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Yesterday, we released our new report The State of Minnesota’s Economy: 2018. After finding Minnesota’s economic performance to be ‘lackluster’ last year, we had to raid the thesaurus again. Our state’s economic performance continues to be unimpressive. Furthermore, looking at key drivers of future growth, there is cause for concern.
It is true that Minnesota performs well on some key economic measures.
On per capita GDP, for example, we rank 15th nationally, 6.1% above the national average. Our average per capita Personal Incomes are 5.3% above the national average, again placing us 15th nationally.
But while our per capita numbers are above the national average, our per worker numbers are below.
On GDP per worker, Minnesota ranks 27th in the US, 9.3% below the national average. On Personal Income per worker we rank 20th, 6.1% below the national average.
This is due to the fact that Minnesota’s labor productivity is below the national average.
In the private sector, our GDP per worker is 7.8% below the national average. When we look at GDP per hours worked, we see that in the goods producing sector Minnesota is 7.3% below the national average and 6.9% below it in the services sector.
We have above average per capita numbers and below average per worker numbers because we have a relatively high share of Minnesotans working.
In 2017, Minnesota’s Labor Force Participation Rate was 68.8%, the second highest in the country. With each worker producing GDP, there is more in total to divide among the population, even while each worker produces less than the national average.
Given that Minnesota’s four neighboring states – with very different economic policies – are among the top eight nationally on Labor Force Participation, this suggests that some other factor drives this.
Minnesota’s high scores on per capita measures are a result of the hard work of the state’s workforce. To generate higher incomes, they will need to become more productive. But indicators are not encouraging.
A skilled workforce is a key factor in driving labor productivity. In this respect, the state’s education does a good job, with scores comparing well nationally.
But data shows that, between 2011 and 2016, Minnesota lost residents in every income category above a modest $25,000 annually. It gained residents in the categories below that. Using income as a proxy for productivity, this means that Minnesota’s labor force was deskilling in those years.
Evidence suggests that our high state personal tax rates are a factor here. We have the third highest top rate of income tax in the US and our lowest marginal rate is higher than the top rate in 23 states.
Minnesota’s workers need more tools to work with.
Another way to boost productivity is to give labor the capital to leverage effort into into increased output. Sadly, here again Minnesota lags the national average. In 2015, each Minnesota worker had 3.9% less capital behind them than the average American worker.
Our state needs more entrepreneurs and innovators
We can also boost productivity with more entrepreneurship and innovation. However, we again lag national averages here. Each of Minnesota’s workers has an average of 63.5% less venture capital behind him or her than the national average. Between 2002 and 2017, the national stock of venture capital increased by 249%, but in Minnesota it increased by just 39%. In 2014, new and young businesses made up 30% of all businesses in Minnesota compared to 34% nationally. And, while we once led the national average in Research and Development spending as share of GDP, we have lagged in every year since 2012.
Once again, evidence suggests that our state’s high tax rates are a factor in this. We have the third highest business tax rate in America.
Minnesota needs to change course
Minnesota’s high tax policies are deterring investment and entrepreneurialism in the state. This is depriving the state’s workers of the tools they need to increase their productivity and leverage their hard work into higher incomes. If our state’s per worker productivity matched the national average, GDP per capita would be $5,800 higher.
John Phelan is an economist at the Center of the American Experiment.