Schafer: Minnesota's economy needs more than a low unemployment rate

  • Article by: LEE SCHAFER , Star Tribune
  • Updated: August 23, 2014 - 2:00 PM

It won’t be long before a lower unemployment rate in Minnesota could be the cause for heavy sighs.

With nearly everybody who wants a job having a good shot at getting one, that should be great news. And it will be for individual workers and families. Yet if the main reason unemployment is so low is that the workforce isn’t growing, that’s far from great news for the economy.

Simply put, a stagnant workforce leads to a stagnant economy.

What’s important to understand about the economic impact of more people working is not just the common sense explanation that they have paychecks to spend. What a person gets done when they go to work also matters.

“The very general implication [of a smaller workforce] is that unless somebody is working, they are not producing anything,” said Shigeru Fujita, senior labor economist with the Federal Reserve Bank of Philadelphia who has studied labor markets and demographics, including in his native country of Japan. If there are fewer people working, he said, “that means that the economic output could go down.”

Fujita called productivity growth “the big unknown” as the workforce slows down or even reverses.

This isn’t some sort of hypothetical situation. In Vermont, the unemployment rate now stands at about 3.7 percent, far lower than the 4.5 percent in Minnesota or the 6.2 percent rate for the nation. Only booming North Dakota has a much lower unemployment rate than Vermont.

The thing is, there’s no North Dakota-style oil boom in Vermont. “No one would say that any part of Vermont’s economy is booming,” said Art Woolf, an associate professor of economics at the University of Vermont and editor of the Vermont Economy Newsletter.

So what’s Woolf’s explanation for the lack of boom given the state’s low unemployment rate? The number of folks between 21 and 64 years old — considered the prime working age population — peaked in Vermont four years ago.

Vermont has not gotten back to the total number of jobs it had before the Great Recession, Woolf said, “and my take is we are never going to.”

In Minnesota, we have more than recovered all the jobs lost in the Great Recession, and total jobs in the state has inched up this year. But the basic demographic trend is much the same as Vermont’s.

A stagnant workforce is an outcome that has been predicted for years, as economists and demographers discussed the graying of the population. Once again, it’s the baby boom generation that’s a big part of the story, as that group has been easing themselves out of the workforce.

The retirements of the boomers is one reason for the decline in the percentage of people now working, called the labor participation rate. At 62.9 percent nationally, it’s back down to where it was in 1978. The rate has declined by more than three percentage points since January 2008, when the oldest boomers turned 62 and became eligible for Social Security benefits.

In Minnesota, the forecast is for the group aged 16 to 64 to decline by not quite 1 percent from 2015 to 2025 as the boomers continue to age out of their prime working years.

Minnesota state demographer Susan Brower is a bit more optimistic about the size of Minnesota’s total workforce, anticipating that many boomers will keep working well beyond their 65th birthday.

As Brower pointed out, however, hours worked tend to decline for older people who do keep a paid job. The upshot, she said, is that the workforce growth “may be close to zero when you factor in the reduced hours.”

What was striking in these conversations with experts was how little they have been asked by state policymakers about what it may mean to have a workforce that stops growing.

Few seem curious in Vermont, Woolf said, and he added that he’s even encountered an argument that fewer people means a lower impact on the land and water.

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