Minnesota and its neighbors have very different economic policies but very similar employment outcomes: Why is that?

Center of the American Experiment has produced regular reports on Minnesota’s economy since 2016 and these have often included a chart showing the employment ratio (the share of the civilian noninstitutional population actually employed) in all 50 states and the District of Columbia in a given year. What they show doesn’t change much from one year to the
next: Minnesota is usually one of the top ranked states, its employment ratio coming in fourth highest in 2019, as Figure 1 shows. But, equally consistently, Minnesota’s neighbors — highlighted in yellow — also rank comparatively high. For their employment ratios in 2019, Wisconsin ranked 13th, South Dakota 6th, and Iowa and North Dakota 2nd and first, respectively.

Figure 1: Employment Ratio, 2019

Source: Bureau of Labor Statistics

These similar labor market outcomes occur even though the governments of these states pursue very different economic policies. Minnesota has some of the highest rates of state income tax in the United States, while South Dakota doesn’t tax income at all. On the Tax Foundation’s 2019 State Business Tax Climate Index, Minnesota ranked 43rd and Iowa ranked 45th while South Dakota ranked 3rd, as Figure 2 shows. Nevertheless, these three states occupied a band just 1.5 percentage points wide on their employment ratios that same year.

Figure 2: State Business Tax Climate Index, 2019

Source: The Tax Foundation

Clearly, then, there is some other factor (or factors) driving high rates of employment in these states besides state economic policy. Identifying this “x-factor” (or factors) is important for understanding variations in economic well-being across the states. The relationship between the employment ratios shown in Figure 1 and the median household incomes shown in Figure 3, for example, is both positive, as Figure 4 shows — with higher employment ratios associated with higher household incomes — and statistically significant (the p-value is less than 0.05). With an R2 of 0.417, that means that 41.7% of the variation in median household incomes can be attributed to variations in employment ratios.

Figure 3: Median Household Income, 2019

Source: Census Bureau

Figure 4: Employment Ratios and Median Household Incomes

Source: Center of the American Experiment

How can we identify this “x-factor” (or factors)? Going around Minnesota giving talks on the state’s economy, I often close by asking people for suggestions. And, reader, I’m asking you now. Please post your answers below.

This article is based on our new report “The X-Factor? Social capital and economic well-being: A quantitative analysis.”