Why Employment Matters

This article originally appeared in the Winter 2020 Issue of Thinking Minnesota, now the second largest magazine in Minnesota. To receive a free trial issue send your name and address to [email protected].

Minnesota has above average levels of GDP per capita thanks to above average levels of employment. The greater the share of the population working to produce GDP, the more GDP there is to divide among the population.

But these high employment levels mask below average labor productivity. This could have an outsized impact on Minnesota’s economy.

The Center’s new report, “Minnesota’s Workforce to 2050,” analyzes looming weaknesses in the state’s workforce, including an aging population and dealing youth employment.

To see how dependent Minnesota’s favorable per capita rankings are on its high employment ratio, consider how per capita n umbers would differ if the employment ration changed. As Figure 1 illustrates, if Minnesota’s employment ration in 2018 was the same as the national average – 60.4 percent – then its ranking for per capita GDP would slip from 14th to 21st. GDP per capita would be $4,691 (or 7.1 percent) lower.

Minnesota’s above average per capita incomes are not driven by the productivity of its workforce. When it comes to labor productivity—which drives incomes in the long term—Minnesota is below the national average. Looking at GDP per worker, our state performs worse than the nation as a whole. The average Minnesota worker produced $123,348 of GDP in 2018, ranking 20th, compared to $131,571 for the average U.S. worker, or 6.7 percent higher. If we look at output by the number of hours worked, we see that in 2018 GDP per hour worked in the private sector was $70.39 in Minnesota, 5.9 percent lower than the $74.80 for the U.S.

Given the importance of a high employment ratio to the state’s above average incomes, projected declines in Labor Force Participation rates and employment ratios will leave the state’s economy vulnerable and ought to be a source of particular concern for Minnesota.

What is the forecast for employment in Minnesota?

As Figure 2 shows, our state’s participation rate is forecast to fall from 69.7 percent in 2018 to 64.6 percent in 2035—lower than it has been at any time since at least 1976.

While this decline is commonly attributed to the aging of the population—and this is an important driver— there are other factors at play. As Figure 3 shows, with the exception of 35 to 44 year olds, the participation rate of all age groups from 25 to 75 is forecast to increase between 2020 and 2045. The largest increase in the participation rate will be seen among aging workers—those aged 62 to 64—while the steepest decline is forecast to be among those aged 16 to 19.

These projections seem reasonable enough given recent labor market trends. Figure 4 shows categories where employment ratios have increased in Minnesota between 2000 and 2018. They include all workers, male and female, over the age of 55, and women aged 25 to 34 and men aged 45 to 54.

Compared with the same categories nationwide, Minnesota performed particularly well in the 55 to 64 category but less well among those over 65.

Figure 4 shows the categories where employment ratios decreased in Minnesota between 2000 and 2018. We see that, overall, the steepest falls in employment ratios have been among younger Minnesotans. The largest decline has been among those aged 16 to 19. The next two largest falls are found among male and female Minnesotans, aged 20 to 24. The story is broadly similar nationally, with the larger declines being found among younger workers, especially young men. But Minnesota has underperformed the national average by some margin in several of these categories, particularly in the aged 20 to 24 category. Looking at youth employment this century, Minnesota has performed poorly compared to the U.S. In fact, in 15 of the 24 categories in Figures 4 and 5, Minnesota has performed worse than the U.S. average.

Getting younger Minnesotans back into the workforce game will be crucial to the state’s economic success.

What is driving these trends and what can policymakers do?

Falling employment due to an aging population might be something policy-makers can do little about, but there is no reason that declines in employment among younger sections of the population cannot be reversed. This will go at least some way toward offsetting the forecast labor force decline and maintaining Minnesota’s high employment ratio.

Table 1 summarizes the results of academic research into Labor Force declines seen in the U.S. in recent decades. Major contributing factors are expanded trade and the adoption of industrial robots. Significant contributing factors are increased disability benefits, higher minimum wages, increased rates of incarceration, and the rise in occupational licensing.

Expanded trade and automation

Looking at how these factors relate to Minnesota, we find that our state has shielded manufacturing workers from the full impact of expanded trade with China through uncharacteristically low tax rates on capital intensive manufacturers—we rank 2nd lowest nationally. 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.

Increased receipt of disability benefits

Among significant factors, the number of Minnesotans receiving Social Security Disability Insurance (SSDI) has increased in recent years, but it still lags the nation. Our state 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 inMinnesota’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 for state programs. Additional research shows the increased use of these benefits is a reflection of policy choices, not increased clinical need.

Higher minimum wages

Higher minimum wages also contribute to employment decline, particularly regarding teen employment. Minnesota’s minimum wage, which is above the federal rate, can reasonably be blamed for at least some of the state’s above average decline in teen employment.

Increased incarceration rates

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, which could explain at least some of the state’s greater decline in employment among black Minnesotans than nationally.

Burdensome occupational licensing

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, contributing at least partially to a greater decline in white employment ratios in Minnesota than nationally.

If Minnesota wants to remain competitive compared to the rest of the country, the pressures that accompany declining high employment ratios must be addressed. Smart public policy changes that encourage productive work, especially among young people, are key to solving the looming weaknesses in Minnesota’s workforce.

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