Minnesota heads into 2023 with low unemployment, workforce challenge

Minnesota heads into 2023 with an ultralow unemployment rate after a year of strong job growth, but also with a shrinking base of workers and economic output that is below the nation's.

It's a complicated picture that economists and analysts who watch Minnesota's economy closely are still trying to decipher.

"We have been growing slower than the U.S. economy and a lot of peer states," said Sean O'Neil, director of economic research at the Minnesota Chamber of Commerce. "We've just not had the supply or labor force to help companies grow and expand."

Minnesota is expected to continue to face workforce challenges as its population levels off. The size of its workforce has also declined during the pandemic and isn't expected to grow much as more baby boomers head into retirement.

"We seem to be on the leading edge of the aging labor force," said Oriane Casale, labor market analyst at the Minnesota Department of Employment and Economic Development. "And we rely on immigration to expand our labor force and that really dried up during the pandemic."

Immigration accounted for half of Minnesota's labor force growth in the decade leading up to the pandemic, Casale added.

In the new year, there's a lot of uncertainty about the U.S. economy especially as the Federal Reserve continues to raise interest rates in its fight against high inflation. While economists are divided over whether it will lead to a recession, the state of Minnesota is forecasting the U.S. will enter a mild downturn this year.

In the past, a diverse mix of industries insulated Minnesota from extreme swings in the economy. After the 2008 recession, for example, the state regained jobs faster than the U.S. But coming out of the pandemic, Minnesota has had a slower recovery.

Here's how Minnesota compares to the U.S. on a variety of economic measures:

Unemployment

For several months in 2022, Minnesota had the lowest jobless rate of all states. It recorded the lowest-ever state unemployment rate in U.S. history of 1.8% in June and July.

The unemployment rate has been slowly ticking up since then, reaching 2.3% in November, but it's still well below the U.S. jobless level, which was 3.7% that month.

Minnesota typically has a lower unemployment rate than the U.S., the result of higher educational levels and an economy that isn't overly reliant on any one industry.

Before the pandemic, Minnesota's lowest unemployment rate was 2.5% in 1999.

While a low unemployment rate is a good thing for workers on the hunt for a job, it's a challenge for employers. Labor shortages have become widespread in many industries. The state has 3.7 job openings for every unemployed person, double the U.S. rate.

Along its forecast for a mild recession, the state's management and budget office projects that the Minnesota jobless rate will increase to 3.5% in 2023 and to 4% in 2024. At the U.S. level, it expects the jobless rate to rise to 4.9% this year and 5.3% the following year.

"Because we're starting from such a low rate of unemployment, in our forecast the unemployment rate for the state doesn't get to an alarming level," said state Economist Laura Kalambokidis.

She added that the state jobless rate is not expected to rise nearly as much as in prior recessions. It jumped to a record high of 10.8% in May 2020 and peaked at 9% in the 2008-2009 recession.

Labor force participation

Minnesota is often touted as a "hardworking state" by state officials because of its higher-than-average labor force participation rate, the percentage of residents of working age who are working or looking for work. Women have a particularly high labor force participation rate in Minnesota.

Before the pandemic, Minnesota's labor force participation rate was 70.8%, about 7 percentage points higher than the U.S. Those rates have since dropped for both Minnesota and the U.S. But the decline has been sharper in Minnesota where there are about 94,000 fewer workers in its 3.1 million labor force compared to before the pandemic.

State officials have pointed to the state's aging workforce and perhaps a higher rate of retirements during the pandemic as a possible explanation, but it's still unclear exactly what has been going on.

Louis Johnston, an economics professor at the College of St. Benedict and St. John's University, noted that many of Minnesota's neighboring states have seen bigger and quicker rebounds in their workforces coming out of the pandemic.

"What is so different about Minnesota compared to our neighbors?" he asked. "I don't know. That to me is the big question."

Kalambokidis said employers now have the challenge of figuring out whether they can convince some people to come back into the labor market with higher wages or more flexible work arrangements.

"But one shouldn't expect huge numbers of those people to come back," she said. "This tight labor market is here for a while."

Job growth

While Minnesota outpaced the U.S. with job growth in 2022 — 3.2% vs. 2.6% — it still is making up for lost ground.

Over the summer, the U.S. fully recovered all jobs lost in the pandemic. Minnesota is getting closer to doing so, but is still about 35,000 jobs short of reaching that benchmark. It has recovered about 92% of jobs.

Minnesota ranks 34th among states in job growth since the beginning of the pandemic, the chamber's O'Neil said.

Minnesota's slower jobs recovery for Minnesota has been driven by the labor force challenges. "It's certainly not a lack of demand on employers' part," Casale said.

She noted that the construction, manufacturing and professional and business services sectors are all fully back at pre-pandemic job levels.

The state's jobs agency has forecast that Minnesota will be back to where it was before the pandemic by the second quarter of this year.

At the same time, the state's management and budget office is forecasting job growth to slow this year to 0.3% and to be flat in 2024. Minnesota saw 2% job growth in 2021 and close to 1% in 2018 and 2019.

Economic growth

The latest figures on state economic output came out recently and showed that Minnesota's gross domestic product, the value of goods and services produced, rose 2.3% in the third quarter of 2022, slower than the U.S. rate of 3.2%.

That follows contraction in the first two quarters of last year for both the state and the U.S.

"We've come out of the pandemic slower than some other states and large part of that points to the tightness in our labor force as being a driver of that," O'Neil said.

Minnesota ranks 35th among states in terms of GDP growth since the beginning of the pandemic, he said. In fact, Minnesota's GDP has been growing slower than the nation's for the last two decades. It grew slightly faster than the nation's in the 1980s and 1990s.

But Minnesotans have higher incomes. And so Minnesota's GDP per capita, or per person, is about 5% to 10% above the national average, said Johnston.

"If you have a states that have a lower GDP per capita, they tend to grow faster than states that have higher GDP per capita," he said. "So in a sense, we're a victim of our own success. There are states that have higher growth rates, [but] I'm not sure I'd want to trade places with them because their GDP per capita is lower."