the state of minnesota’s economy: 2020

THE STATE OF MINNESOTA’S ECONOMY: 2020A focus on economic growthJOHN PHELAN & MARTHA NJOLOMOLE • ECONOMISTS

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John Phelan is an economist at Center of the American Experiment. He is a graduate of Birkbeck College, University of London, where he earned a BSc in Economics, and of the London School of Economics where he earned an MSc. John worked in finance for 10 years before becoming a professional economist. He worked at Capital Economics in London, where he wrote reports ranging from the impact of Brexit on the British economy to the effect of government regulation on cell phone coverage. John has written for City A.M. in London and for The Wall Street Journal in both Europe and the U.S. He has also been published in the journal Economic Affairs.

Martha Njolomole is an economist at Centerof the American Experiment. She is a graduateof Troy University in Alabama, where she earneda Master of Arts in Economics. Her upbringingin Malawi, a developing country, spurred herinterest in researching the social and economicadvancement of economically disadvantagedpeople. Martha’s recent work includes analyzingthe impact of microfinance on entrepreneurship,policy prescriptions for institutional reform indeveloping nations, and examining the impact oflegislative proposals on economic freedom in the United States.

The State of Minnesota’s Economy: 2020

A focus on economic growth

CO N T E N TS

Executive Summary ...........................................................................1

Introduction ...........................................................................................2

Per capita income — Why it matters, where we are, where we’ve come from .................................................................3

The sources of per capita income growth .........................16

Increasing output per worker ...................................................25

Conclusion ...........................................................................................42

Endnotes ..............................................................................................45

MARCH 2021

CENTER OF THE AMERICAN EXPERIMENT • 1

» Minnesota typically scores well on levels of per capita income, which is what matters for economic welfare. In terms of per capita GDP, Minnesota ranks 15th out of the 50 states and the District of Columbia. Our state’s per capita GDP — $68,050 in 2019 — is 4.2 percent higher than the figure for the United States, $65,298.

» Our state does less well when it comes to growth rate. Since 2000, per capita GDP in Minnesota has grown by 20.6 percent in real, inflation ad-justed terms. This ranks us 22nd among the 50 states and the District of Columbia and is below the United States’ growth rate over the same period, 25.0 percent. This cannot be explained by "convergence."

» The story is the same with Personal Income: an above average level but a below average growth rate. Furthermore, per capita wage and capital income growth in Minnesota ranked 29th and 39.5 percent of the increase in per capita Person-al Income came from increased transfers, above the United States’ share of 34.6 percent.

» It is a similar story when we look at Minnesota’s Metropolitan Statistical Areas (MSAs). Between 2001 and 2019, GDP grew in the metropolitan portion of the U.S. by 42.5 percent, a rate which two of our MSAs beat — Mankato and Rochester — but which the other three lagged — Minne-apolis-St. Paul, St. Cloud and Duluth. Compared to its peers across the United States, GDP in the Minneapolis-St. Paul MSA grew by 37.4 percent between 2001 and 2019, compared to 56.7 per-cent for its peers. Of those peers, the Twin Cities only outperformed St. Louis and Detroit.

» Per capita economic growth comes from three sources: an increase in the amount of labor provided by a given population (a higher em-ployment rate/ratio or hours worked); growth of capital per worker (the tools those workers have to work with); and Total Factor Productivity (TFP), also known as Technology, which is the way inputs to the production process are trans-formed into output.

» There is little scope for Minnesota to generate much per capita income growth from increased labor inputs. At 67.8 percent, we already have the third highest employment rate in the United States. Among younger workers and black work-ers, however, employment is lower than in 2000.

» We need to make these workers more productive and here there is room for improvement. Minne-sota’s GDP per worker ranked 21st in 2019 and we rank 18th on GDP per hour worked. On both measures, again, our growth has lagged behind the national rate since 2000.

» The amount of capital each Minnesotan worker has to use, which leverages labor, is about the same as the United States’ median average, so there is scope for improvement here.

» Minnesota can also boost per capita income growth by investing in human capital. In terms of education, we score well on measures such as National Assessment of Educational Prog-ress (NAEP) scores, where we rank 4th. But if we control for socioeconomic factors, we fall to 33rd. Our state’s ethnic minority students are also particularly badly served.

» We could also increase human capital by attract-ing and/or retaining highly skilled workers. How-ever, using income as a proxy for productivity, we see that Minnesota has, on net, been losing more highly skilled workers: Between 2011 and 2018, Minnesota saw a net outflow of people above an income threshold of $50,000 annually.

» On one of the components of TFP, innovation, Minnesota scores well, ranking 6th in 2019 for patents per million of the population. But other states do a better job of implementing these.

» But on entrepreneurship we do less well. In 2020, new businesses accounted for 31.3 per-cent of businesses in Minnesota compared to 37.7 percent for the United States, ranking us 38th. •

Executive Summary

AmericanExperiment.org

2 • THE STATE OF MINNESOTA’S ECONOMY: 2020

In our recent report “Closing Minnesota’s Bud-get Deficit: Why we should make spending cuts and not raise taxes,” we noted that, looking at the data for our state, it seems that the dollar amount of tax revenue available to the government is far more likely to be a function of the size of the state’s economy than of the level of its tax rates. This means that if you want more money to fund gov-ernment services, you should look to increase the state’s Gross Domestic Product (GDP) rather than hike its tax rates.1 This report looks at how we can foster that stronger economic growth in Minnesota.

This report looks at the period from 2000 to

2019, except where data availability requires us to use some other date. This gives us a good span of time to look at longer-term trends and changes in Minnesota’s economy. It also means that our data cover two periods of economic downturn and recovery, as dated by the National Bureau of Eco-nomic Research.2 In most cases, the most recent data in this report is from 2019. In early 2020, the COVID-19 pandemic hit Minnesota and the federal and state government took various steps to combat it, with significant economic impacts. This report reflects the economic situation in our state on the eve of the pandemic. •

Introduction



Why per capita income matters

What matters for economic welfare is per cap-ita income. This is a general measure of welfare, telling us how much per person is available to be consumed, invested, or put to some other use.3

If we want to increase economic welfare, we should pursue policies that increase per capita incomes. A doubling of total GDP, if it is matched by a doubling of the population, will leave the av-erage member of the population no better off. For example, China’s GDP in 2017, $23.3 trillion, was 8.2 times larger than that of the United Kingdom, $2.9 trillion, but average living standards are much higher in the U.K. because China’s population (1.4 billion) is 21 times larger than that of the U.K. (66 million), so China’s GDP is divided among many more people. As a result, per capita incomes in the U.K. are, on average, 2.6 times higher than in China.4

Per capita incomes in MinnesotaMinnesota typically scores well on levels of per

capita income, but it does less well when it comes to rates of per capita income growth.

In terms of per capita GDP,5 Minnesota ranks 15th out of the 50 states and the District of Co-

lumbia, as Figure 1 shows. Our state’s per capita GDP — $68,050 in 2019 — is 4.2 percent higher than the figure for the United States, $65,298.

But while Minnesota’s level of GDP is relatively impressive, its rate of GDP growth is less so. Figure 2 shows that, since 2000, per capita GDP in our state has grown by 20.6 percent in real, inflation adjusted terms. This ranks us 22nd among the 50 states and the District of Columbia and is below the United States’ growth rate over the same peri-od, 25.0 percent.

Figure 3 shows how Minnesota’s per capita GDP has changed relative to that of the United States between 2000 and 2019. Changes in per capita GDP in our state matched those of the Unit-ed States generally quite closely until 2014. Since then, a persistent and widening gap has opened up. Relatively speaking, on this vital measure of economic well-being, Minnesota is not performing as well as it used to.

