its five-year survivability rate for new companies of 55%. So this means that the state has a good chance of growing its economy if its rate of business formation was to be increased. And in order for that to happen, some changes need to take place.
If Minnesota is to gain from this new trend of increased entrepreneurship, a couple of changes might help. And those changes translate to making Minnesota a friendlier state for business creation. Taxes are one big factor. Currently, Minnesota has some of the country’s highest income tax rates: for the rich as well as the poor, and also for corporations. High taxes however are deterrent to growth. Both high corporate and high individual income tax rates are deterrent factors to investment. Additionally, high individual income taxes discourage high-income individuals from moving to Minnesota to contribute to its economy.
Minnesota’s high taxes are especially concerning considering that Minnesota happens to have some of the lowers levels of capital already. According to the Center of the American Experiment State of the Economy report for 2019, Minnesota’s level of capital per worker has been below the national average since 2000. Minnesota also has low levels of venture capital per worker compared to the national average. These are factors that can be improved by changing tax rates.
In addition to taxation, Minnesota policymakers should also strive to make regulation more conducive to entrepreneurship. Restrictive laws like occupational licensing prevent people from entering into occupations and building businesses. Other restrictive rules on businesses like minimum wage laws need to be seriously evaluated before being enacted. These laws and more others like it, raise the cost of starting and operating a business. Moreover, the burden of the cost of burdensome regulation tends to fall disproportionately on small and young businesses, which are critical to growth.
The coronavirus induced shutdown has delivered a big blow to Minnesota’s economy. Therefore, it is crucial that policymakers enact policies that will foster economic growth going forward.
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