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The State of Minnesota’s Economy: 2018

Minnesota’s economic growth continues to be unimpressive

Executive Summary

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 9.2 percent—$5,800—worse 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’s 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, what the state will need is for the 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’s top rate of income tax is higher in all but three other states. It is not just “the rich” who are taxed heavily; Minnesota’s lowest tax rate is higher than the highest tax rate in 23 states. As a result, the state loses residents in every income category over a modest $25,000 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 2015, the average worker in our state had $100,129 of capital to work with, 3.9 percent below the national figure of $104,245.

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

In 2017, the average American worker had $375 of venture capital behind him, in Minnesota that figure was just $137—63.5 percent less. Between 2002 and 2017, Minnesota’s stock of venture capital increased by 39 percent in real terms, compared with a 249 percent increase nationally. In 2014, new and young businesses made up 30 percent of all businesses in our state compared to 34 percent nationally. These are the results of Minnesota’s high corporate income taxes. We have the third 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 $62,962 in 2017, 15th highest in the U.S. and 6.1 percent higher than the national average of $59,141. By contrast, our GDP per worker was $123,707 compared to $135,135 nationally. Our state ranked 27th in the nation on this measure, 9.3 percent below the national average. Figures for Personal Income tell a similar story. In per capita terms, Minnesota ranks 15th nationally, with per capita Personal Income of $53,043 in 2017, 5.3 percent above the national average of $50,392. In per worker terms, Minnesota lags the national average by 6.1 percent with per worker Personal Income of $80,800 compared to a national average of $85,760.

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 2017 Minnesota’s workers produced an average GDP totaling $110,314—7.8 percent below the national average of $118,896. On a GDP per hour worked basis, the story is the same. In the goods producing sector, Minnesota’s workers produced $72.71 of GDP, 7.3 percent below the national average of $78.05. In services, our state’s workers produced $62.60 of GDP per hour worked in 2017, 6.9 percent below the national average of $66.93.

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 2017, Minnesota’s Labor Force Participation rate was 68.8 percent, the second 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 $70,218 in 2016, 18.8 percent above the national average of $59,093. However, households with two workers accounted for 34 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 remain unimpressive.

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