It is a similar story when we look at Minnesota’s Metropolitan Statistical Areas (MSAs).6 Between 2001 and 2019, GDP grew in the metropolitan por-tion of the U.S. by 42.5 percent. As Figure 4 shows, of Minnesota’s five MSAs, two beat this growth rate — Rochester (64.5 percent) and Mankato (47.0 percent) — but the other three underper-

Per capita income – Why it matters, where we are, where we’ve come from



Per Capita Gross Domestic Product, 2019 (Current Dollars)

FIGURE 1

District of ColumbiaNew York

MassachusettsConnecticutWashington

CaliforniaDelaware

North DakotaAlaska

New JerseyMaryland

IllinoisWyomingColorado

MinnesotaHawaii

NebraskaUnited States

VirginiaNew Hampshire

TexasPennsylvaniaSouth Dakota

IowaKansasOregon

UtahWisconsin

OhioGeorgia

Rhode IslandNevada

North CarolinaIndiana

LouisianaTennessee

VermontMichiganMissouri

FloridaOklahoma

ArizonaMaine

New MexicoMontana

KentuckySouth Carolina

IdahoAlabama

West VirginiaArkansas

Mississippi

$0

SOURCE: BUREAU OF ECONOMIC ANALYSIS

$50,000 $100,000 $150,000 $200,000 $250,000

$203,173 $91,102

$86,557 $80,729 $80,500 $79,287 $79,159

$75,034 $74,343

$71,467 $70,587 $69,886 $69,839

$68,242 $68,050 $67,622 $67,210

$65,298 $65,246 $64,451 $63,588 $63,173 $62,104 $61,697 $60,582 $60,133 $60,050 $60,012 $59,488 $58,933 $58,416 $57,854

$56,407 $56,398 $55,266 $55,143 $54,510 $53,759 $53,508

$51,518 $51,058 $50,849 $50,377 $50,144 $49,528 $48,213 $48,079 $46,817 $46,529

$44,005 $43,394

$38,967



North DakotaCaliforniaOklahoma

South DakotaWashington

NebraskaNew York

MassachusettsOregon

IowaMaryland

KansasPennsylvania

MontanaTexasUtah

VermontHawaii

United StatesNew Hampshire

WisconsinWyoming

MinnesotaNew Mexico

IllinoisDistrict of Columbia

West VirginiaRhode Island

OhioTennessee

VirginiaIndiana

AlabamaArkansas

AlaskaMaine

ColoradoIdaho

KentuckyFlorida

LouisianaNew Jersey

South CarolinaMississippi

ConnecticutArizona

North CarolinaGeorgia

MichiganMissouriNevada

Delaware

-20%


0% 20% 40% 60% 100%

84.3%40.9%

39.1%38.2%

36.2%35.7%

34.2%33.6%33.0%

31.6%31.0%

29.9%29.5%29.2%

27.7%27.6%

26.5%25.2%25.0%

24.2%21.9%

21.0%20.6%

19.2%18.4%17.9%17.6%17.6%17.4%17.4%17.4%

15.7%15.6%15.5%15.5%15.1%15.0%14.7%

13.9%12.2%11.8%11.8%11.7%11.5%11.2%

10.4%10.2%

8.4%7.2%7.2%

Real Per Capita Gross Domestic Product Growth, 2000-2019

FIGURE 2

80%

-4.5%-7.7%



formed – Minneapolis-St. Paul (37.4 percent), St. Cloud (34.9 percent), and Duluth (30.4 percent).

The state’s economic hub, the Minneapolis-St. Paul MSA, has fared badly compared with its competitors elsewhere in the country. As Figure 5 shows, for the next six larger and next six smaller MSAs by GDP in 2001, the average growth rate from 2001 to 2019 was 56.7 percent, compared to just 37.4 percent for Minneapolis-St. Paul. Of its 2001 peer group, the Twin Cities only outper-formed St. Louis and Detroit.

We see the same story when we look at Person-al Income.7 As Figure 6 shows, in 2019, Minnesota ranked 14th out of the 50 states and the District

of Columbia, with a per capita Personal Income of $58,834, 4.1 percent above the level for the United States as a whole, $56,490.

But, again, while the level is impressive, the rate of growth is less so. As Figure 7 shows, over the period 2000 to 2019, Minnesota’s per capita Per-sonal Income increased by 22.1 percent in real, in-flation adjusted terms. This ranked our state 30th out of the 50 states and the District of Columbia, and below growth for the United States, which was 24.1 percent.

The picture darkens further still for Minnesota when we look at how the components of Personal Income have changed over this period. Figure 8

Real Per Capita Gross Domestic Product Growth, 2000-2019 (2000=100)

FIGURE 3


120

110

90

100

80

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

130

United States Minnesota



shows that, when we examine two of the three sources of Personal Income — "Net earnings by place of residence" (wages; labor income) and "Dividends, interest, and rent" (capital income) — per capita Personal Income in our state grew by only 15.0 percent between 2000 and 2019. This ranked Minnesota 29th out of the 50 states and the District of Columbia, and below the growth for the United States as a whole, 18.0 percent. It is a different story, however, for the third source, "Per-sonal current transfer receipts" (transfer income8). This, as Figure 9 shows, rose by 81.8 percent in Minnesota from 2000 to 2019. This was above the growth for the United States generally — 66.4

percent — and ranked our state ninth out of the 50 states and the District of Columbia.

The results of Minnesota’s below average in-crease in per capita labor and capital income and above average increase in transfer income is that a relatively large share of the total growth of per capita Personal Income in our state has come from expanded transfer payments. As Figure 10 shows, increases in transfer income accounted for 39.5 per-cent of the increase in per capita Personal Income in Minnesota between 2000 and 2019, compared to 34.6 percent for the United States as a whole.

Figure 11 shows how the growth rates of Minne-sota’s sources of Personal Income have changed

Real Gross Domestic Product Growth by Metropolitan Statistical Area, 2001-2019

FIGURE 4


60%

40%

10%

20%

0

80%

50%

30%

70%

Rochester Mankato United States (Metros)

Minneapolis/ St. Paul/

Bloomington

St. Cloud Duluth

64.5%

47.0%42.5%

37.4%34.9%

30.4%



over time relative to those of the United States generally. The changes for labor and capital in-come track quite closely over the whole period, but for transfer income our state opened a substantial

lead over the United States at large during 2005-2007 and this has widened over time. Minnesota is over-reliant on increases in transfer payments for its Personal Income growth. •

Real Gross Domestic Product Growth by Metropolitan Statistical Area, 2001-2019

FIGURE 5


160%

40%

80%

0

120%

San Jose

-Sunnyvale-Santa Clara, CA

140%

20%

60%

180%

100%

173.3%

91.5%

70.0%

58.4% 56.7% 53.7%49.1% 47.7% 45.5% 43.9% 43.5%

37.4%

15.5%7.5%

Seattle-Ta

coma-B

ellevue, W

A

Dallas-F

ort Worth

-Arlin

gton, T

X

Phoenix-Mesa

-Chandler, A

Z

Average

San Diego-C

hula Vista-C

arlsbad, C

A

Denver-Auro

ra-Lakewood, CO

Boston-C

ambridge-N

ewton, M

A-NH

Atlanta-Sandy Sprin

gs-Alpharetta

, GA

Miami-Fort

Lauderdale-Pompano Beach

, FL

Baltimore-C

olumbia-Towso

n, MD

Minneapolis-St. P

aul-Bloomingto

n, MN-W

I

St. Louis,

MO-IL

Detroit-

Warren-D

earborn

, MI



Per Capita Personal Income, 2019 (Current Dollars)

