Minnesota’s Workforce to 2050

Compared to most other states, Minnesota performs well on per capita welfare measures, such as GDP and Personal Income per capita. In both, we are above the national average.

But these numbers are driven by the fact that Minnesota has a hard-working population, as seen in the share of the population in employment—67.7 percent in 2018—the second highest in the United States. A relatively greater share of the population producing goods and services—GDP—to be divided among the population means a relatively high level of GDP per capita.

These numbers mask our state’s below average labor productivity. In 2018, the average Minnesota worker produced $123,348 of GDP, 6.7 percent below the national average of $131,571. And, as economists agree, increases in productivity drive increases in per capita incomes in the medium to long term.

Considering how important this high employment ratio is to Minnesota’s relative economic strength, its forecast decline raises concerns. Our state’s participation rate is forecast to fall to 64.6 percent in 2035, lower than at any time since at least 1976.

This is often ascribed to an aging population. By 2050, the share of Minnesota’s population aged over 65 will rise to 21.3 percent.

But that is not the whole story. Since 2000, the employment ratios of Minnesotans aged 55 to 64 and 65 and over have increased by 9.5 and 4.5 percentage points, respectively. By contrast, for Minnesotans aged 16 to 19 and 20 to 24, participation rates fell by 15.6 and 11.9 percentage points, respectively—a greater fall than similar declines seen at the national level. If employment ratios in these two categories could be returned to 1999 levels, an extra 86,000 Minnesotans would be employed.

This suggests that fatalism about a shrinking workforce is misplaced, at least to some degree. What has caused employment ratios in these other groups to fall and how might these falls be reversed?

A large body of empirical research into declining employment ratios has identified expanded trade with China and the adoption of industrial robots as major contributing factors, and increased receipt of disability benefits, higher minimum wages, increased rates of incarceration, and a rise in occupational licensing as significant contributing factors.

Minnesota has shielded manufacturing workers from the full impact of the “China Shock” with uncharacteristically low tax rates on capital intensive manufacturers— we rank 2nd lowest nationally. These low tax rates should be maintained and taken as a lesson on how state fiscal policy can support economic growth.

Increased exposure to technology lowers female participation rates, which have fallen in Minnesota more than nationally since 2000. The state has, so far, had only average exposure to industrial robots, but research suggests it could be of “upper medium vulnerability” to job losses in the future. But improved technology and mechanization are a key driver of the increased labor productivity we want to see. Policymakers need to enable those who lose out initially to retrain so they can take advantage of these productivity enhancing developments.

While receipt of Social Security Disability Insurance (SSDI) in Minnesota has increased in recent years, it still lags the nation. Minnesota leads the national average on Veterans Affairs Disability Compensation (VADC) recipients as a share of the population, but these recipients typically receive lower payouts than the average. This might suggest that increased receipt of these benefits has played little part in Minnesota’s declining employment ratio. But research shows—strongly in the case of SSDI—that these increases have lowered employment at the margin. The same is likely to be true also for state programs. Increased use of these benefits has reflected policy choices rather than increased clinical need, so state authorities need to keep a tight grip of eligibility requirements.

Higher minimum wages have been shown to have a negative impact on teen employment particularly. Minnesota’s minimum wage, which is above the federal rate, can reasonably be blamed for at least some of the above average decline in teen employment seen in the state. To increase teen employment, policymakers need to at least hold the minimum wage to facilitate a real terms reduction over time. The optimal policy would be to abolish it.

Minnesota’s incarceration rate is one of the lowest in the country, but disparities between rates for white and black residents are 4th highest nationally. Research shows that this has a disproportionate negative impact on rates of black employment, so this could explain at least some of the greater decline in employment among black Minnesotans than nationally. A balance needs to be struck between law and order and economic efficiency, and a “Clean Slate” law, such as those enacted in Pennsylvania and Utah recently, coupled with a repeal of the “Ban the Box” law would be a start.

Occupational licenses have been found to lower the labor supply of white workers especially. At present, Minnesota’s occupational licensing burden is not especially onerous. However, research shows that, between 2012 and 2017, our burden rose at the 11th fastest rate in the country, which could partially explain a greater decline in white employment ratios in Minnesota than nationally. While this trend needs to be stopped and reversed, one way to ameliorate many of the effects would be to enact a mutual recognition bill, such as the one Arizona recently passed.

In summary, Minnesota’s current economy is relatively strong compared to the rest of the country, but weaknesses in a number of areas should cause concern. There are specific actions policymakers can take to help shield Minnesotans from the effects of a forecast decline in the state employment ratio and a potential economic downturn:

  • Maintain low tax rates on capital intensive manufacturers to encourage business investment.
  • Retrain workers displaced by industrial robots to preserve their workforce participation.
  • Closely monitor eligibility requirements for state benefits to encourage workforce participation for able-bodied adults.
  • Abolish the minimum wage, or at least hold it to the current rate, to increase teen employment.
  • Enact a “Clean Slate” law and repeal the “Ban the Box” law to strike a balance between law and order and economic efficiency.
  • Enact a mutual recognition bill to reduce hurdles for occupational licensing.