The State of Minnesota’s Economy: 2017: Performance continues to be lackluster

Executive Summary

Money isn’t everything, but a strong and growing economy is vital for many of the things we take for granted living in Minnesota. Without high incomes we would struggle to cope with the harsh winter weather or support the vibrant cultural life we take pride in. Nor would we be able to fund public services such as education and policing.

Last year, Center of the American Experiment took an in depth look at Minnesota’s economy, with a report authored by Dr. Joseph Kennedy. A source of pride for many in the state, we found that, in fact, the data showed our state’s economic performance to be only mediocre. We concluded that Minnesota can do better.

A year later we look again at Minnesota’s economy. We use the most current data to assess its health. And we apply a framework of economic growth theory to look at where it might be headed in the future.

We find that:

Minnesota’s GDP growth has lagged that of the nation generally. As a result, it has not made back the ground it lost in the mid-2000s, and is 2.5% below what it would have been had it grown at the national rate since 2000.

Minnesota’s private sector productivity is below the national average. The average Minnesota worker produces just 92 percent as much as the average U.S. worker.

Personal income growth has been almost exactly equal to the national average, but that growth has been driven by government transfer payments. These account for 47% of the rise in personal income.

Minnesota has a high household income compared to the national average, but, reflecting lower productivity, this is a result of more workers per household.

Minnesota’s rate of job growth has tracked the national average, but new jobs have been concentrated in less productive sectors. Since the onset of the recession in December2007, Mining & Logging, which contributes$447,603 of value per worker, has added just 700 new jobs. Health care, which adds just $88,761 of value per worker, has added 93,300 jobs.

The Twin Cities are lagging comparable urban areas in GDP growth and job creation. Of the 15 Metropolitan Areas with the largest GDP, the Twin Cities rank thirteenth for GDP growth and twelfth for job growth since 2000.

There are wide variations in economic strength across the state. Some counties in Greater Minnesota, notably in the southwest of the state, have narrowed the income gap with the Twin Cities.

Minnesota’s urban areas – its MSAs – compare poorly with those in neighboring states. In terms of economic growth this millennium, only Mankato is in the top ten. Iowa has three MSAs on that list.

Minnesota’s declining labor force participation rate will be a drag on per capita GDP growth for the next 20 years. From 69.9 percent now, it is forecast to fall to 64.6 percent in 2035.

Increasing per worker productivity could offset this, but Minnesota is suffering a net outflow of workers earning over $25,000 a year. And it is losing residents in all age categories.

To increase per capita GDP, Minnesota will need more capital per worker, but its high tax rates discourage such investment. Minnesota has the third highest rate of corporate taxation in the U.S. Coupled with the federal tax, Minnesota has one of the highest corporate tax rates in the developed world. In 2015, Minnesota attracted only $108 of venture capital per worker, compared to a national average of $391.

Partly as a result of this, the share of new and young businesses in Minnesota increasingly lags the national average.

Minnesota’s educational system is a positive for growth, but the state slightly lags the nation in Research & Development spending. In 2014, Research & Development spending accounted for 2.47 percent of Minnesota’s GDP compared to 2.53 percent nationally.