FIGURE 6

District of ColumbiaConnecticut

MassachusettsNew York

New JerseyCalifornia

WashingtonMaryland

New HampshireAlaska

WyomingColorado

VirginiaMinnesota

IllinoisPennsylvaniaNorth Dakota

HawaiiUnited StatesRhode Island

VermontNebraskaDelaware

South DakotaKansas

WisconsinOregon

TexasFlorida

IowaNevada

MaineOhio

MontanaMichigan

UtahTennessee

IndianaMissouriGeorgia

North CarolinaLouisiana

OklahomaArizona

IdahoSouth Carolina

ArkansasAlabamaKentucky

New MexicoWest Virginia

Mississippi

$0


$20,000 $40,000 $60,000 $80,000 $100,000

$83,406 $77,289

$74,187 $71,717

$70,471 $66,619

$64,758 $64,640

$63,502 $62,806

$62,189 $61,157

$59,657 $58,834 $58,764

$58,032 $57,232 $57,015 $56,490 $56,361

$55,293 $54,515 $54,485 $53,962 $53,426 $53,227 $53,191 $52,813 $52,426

$51,865 $51,161 $50,634 $50,199 $49,747 $49,228 $48,939 $48,684 $48,678 $48,656 $48,236 $47,766 $47,460 $47,341

$46,058 $45,968 $45,438

$44,629 $44,145 $43,770 $43,326

$42,315 $38,914



Real Per Capita Personal Income Growth, 2000-2019

FIGURE 7

North DakotaMontana

WyomingUtah

South DakotaCaliforniaNew YorkLouisiana

WashingtonOklahoma

AlaskaArkansas

Hawaii District of Columbia

MassachusettsPennsylvania

VermontWest Virginia

KansasIowa

NebraskaTexas

New MexicoOregon

Rhode IslandUnited States

MaineVirginia

IdahoAlabama

MinnesotaMaryland

South CarolinaTennesseeMississippiWisconsin

New JerseyNew Hampshire

ConnecticutColorado

FloridaIllinois

KentuckyArizona

OhioMissouri

North CarolinaIndianaGeorgia

MichiganDelaware

Nevada

0%


10% 20% 30% 40% 50%

48.5%45.1%

41.9%35.8%

35.5%34.5%

34.1%33.5%

32.5%32.3%32.3%32.1%

30.6%29.6%29.6%

28.6%27.9%

27.6%27.4%27.2%

26.5%26.4%

25.6%25.4%

24.4%24.1%

23.6%22.9%22.7%

22.2%22.1%22.0%

21.7%21.1%21.1%20.9%20.9%20.9%20.8%

20.5%20.0%

19.3%18.4%18.2%

17.9%17.0%16.8%

16.1%12.6%

9.0%8.2%8.1%



Real Per Capita Labor and Capital Income Growth, 2000-2019

FIGURE 8

North DakotaMontana

WyomingUtah

South DakotaNew YorkCalifornia

AlaskaWashington

District of ColumbiaOklahoma

MassachusettsLouisiana

Hawaii Arkansas

KansasPennsylvania

NebraskaTexasIowa

West VirginiaVermont

United StatesRhode Island

OregonConnecticut

VirginiaNew Jersey

MarylandMinnesota

IdahoMaine

ColoradoTennessee

New HampshireIllinois

WisconsinFlorida

New MexicoSouth Carolina

AlabamaOhio

MississippiMissouri

North CarolinaArizona

KentuckyIndianaGeorgiaNevada

MichiganDelaware

0%


10% 20% 30% 40% 50%

49.2%39.3%

38.3%32.0%

31.4%31.3%

29.4%29.3%29.1%

28.7%25.9%25.8%

24.9%24.5%

22.7%22.7%22.7%

21.8%21.2%20.9%

18.7%18.1%18.0%18.0%

17.4%16.8%16.6%16.5%

16.1%15.0%14.9%14.5%14.2%14.1%

13.8%13.7%13.7%

13.2%12.9%

12.3%12.0%

10.7%9.5%9.5%

8.7%8.4%

8.1%7.3%

5.1%

-10%

-0.6%-1.2%

-3.2%



Real per capita transfer income growth, 2000-2019

FIGURE 9

New MexicoDelaware

NevadaColoradoVermont

New HampshireArizonaVirginia

MinnesotaMichigan

OregonMaryland

IndianaLouisiana

Hawaii California

IdahoArkansasMontanaAlabama

South CarolinaWisconsin

GeorgiaMississippi

MaineUtah

KentuckyWyoming

North CarolinaTexasIowa

OklahomaUnited States

IllinoisMissouri

South DakotaOhio

TennesseePennsylvania

FloridaNebraska

Rhode IslandKansas

MassachusettsWashingtonNew Jersey

West VirginiaConnecticut

New YorkAlaska

North DakotaDistrict of Columbia

0%


20% 40% 60% 80% 100%

96.7%96.1%

93.2%90.9%

89.8%86.9%86.4%

84.3%81.8%

78.2%78.1%77.7%77.5%77.1%77.1%76.9%76.9%

75.6%74.9%

74.0%73.9%73.6%73.4%

71.6%71.5%

70.5%69.8%

69.1%69.0%68.7%

67.7%67.5%

66.4%65.1%

62.7%62.5%

61.4%60.7%60.6%60.4%60.0%59.7%59.5%59.2%59.2%

57.8%57.7%

56.4%50.1%

49.2%44.8%

36.9%



Labor and capital and transfer income increases as share of all per capita Personal Income increases, 2000-2019

FIGURE 10

North DakotaDistrict of Columbia

WyomingUtah

WashingtonNew York

MassachusettsSouth Dakota

AlaskaCaliforniaMontana

ConnecticutKansas

NebraskaTexas

Hawaii New Jersey

OklahomaPennsylvania

IowaMaryland

VirginiaUnited States

ColoradoIllinois

Rhode IslandLouisiana

MinnesotaNew Hampshire

OregonArkansas

WisconsinIdaho

TennesseeFlorida

VermontWest Virginia

MaineOhio

South CarolinaMissouri

AlabamaNorth Carolina

New MexicoArizonaIndiana

MississippiKentucky

GeorgiaDelawareMichigan

Nevada

0%


20% 40% 60% 80% 100%

86.3%85.9%

80.6%80.1%

79.0%78.4%

77.3%76.9%76.7%

76.0%73.0%72.5%72.4%72.2%71.4%

70.8%70.6%

67.9%67.1%

66.4%66.0%65.6%65.4%

63.8%63.3%

62.5%62.0%

60.5%59.6%59.1%

58.4%57.4%57.2%

56.8%56.5%

55.9%52.0%51.7%51.4%

48.0%47.7%

45.3%44.7%

42.6%40.5%

39.3%36.6%36.4%36.3%

13.7%14.1%

19.4%19.9%21.0%21.6%22.7%23.1%23.3%24.0%27.0%27.5%27.6%27.8%28.6%29.2%29.4%32.1%

32.9%33.6%34.0%34.4%34.6%36.1%36.7%37.5%38.0%39.5%40.4%40.9%41.6%42.6%42.8%43.2%43.5%44.1%

48.0%48.3%48.6%52.0%52.2%54.7%55.3%57.4%59.5%60.7%63.4%63.5%63.7%

100.0%100.0%100.0%

Labor and capital income Transfer income



Real per capita labor and capital and transfer income growth, 2000-2019 (2000=100)

FIGURE 11


180

140

100

120

80

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

200

United States labor and capital income Minnesota labor and capital income

160

United States transfer income Minnesota transfer income



ISN’T THIS JUST CONVERGENCE?

