The State of Minnesota’s Economy – What does our state’s economist think?

Yesterday, the Federal Reserve Bank of Minneapolis hosted its first Regional Economic Conditions Conference. The event brought in experts from across the Fed’s Ninth District – Montana, North Dakota, South Dakota, Minnesota, north-west Wisconsin, and the upper peninsula of Michigan – to report on economic developments and prospects (you can find a video of their presentations here).

Minnesota was represented by Laura Kalambokidis, the State’s Economist and a professor in the Department of Applied Economics at the University of Minnesota. She made several interesting points.

Minnesota’s jobs

Prof. Kalambokidis noted that the profile of Minnesota’s workforce matched that of the nation as a whole rather closely. This is a good thing. A diverse portfolio of jobs reduces risk as does a diverse portfolio of investments. If any one sector/investment tanks, you still have the others.

But Prof. Kalambokidis also noted that Minnesota has a higher share of employment in Education and Health Services than the nation as a whole, with about 85% of that in healthcare services. This is a point we have made before. It isn’t a sign of economic strength for the state, given the relatively low amount of Gross Value Added these jobs tend to generate. Worryingly, the growing share of jobs in these sectors is a long term trend in the state. Prof. Kalambokidis’ says that Minnesota has seen “steady and broad based employment growth throughout the recovery from the Great Recession”, but this would not appear to be the case in the longer term.

Another area of advantage noted is Minnesotan manufacturing, although “the differential is larger for other Great Lakes states”. Again, we have written about this lately. Minnesota taxes its capital intensive industries relatively lightly and reaps the rewards from that in terms of jobs.

Minnesota’s education

Prof. Kalambokidis gave Minnesota’s educated workforce as a source of economic advantage for the state. As we have written recently, this is true. But we must work to keep it so. The developments in the Edina school district, where academic standards have fallen as teacher activism has risen, show the potential dangers of losing sight of this.

Minnesota’s wages and workers

A recurring theme in Prof. Kalambokidis’ talk (and others) was the ‘tightness’ of the Minnesotan labor market. We have written about this recently, particularly in the case of Target’s recent announcement of a $15 minimum wage. In economics, if there is an excess of demand for labor over the supply of labor what that really means is an excess of demand over supply at the current wage. At a higher wage the two will be brought back into equilibrium. More bluntly, one of the later speakers quoted Minneapolis Fed head Neel Kashkari, who recently said “If you’re not raising wages, then it just sounds like whining”

But this cuts both ways. We often hear that increases in the cost of living are outstripping wage growth. Well, if so, here we have a market mechanism correcting that. Average private sector wages in Minnesota have risen by 4.4% in the last 12 months according to Prof. Kalambokidis. We don’t need harmful policies like the minimum wage. Neither should we be trumpeting increased immigration as a way of holding wages down, which is the implicit position of those who argue that we need it to solve a labor shortage.

During the Q&A, the panel were asked about domestic out-migration. Prof. Kalambokidis observed that immigrants from abroad offset this, which could help with economic growth. A little later, she was asked “What is the caliber of the international population that is coming in here?” Just a few minutes after offering immigration as a boon for the economy, Prof. Kalambokidis stumbled over this, saying “So I don’t…I don’t know…I don’t have a lot of detail about the international in-migrants”

This, as we have written recently, is key to assessing the economic impact of immigration. GDP per capita (GDP / population) is what matters for living standards. If the immigrants are more productive than the average worker we already have, they will increase GDP more than the capita. If they are less productive than that average they will increase capita more than GDP. In this latter case, they will have increased GDP but lowered GDP per capita. To tout the economic benefits of immigration without having a clear idea of the quality of your immigrants would seem to be somewhat premature.

Minnesota’s productivity

In the Q&A, Prof. Kalambokidis was asked about the prospects for economic growth given the demographic challenges Minnesota faces. “When you have slow labor force growth and you want economic growth,” she replied, “the key is going to be productivity”. This is a point we have made recently. She also tied this to rising wages, a point we have also made. The only way to raise living standards is through increased productivity.

Minnesotan’s personal incomes

Tawni Ferrarini showed how, in the upper peninsula of Michigan, transfer income, such as Social Security, Medicaid, Medicare, welfare, and other government program distributions, had become a more important component of personal income over time. Prof. Kalambokidis was asked if this was the case for Minnesota. She speculated that wage income was a much more important part of personal income than in the upper peninsula. This is not a high bar, given the economic challenges faced by that part of Michigan. But what is happening to Minnesotan personal incomes?

We look at this in our forthcoming report, The State of Minnesota’s Economy: 2017. As Figure 1 shows, since 2000, labor income has risen by 9.4% in Minnesota – quite close to the national average. But transfer income has risen by much more, 69.1%. As Figure 2 shows, increases in transfer income account for 47% of the increase in personal income since 2000.

Figure 1: Real per Capita Income Growth by Component of Income, 2000-2016

Source: Bureau of Economic Analysis (2016 Dollars)

Figure 2: Sources of Growth of Real per Capita Income by Component of Income, 2000-2016

Bureau of Economic Analysis (2016 Dollars)

Minnesota’s economy

This was the first Regional Economic Conditions Conference. It was an excellent event and hopefully it won’t be the last.

Much of what Prof. Kalambokidis highlighted has been highlighted here at the Center. We are less sanguine about employment patterns given the low productivity of the jobs we are gaining. We share her belief in the economic importance of education and are concerned to maintain our advantage. We see rising wages generated by market forces as a good thing, and policies such as minimum wages as irrelevant at best and harmful at worst. We would want more information about the skills of our immigrants before we pronounce them an unmitigated economic boon. We agree completely that increased productivity is vital for future economic growth. And we are more concerned than Prof. Kalambokidis about the growing share of personal incomes derived from transfers.

John Phelan is an economist at the Center of the American Experiment.