It is sometimes argued that Minnesota’s below average GDP growth is the result of an already high level of GDP.9 The economic theory of convergence holds that, all else being equal, poorer economies’ per capita incomes will tend to grow at faster rates than those in richer economies; they will catch up, in other words.

The evidence once supported this theo-ry. During much of the 20th century, poorer states and regions in America caught up with richer ones at a rate of about 2 percent per year, a figure sometimes called the “iron law of convergence.”10 In 1930, for example, workers in Mississippi earned just 20 percent of the wages of workers in New York. By 1980, the proportion had increased to 65 percent. In 1991, the economist Olivier Blanchard wrote, “The convergence of income across regions in the United States is a robust fact.” And, back then, it was.

More recent research casts doubt on this. While incomes across states converged at a rate of 1.8 percent per year from 1880 to 1980, there has been hardly any convergence at all since then. Specifically, “The conver-gence rate from 1990 to 2010 was less than half the historical norm, and in the period leading up to the Great Recession there was virtually no convergence at all.”11 Other recent research finds that convergence has declined in cities too. Between 1940 and 1980, poor cities caught up with rich ones at a rate of 1.4 percent a year. Since then, they have lagged behind.12

In other words, the “convergence” which some say explains Minnesota’s slow rate of economic growth relative to the United States’ average has not been happening over the period covered in our report. Our eco-nomic growth is lagging, and “convergence” does not explain it.



Increased labor from

a given population

To understand what policies could increase Minnesota’s per capita income growth, we need to understand what drives it. Then, we can in-vestigate how our state has performed on these measures in the past and look at how it might be expected to do in the future.

Per capita economic growth comes from three sources, illustrated in Figure 12. These are an in-crease in the amount of labor provided by a given population (a higher employment rate/ratio or hours worked); growth of capital per worker (the tools those workers have to work with); and Total Factor Productivity (“The effectiveness with which factors of production are converted into output”13), which is also known as Technology (“the way inputs to the production process are transformed into output”14).

Increased labor With a given population, we can generate more

output if a higher share of it (the employment ratio) is employed and producing. Also, at the intensive margin, the workforce of a given popula-tion could produce more output by working more hours. Both would increase output per capita by increasing the numerator — GDP — but not the denominator — population.

The sources of per capita income growth

When it comes to the share of Minnesotans employed, it would appear that there is little scope for improvement. Figure 13 shows the employ-ment ratios for the 50 states and the District of

Sources of Per Capita Income Growth

FIGURE 12

Growth of capital per

worker

Growth of technology/Total Factor Productivity

Growth of per capita income



To visualize more clearly the contributions to per capita income growth of these three sources, imagine an economy whose only economic output is ditch digging.

If we have a population of one and this worker produces one ditch a year with their bare hands, then annual output is one ditch per capita. If we add a second worker, total output rises to two ditches but per capita out-put remains one ditch per capita: nobody is better off. If a third person enters but doesn’t work, then total output remains at two ditches but per capita output falls to 0.67 ditches per capita: all three are worse off. If this third person begins to work, then per capita output rises back to one ditch annually.

We can make each worker more produc-tive by giving him/her a shovel: increasing capital per worker. With this, each worker might dig 10 ditches a year. Total output would rise to 30 ditches, and per capita output would rise to 10 ditches per capita.

Each shovel has increased output by nine ditches. But eventually this “capital deepen-ing” runs into diminishing returns. Giving each worker a second shovel will double capital per worker, but the workers cannot use two shov-els at once so this new capital will produce no extra ditches. The marginal product of intro-ducing the first shovel was nine ditches: for the second it falls to zero.

We can generate more ditches per worker by increasing Technology, or TFP. In terms of innovation, we might, for example, invent an earth mover operated by one worker that can do the same work in a day as a hundred people equipped with shovels. In terms of en-trepreneurship, we might have some workers digging while others are allocated to wheel-ing away the dirt. This specialization could allow those digging ditches to dig more than enough to cover the ones no longer being dug by the wheelers, especially if the wheelers

were less good at digging.

DIGGING DITCHES A PARABLE OF ECONOMIC GROWTH

Columbia. Minnesota ranked third in 2019 with 67.8 percent of its civilian noninstitutional popula-tion employed, well above the rate for the United States, 60.8 percent.

Even so, Minnesota’s employment ratio is lower than it was in 2000, by 4.8 percentage points. This was the 18th steepest percentage point decline over that period among the 50 states and the District of Columbia, as Figure 14 shows. It was a steeper decline than that seen by the United States generally, 3.7 percentage points. Furthermore, this decline in the employment ratio was not uniform across all sectors of the labor force. As Figure 15 shows, Minnesota has seen an increase in the employment ratio of every age

group over 55 and a decline in all groups below that except for women aged 25 to 34. In some categories, too, our state has seen employment ratios fall notably more than the United States generally. For Minnesotans aged 16 to 19, for example, the employment ratio has fallen by 19.5 percentage points compared to 14.8 percentage points for the United States. For black and African American Minnesotans, the employment ratio decline of 4.9 percentage points was more than double that of the United States as a whole, 2.2 percentage points.

When we look at hours worked, we might see more scope for per capita income growth. Figure 16 shows that for average weekly hours worked,



Minnesota tied for 38th in 2019 (with Idaho), with the average worker working 33.7 hours a week compared to 34.3 for the United States generally. This could reflect our state’s higher than aver-age share of part-time employment. As Figure 17 shows, 19.6 percent of Minnesota’s workers are part time compared to an average for the United States of 17.1 percent.

The limits of laborIncreasing the amount of labor provided by a

given population is not a strategy for sustained, long term, per capita income growth.

We might see a short term boost to per capita income growth if the employment ratio rises and a greater share of the population is producing out-put, but, clearly, this will run into an upper limit at

some point. When everybody — or as near every-body who is likely to be — is employed, there is no more room for growth. This is a situation we are closer to in Minnesota than almost anywhere else, as Figure 13 shows.

We might also experience some short term boost to per capita income growth if each work-er increases his/her working hours and spends longer producing output. But that, again, runs into an upper limit — there are only so many hours in the day, after all. There is also a normative con-sideration: economic growth is a means to an end — a more comfortable life — not an end in itself. In labor economics, working is generally considered a disutility15 so if we only generated higher incomes by working longer hours, it isn’t clear that we would be better off. •



Employment Ratios, 2019FIGURE 13

IowaNebraska

MinnesotaNorth Dakota

New HampshireColorado

District of ColumbiaSouth Dakota

MarylandUtah

MassachusettsVermont

KansasVirginia

WisconsinConnecticut

WyomingWashington

IdahoIndianaIllinois

MissouriRhode Island

TexasNevada

New JerseyUnited States

MontanaOhio

PennsylvaniaTennessee

DelawareMaine

GeorgiaCaliforniaMichigan

AlaskaNorth Carolina

OregonArizona

HawaiiOklahomaNew York

FloridaSouth Carolina

AlabamaKentuckyArkansasLouisiana


Mississippi

0%


10% 30% 50% 60% 70%

69.0%68.1%67.8%67.7%67.4%67.2%67.1%67.1%66.8%66.6%

65.7%64.6%64.4%64.4%64.3%

63.8%62.9%62.8%62.6%62.4%

62.0%61.9%61.9%61.8%61.6%61.6%

60.8%60.7%60.7%60.6%60.3%60.2%60.2%59.9%59.6%59.5%59.3%59.3%59.3%59.0%58.9%58.8%

58.1%57.3%57.3%

56.9%56.5%56.3%

55.8%55.2%

52.6%52.5%

20% 40%



Total, 16 to 19 years

White, men

Men

White

Black or African American

Total

Men, 20 to 24 years


White, women

Women

Women, 20 to 24 years

Men, 25 to 34 years

Men, 35 to 44 years

White, 20 to 24 years


Men, 45 to 54 years









Total, 65 years and over

White, 65 years and over



Men, 55 to 64 years


Percentage Point Change in Employment Ratios, 2000-2019

FIGURE 14

District of ColumbiaMassachusetts

IowaMaryland

PennsylvaniaNorth DakotaWest Virginia

VirginiaNew York

WashingtonRhode Island

TennesseeNew Jersey

LouisianaFlorida

IdahoArizona

ColoradoNebraska

UtahAlabamaArkansas

ConnecticutKansas

TexasIndiana

New HampshireOhio

United StatesOklahoma

VermontSouth Dakota

CaliforniaIllinois

MinnesotaNew Mexico

HawaiiKentuckyMontana

NevadaSouth Carolina

WisconsinMissouri

WyomingMaine

North CarolinaOregon

DelawareMichigan

MississippiGeorgia

Alaska

-8


-6 -4 -2 0 4

3.50.1

-10

-0.4-0.4

-1.0-1.2

-1.3-2.2-2.2

-2.3-2.4-2.4

-2.5-2.5

-3.1-3.2-3.2

-3.3-3.4-3.4

-3.5-3.5-3.5-3.5-3.5-3.5

-3.6-3.6-3.7-3.7-3.7

-3.9-4.1

-4.7-4.8

-4.9-5.2-5.2-5.2

-5.6-5.7

-5.9-6.0

-6.3-6.4-6.4

-6.5-6.6

-7.0-7.5-7.5

-9.3

2




White, men

Men

White

Black or African American

Total

Men, 20 to 24 years


White, women

Women


Men, 25 to 34 years

Men, 35 to 44 years



Men, 45 to 54 years









Total, 65 years and over

White, 65 years and over



Men, 55 to 64 years


3.50.1

-19.5 -14.8

-6.7 -5.6

-6.3 -5.2-5.1

-4.1-4.9

-2.2-4.8

-3.7-4.7

-8.9-3.9

-5.0-3.5

-2.8-3.4

-2.4-3.3

-2.3-2.9

-4.4-2.9

-1.6-2.1

-5.6-2 -1.4

-2 -1.4

-1.8 -1.7-1.8

-1.4-1.6

-1.3-1.5

-1.2-1.1

-1.2-0.7

-1.2-0.6

-1.7

Percentage Point Change in Employment Ratios, 2000-2019

FIGURE 15

-15


-10 -5 0 10-20 5

Minnesota United States

1.7 0.6

4.7 7.1

5.3 6.9

7.7 7.7

8.5 6.0

9.1 4.1

10 6.4



36.236.1

35.735.635.635.535.435.235.235.235.135.135.034.834.834.834.734.534.534.534.434.434.434.334.334.334.334.334.234.234.234.134.034.034.033.933.833.833.733.733.633.633.633.433.433.333.233.133.033.033.0

32.7

Average Weekly Hours Worked of All Employees on Private Nonfarm Payrolls, 2019

FIGURE 16

LouisianaTexas

OklahomaWest Virginia

WyomingDistrict of Columbia

North DakotaAlabama

AlaskaTennessee

IndianaKentuckyArkansas

ArizonaGeorgia

MississippiUtah

NevadaSouth Carolina

WashingtonCalifornia

KansasNorth Carolina

FloridaIowa

MichiganVirginia

United StatesMaryland

New JerseyPennsylvania

OhioIllinois

New MexicoOregon

South DakotaConnecticut

MaineIdaho

MinnesotaMissouri

NebraskaVermontMontana

New HampshireColorado

MassachusettsWisconsinDelawareNew York

Rhode IslandHawaii

0


5 10 15 25 3520 30 40



Full-Time and Part-Time Unemployment as Share of Total Employment, 2019

FIGURE 17

UtahMaine

WisconsinMontana

OregonIdaho

ConnecticutVermont

MinnesotaMichigan

OhioMassachusetts

ArizonaPennsylvania

ColoradoNew Mexico

New HampshireWyoming

HawaiiIowa

Rhode IslandCaliforniaNebraska

MissouriKansasIndianaIllinois

North DakotaWashington

United StatesSouth DakotaWest Virginia

New YorkKentucky

AlaskaDelaware

North CarolinaNew Jersey

OklahomaTennessee

TexasArkansas

NevadaMaryland

VirginiaFlorida

LouisianaSouth Carolina

MississippiAlabamaGeorgia

District of Columbia

0%


20% 40% 60% 80% 100%

% Full Time % Part Time

76.2%78.2%78.3%78.9%79.5%80.0%80.1%80.3%80.4%80.5%80.7%80.8%80.9%80.9%

81.1%81.1%81.2%81.3%81.6%81.7%82.1%82.3%82.6%82.6%82.7%82.7%82.7%82.8%82.9%82.9%82.9%82.9%83.1%83.2%83.6%83.8%83.8%83.9%84.0%84.6%84.8%84.8%84.9%84.9%85.0%85.1%85.3%85.4%85.8%86.2%86.6%

88.9%

23.8%21.8%21.7%21.1%

20.5%20.0%19.9%19.7%19.6%19.5%19.3%19.2%19.1%19.1%18.9%18.9%18.8%18.7%18.4%18.3%17.9%17.7%17.4%17.4%17.3%17.3%17.3%17.2%17.1%17.1%17.1%17.1%

16.9%16.8%16.4%16.2%16.2%16.1%

16.0%15.4%15.2%15.2%15.1%15.1%

15.0%14.9%14.7%14.6%14.2%13.8%13.4%11.1%



IS IMMIGRATION THE ANSWER?Too often, people take the argument that

an increased share of a given population in employment means higher per capita incomes and conflate it with the argument that a grow-ing population and workforce means higher per capita incomes. The arguments are not the same. Whether a policy which increases the population, such as expanding immigration, leads to higher per capita incomes depends on two things.16

The first is whether the new arrivals have an employment ratio at least as high as that of the population already here. If they do not, they actually will lower the employment ratio, exacerbating the very problem the policy is intend-ed to solve. There is good news for Minnesota here. In 2016, the employment ratio among Minnesota’s foreign-born population was 68.6 per-cent, above that for native-born Minnesotans, 66.6 percent.

The second is whether the new arrivals are at least as productive as the workers already resident. Considering GDP per capita, immigrant workers add to the denominator (population) as well as the numerator (GDP). If these workers increase the population by a greater percentage than they increase GDP, they will actually lower GDP per capita.

What matters is the skill level of the work-

ers and here the picture is less positive for Minnesota. The 32.6 percent of immigrants aged 25 or older who have bachelor’s degrees or higher is a figure similar to native-born Minnesotans’ 35 percent. However, whereas 34 percent of native-born Minnesotans have attended some college or earned an associ-ate degree, that figure is just 21.6 percent for foreign-born Minnesotans and falls to 15.5 percent for foreign-born non-citizens. While

30.8 percent of native-born Minnesotans have a high school diploma or less and just 4.9 percent are not high school graduates, for foreign-born Minnesotans these num-

bers are 45.8 percent and 27.1 percent, respectively. For foreign-born residents who are not citizens these figures rise to

52.7 percent and 34.4 percent.This is reflected in the jobs Minneso-

ta’s immigrants do. Foreign-born workers are found more often in service occupations, which include health care support, protective service, food preparation and serving, building and grounds cleaning, and personal care oc-cupations. These are lower-productivity jobs that generate relatively low levels of GDP, as Figure 22 shows.

Economics alone shouldn’t drive immigra-tion policy, but if the aim is to use immigration to generate per capita income growth, the preference should be for skilled workers.17



Sustained increases in per capita incomes come from increases in productivity: the amount of out-put a worker can produce with a given amount of labor. Indeed, as the economist Paul Krugman has written, “Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”18 The same applies to states.

Productivity is generally mea-sured in one of two ways. First we can look at GDP produced per worker, and second we look at GDP produced per hour worked.

Looking at GDP per worker, Minnesota has room for improve-ment. Figure 18 shows that, in 2019, our state’s GDP per worker was $127,968, which was 6.2 percent lower than the level for the United States generally, $136,417. This ranked Minnesota 21st out of the 50 states and the District of Colum-bia. Minnesota is also a laggard when we look at GDP per hour worked. In 2019, our state lagged the United States average as Figure 19 shows. For the United States generally, $79.39 of GDP was

generated for each hour worked, for Minnesota the figure was $75.95, 4.3 percent lower.

Productivity growth in Minnesota lagged the growth rate for the United States between 2000 and 2019. Figure 20 shows that GDP per worker increased by 25.1 percent for the United States compared to 21.8 percent for Minnesota. In per

hour terms, as Figure 21 shows, GDP grew by 10.5 percent be-tween 200819 and 2019, again be-low the rate for the United States, 13.9 percent.

Given the importance of productivity, it is worth looking at these numbers in more detail. Figure 22 shows the GDP asso-ciated with the average job in various industrial sectors for both Minnesota and the United States, as well as the percentage increase

or decrease in jobs in those sectors between 2000 and 2019. The general pattern is a concerning one and is the same for both our state and the United States generally: The big gains in employment this century have come in sectors where each job generates relatively little GDP, such as Health Care and Social Assistance (GDP per job of $77,404 in

Increasing output per worker

Productivity is generally measured in one of two ways. First we can look at GDP

produced per worker, and second we look

at GDP produced per hour worked.



Minnesota) and Educational Services ($57,061). A striking difference is in Mining & Logging, the best performing sector in Minnesota in terms of GDP per job ($569,139). For the United States, em-ployment in this sector rose by 22.8 percent from 2000 to 2019, but in our state it actually fell, by 19.0 percent, over the same period.

Increased capital per workerWe can increase the amount of output pro-

duced by a given amount of labor by giving it capital to use: increasing the amount of capital per worker.

Figure 24 shows that Minnesota’s stock of capital per worker could be higher. In 2019, we ranked 26th out of the 50 states and the District of Columbia with $151,489 of capital per worker. This was 12.5 percent below the average for the United States,

$173,122, but this average is being pulled up by some outliers: Wyoming, North Dakota and Alaska, which rely heavily on the capital intensive extractive industries. When we account for these by looking at the median, Minnesota looks better, with capital per worker almost exactly the same as the median average for the United States, $151,861.20

Minnesota has also performed well when it comes to the growth of its per worker capital stock. Figure 25 shows that, between 2000 and 2019, capital per worker grew by 29.8 percent in our state, above the growth for the United States of 26.5 percent.

The limits of capital But, as with labor, there are limits to usefully

increasing capital per worker, too. The first unit might increase output significantly, but the second

HOW DO WE EXPLAIN THE DIFFERENCE BETWEEN PER CAPITA AND PER WORKER OUTCOMES?

On the face of it, the difference between Min-nesota’s impressive per capita income numbers seen in Figure 1 and Figure 6 and the relatively disappointing per worker income numbers seen in Figure 18 and Figure 19 might appear to be a puzzle. In fact, the answer is quite simple: Minne-sota’s above-average employment, seen in Figure 13, offsets its below-average worker productivity.

Per capita figures divide GDP by the popula-tion. Per worker figures divide it by the workforce. In both cases the numerator — total GDP — is the same, but the denominator — population or the workforce — is different. Because of Minne-sota’s high employment ratio, when workforce is the denominator the numerator is divided by a relatively greater number than when it is divided by the population. The numeric example shown in Table 1 illustrates this. State A has a

lower employment ratio (50 percent) but higher productivity (2 units of GDP per worker). State B (corresponding to Minnesota) has a higher employment ratio (75 percent) but lower produc-tivity (1.5 units of GDP per worker). As a result, State B has a higher level of GDP and GDP per capita, but a lower level of GDP per worker.

Year State A State B

GDP 100 110

Labor Force 50 75

Population 100 100

GDP per Capita 1 1.1

GDP per Worker 2 1.5



or third will increase it by less until, eventually, ad-ditional inputs yield a negative increment of output.

Thus, of our three sources of per capita income growth, two — increases in the amount of labor provided by a given population and in the stock of capital per worker — are subject to some upper limit at which further increases are either im-possible, in the case of labor, or actually produce negative returns, in the case of capital. Sustained per capita income growth needs sources that are not subject to such constraints.

Increased human capitalWe can generate more output from a given

input of labor at the intensive margin if that labor becomes more skilled. In this sense, investments in human capital are like investments in any other type of capital: They increase productive capacity at some future point.21 There is no upper limit here, theoretically at least, because there is no upper limit to the amount of knowledge or skill each worker can possess.

Human capital is difficult to quantify. Some

researchers use average years of schooling as proxy for “educational attainment” but this is a measure of an input — time in school — when “educational attainment” — skills acquired — is an output.22 When attempts are made to augment these measures of the quantity of education with measures of its quality, Minnesota compares very favorably.23 As Figure 26 shows, Minnesota ranks third in the United States for the aggregate per worker knowledge capital of its residents who were educated in the state.

But the measure of quality used here are test scores from the National Assessment of Educa-tional Progress (NAEP), the use of which pres-ents problems of its own. Students from different socioeconomic and ethnic backgrounds tend to perform differently on NAEP tests regardless of the state they are in which “often renders convention-al state rankings as little more than a proxy for a jurisdiction’s demography.” A state, like Minnesota, that does well on such aggregated scores might be benefiting from its socioeconomic make up rather than any great achievement by its education

IS PRODUCTIVITY LOW BECAUSE OF HIGH PART-TIME EMPLOYMENT?

As Figure 17 shows, Minnesota has one of the highest shares of part-time employment in the United States. This could influence our state’s labor productivity numbers.

On a per worker basis, all workers, wheth-er part-time or full-time, count the same. But, if a greater share of them are working and producing only on part-time hours, then that will increase the denominator (employment) by more than the numerator (GDP). In this case, a higher share of part-time employment might drive below aver-

age-per-worker productivity numbers. The evidence suggests that higher shares

of part-time employment do not drive down per worker productivity numbers. Figure 23 shows that, in 2019, there was no relationship between the share of employment in a state that is part time and that state’s GDP per worker. Per worker productivity seems to be independent of the relative share of employ-ment that is part time, so other factors must account for Minnesota’s relatively low level of productivity.



Per Worker Gross Domestic Product, 2019 (Current Dollars)

FIGURE 18

District of ColumbiaNew YorkCalifornia

AlaskaDelaware

WashingtonMassachusetts

ConnecticutHawaii

New JerseyNorth Dakota

IllinoisWyoming

United StatesTexas

MarylandPennsylvania

VirginiaNebraskaLouisianaColorado

MinnesotaGeorgiaOregon

OhioUtah

KansasSouth Dakota

North CarolinaNevada

WisconsinNew Mexico

TennesseeIndiana

New HampshireRhode Island

IowaOklahoma

MichiganFlorida

MissouriArizona


AlabamaWest Virginia

MontanaVermont

MaineArkansas

IdahoMississippi

$0

SOURCE: BUREAU OF ECONOMIC ANALYSIS AND BUREAU OF LABOR STATISTICS

$200,000 $250,000 $300,000 $350,000 $400,000$100,000 $150,000$50,000

$370,515 $194,775

$168,839 $168,376

$164,355 $162,211 $161,067

$156,340 $148,902

$145,626 $145,129 $142,905 $142,827

$136,417 $136,034 $134,113

$129,959 $129,724 $128,852 $128,652 $128,637 $127,968 $127,566 $125,370 $123,972 $122,937 $122,906 $121,820 $121,081 $119,277 $117,254 $116,052 $116,050 $116,040 $115,918 $115,671 $114,303 $113,503 $112,982 $110,972 $110,276 $109,860 $109,173

$106,333 $103,890 $103,496 $102,586 $101,533 $101,221 $99,358 $97,740 $96,562



Per Hour Gross Domestic Product, 2019 (Current Dollars)

FIGURE 19

District of ColumbiaNew YorkDelawareCalifornia

MassachusettsAlaska

WashingtonConnecticut

HawaiiNew Jersey

IllinoisNorth Dakota

WyomingUnited States

MarylandColoradoNebraska

PennsylvaniaMinnesota

VirginiaTexas

OregonGeorgia

OhioSouth Dakota

KansasLouisiana

UtahWisconsin

North CarolinaRhode Island

New HampshireNevada

New MexicoIowa

IndianaTennessee

MichiganMissouri

FloridaOklahoma

ArizonaKentucky

South CarolinaMontanaVermont

MaineAlabama

West VirginiaIdaho

ArkansasMississippi

$0


$50 $100 $150 $200 $250

$208.74$118.05

$99.61$98.16$97.03$95.67

$94.04$92.51

$91.07$85.16$84.06

$81.99$80.24$79.39$78.43$77.26$76.70$76.00$75.95$75.64$75.37

$73.75$73.31$72.71$71.87$71.46$71.08$70.86$70.85$70.40$70.10$69.41$69.15$68.27

$66.65$66.12$65.94$65.88$65.64$64.71$63.59$63.14$62.21$61.64$61.43$60.44$59.89$59.03$58.14$58.01$56.78$55.50



Real Per Worker Gross Domestic Product Growth, 2000-2019

FIGURE 20

North DakotaCaliforniaOklahoma

South DakotaOregon

NebraskaMontana

WashingtonKansasHawaiiTexas

New YorkWyoming

IowaMaryland

WisconsinAlaska

United StatesVermont

UtahPennsylvania

MassachusettsMinnesotaMississippi

KentuckyMaine

New MexicoNew Hampshire

IllinoisOhio

West VirginiaAlabama

South CarolinaArkansas

IndianaTennessee

VirginiaIdaho

GeorgiaMichigan

North CarolinaLouisiana

MissouriColorado

New JerseyFlorida

ConnecticutRhode Island

ArizonaDistrict of Columbia

DelawareNevada

0% 20% 40% 60% 80% 100%

82.7%43.4%43.0%

40.6%38.6%

36.1%35.0%

34.1%32.9%

29.5%28.9%28.9%28.7%

26.7%26.4%

25.5%25.4%25.1%

24.4%24.3%24.1%

23.1%21.8%21.4%21.0%20.4%20.0%20.0%19.5%19.4%19.3%19.2%

17.2%16.8%16.6%16.4%15.9%15.4%

14.7%13.6%

11.6%11.6%11.4%10.8%

8.9%8.8%

7.7%7.3%

4.3%

-20%

-1.1%-4.2%

-7.7%




Real Per Hour Gross Domestic Product growth, 2008-2019

FIGURE 21

New YorkNorth Dakota

WashingtonNebraskaCalifornia

GeorgiaUtah

WisconsinSouth Dakota

OhioKansasHawaii

OregonIllinoisMaine

MassachusettsColoradoVermont

United StatesSouth Carolina

KentuckyPennsylvania

New HampshireIowa

New MexicoRhode Island

MarylandMichigan

VirginiaArkansas

MinnesotaTennessee

FloridaDelawareMontana

West VirginiaIndianaNevada

MissouriAlabama

IdahoMississippi

ArizonaNorth Carolina

New JerseyTexas

LouisianaOklahoma

District of ColumbiaConnecticut

AlaskaWyoming

0% 10% 20% 30% 40% 50%

40.7%26.8%26.6%

22.9%21.1%20.9%

18.7%18.7%18.5%18.1%18.0%

17.2%17.1%16.9%

15.3%15.2%14.8%14.6%

13.9%13.8%13.6%

12.4%12.1%12.1%11.7%

11.2%11.2%11.1%10.9%10.6%10.5%10.3%10.1%9.7%

9.2%9.1%

8.7%7.5%7.4%

6.8%5.9%5.6%5.4%

4.5%3.7%3.7%

0.5%0.4%

-20%

-1.4%-2.3%

-13.8%-17.2%


-10%



system. Indeed, when we disaggregate the data to take these factors into account, Minnesota slumps from 4th to 33rd in the United States.24

Digging deeper into the numbers gives more cause for concern. In Texas — a state that serves similar student demographics as Minnesota — black, Hispanic and Asian/Pacific Islander stu-dents outperformed Minnesota’s black, Hispanic, and Asian/Pacific Islander students on each 2019 NAEP subject test for each grade level. In Missis-

sippi, black and Hispanic students in both fourth- and eighth-grade math and reading outperformed Minnesota black and Hispanic students. Both states spend significantly less per pupil than Min-nesota. Equally important, Mississippi’s NAEP test scores for fourth- and eighth-grade black students have been scaling up over the years, compared to Minnesota’s declining scores and inconsistent growth among fourth- and eighth-grade black students. And, when NAEP results are income

Minnesota’s GDP Per Worker, 2019, and Job Growth by Sector, 2000-2019

FIGURE 22


$300,000

$100,000

$0

Min

ing

an

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Lo

gg

ing

Fin

an

cia

l A

cti

vit

ies

Info

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on

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ole

sale

Tra

de

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ati

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, W

are

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ng

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.

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s M

an

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oo

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on

Healt

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are

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cia

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Reta

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$600,000

Change in employment, 2000-2019, United States Change in employment, 2000-2019, Minnesota

$200,000

$500,000

$400,000

80%

70%

60%

50%

40%

30%

20%

10%

0%

-10%

-20%

-30%

-40%$-300,000

$-100,000

$-200,000

GDP per Job, 2019, United States GDP per Job, 2019, Minnesota



adjusted (with controls for free and reduced-price lunch eligibility), our state’s fourth graders’ reading scores ranked 28th in the United States. Among low-income students in Mississippi — who make up 75 percent of the student body compared to Minnesota’s 37 percent — fourth graders’ reading scores ranked 2nd.25

Another way Minnesota could improve its stock of human capital and productivity is by attract-ing highly skilled workers to the state or holding on to those it already has. Sadly, Minnesota has performed poorly on this front. Using income as a proxy for productivity, which is standard in eco-nomics, Figure 27 shows that Minnesota attracts

lower-income residents and loses higher-income ones. Furthermore, these losses are not limited to the so-called “rich” who might be fleeing the state’s high top rate of tax. Between 2011 and 2018, Minnesota saw a net outflow of people above a threshold of $50,000 in income annually.

Technology/Total Factor Pro-ductivity

If we have diminishing returns to the amount of labor and capital that we use to produce output, how have we witnessed mostly sustained econom-ic growth in some parts of the world over the last two centuries? The answer is that per capita eco-

Relationship Between Part-Time Share of Employment and GDP Per Worker, 2019

FIGURE 23

$250,000

$150,000

0

$400,000

$200,000

$350,000

$300,000

$50,000

$100,000

5% 10% 15% 20% 25% 30%

LO

WE

R G

DP

PE

R W

OR

KE

R T

O H

IGH

ER

GD

P P

ER

WO

RK

ER

LOWER SHARE OF PART-TIME EMPLOYMENT TO HIGHER SHARE OF PART-TIME EMPLOYMENT

R2 = 0.002

SOURCE: BUREAU OF LABOR STATISTICS, BUREAU OF ECONOMIC ANALYSIS, AND CENTER OF THE AMERICAN EXPERIMENT



Capital Per Worker, 2019 (Current Dollars)FIGURE 24

AlaskaNorth Dakota

WyomingCalifornia


OklahomaWashington

New YorkTexas

ConnecticutPennsylvania

MassachusettsColoradoLouisiana

New JerseyUnited States

IllinoisGeorgiaKansasIndiana

MarylandOregon

New HampshireNebraska

OhioMinnesotaDelawareMichigan

UtahWisconsin

ArizonaDistrict of Columbia

TennesseeIowa

MontanaNorth Carolina

ArkansasHawaii

AlabamaSouth Dakota

MissouriIdaho

NebraskaFlorida


VermontRhode Island

VirginiaMississippi

Maine

$0

SOURCE: BUREAU OF LABOR STATISTICS, BUREAU OF ECONOMIC ANALYSIS, AND EL-SHAGI AND YAMARIK

$200,000 $300,000 $400,000$100,000

$502,304 $403,739

$380,581 $228,138

$220,512 $214,519 $212,182

$206,828 $202,469 $200,656 $198,565 $197,620

$189,447 $179,570

$176,040 $175,467 $173,122 $170,403

$162,182 $160,713 $156,703 $155,733 $155,002 $153,625 $152,323 $152,235 $151,489 $151,481 $151,077 $150,432 $145,516 $143,785 $140,375 $137,957 $137,202 $136,781 $135,827 $135,541 $134,790 $133,234 $132,972 $132,462 $132,137 $131,848 $130,356 $129,885 $129,480 $129,001 $128,742 $122,993 $119,656 $119,640

$600,000$500,000

MEDIAN = $151,861



Real Capital Per Worker Growth, 2000-2019FIGURE 25

SOURCE: BUREAU OF LABOR STATISTICS, BUREAU OF ECONOMIC ANALYSIS, AND EL-SHAGI AND YAMARIK

North DakotaWest Virginia

NebraskaPennsylvaniaSouth Dakota

WashingtonMarylandCalifornia

OhioArizonaGeorgia

MassachusettsIowa

IndianaMinnesotaWisconsin

UtahNorth Carolina

District of ColumbiaNew York

OregonFlorida

United StatesIdaho

OklahomaSouth Carolina

IllinoisTennessee

New JerseyConnecticut

New HampshireMissouri

KansasHawaii

Rhode IslandKentuckyArkansas

MaineVermontMontana

NebraskaColoradoAlabama

MississippiTexas

LouisianaMichigan

VirginiaDelaware

New MexicoWyoming

Alaska

0% 50% 100% 150% 200%

184.5%62.7%

56.1%55.3%

51.6%47.6%

42.1%39.2%

34.8%34.4%33.8%

31.3%30.3%30.2%29.8%29.3%29.0%28.4%28.4%28.1%27.2%27.2%26.5%25.8%25.7%25.5%

23.6%22.2%22.1%20.9%20.7%20.3%19.7%19.5%19.1%18.9%17.9%17.8%16.9%15.7%14.9%14.7%14.1%14.0%13.9%12.3%11.2%10.6%

2.2%

-100%

-7.2%-22.8%

-56.8%

-50%



nomic growth is not driven by ever larger inputs of labor, capital, or natural resources, but by new ideas. While we might one day run out of an input like oil, and some conclude from this that there are limits to growth, there is no reason to think that we will run out of ideas, which are the true source of that growth. Human ingenuity is, as the economist Julian Simon called it, “The Ultimate Resource.”26

This source of growth is called Technology or Total Factor Productivity (TFP). An example would be the use of tin throughout history. Between 3,000BC and 600BC, tin was alloyed with copper to produce bronze, which gave that age its name. Bronze was used extensively in weapons, armor, and household items like plates and cups. Nowadays, tin is mixed with indium to produce a solid solution that is both transparent and elec-trically conductive. This is used for the touchscreen on smart phones. As economists Charles I. Jones and Dietrich Vollrath explain: “The different ideas regarding tin allow us to use the same bundle of inputs to produce output that generates higher levels of utility.”27

These ideas don’t just take the shape of new inventions, they may also be the creation of new processes. Jones and Vollrath note that Sam Walton’s innovative approach to retailing was no less an idea than inventing something like the smartphone. So, too, are the “assembly lines and mass production techniques that allowed Henry Ford’s company to turn out a Model T every 24 seconds.”28

"Ideas" are hard to capture in quantitative data. Data on the share of a state’s income that is spent on Research & Development are readily available, but that measures an input and it is outputs — the products of that R&D — which matter for econom-ic growth. Data on patents are also readily avail-able and can be used as a measure of the output of new ideas. But this, too, has drawbacks. As Jones and Vollrath note:

Many ideas are neither patented nor produced using resources that are officially labeled as R&D. The Wal-Mart operation manual [is a] good [example]. In addition, a simple count of the number of patents granted in any particu-lar year does not convey the economic value of the patents. Among the thousands of patents awarded every year, only one may be for the transistor or the laser.29

With this in mind, these ideas broadly fall into two categories: innovation and entrepreneurship.

On some measures, Minnesota is one of the most innovative states in America. Figure 28 shows

that, in 2019, our state generat-ed 874 patents per million of the population, ranking us 6th — little changed from 2nd in 2000 — and well above the average of 567.

But ideas move more easily than either goods or capital, especially in a jurisdiction like the United States where there are no barriers to commerce between the states. As a result, an idea generated in one place can be exploited in another. But Minnesota’s middling per capita GDP growth, seen in Figure 2, and below-average productivity perfor-

mance, seen in Figures 18 and 19, suggest our state is good at generating new ideas, but other states are better at applying them and reaping the benefits.

This is closely related to entrepreneurship and Minnesota fares relatively poorly here. Figure 29 shows that, in 2020, New and Young Businesses — those which are five years old or less — accounted for just 31.3 percent of all businesses in our state. For the United States generally, the figure was 37.7 percent and Minnesota ranked 38th. This is lower than in 2000, as Figure 30 shows. Between 2000 and 2020, the share of Minnesota businesses which were New and Young Businesses fell by 4.6 percent. As we have seen throughout this report, this move was in the same direction as the national trend but was more pronounced here. •

Another way Minnesota could improve its stock of human capital

and productivity is by attracting highly

skilled workers to the state or holding on to those it already has.



Aggregate Knowledge Capital Per Local Worker, 2007

FIGURE 26

IowaNorth Dakota

MinnesotaWisconsinNebraska

KansasSouth Dakota

MaineNew Hampshire

MontanaWyoming

AlaskaIdahoUtah

ConnecticutOregon

ColoradoMissouri

WashingtonNew Jersey

IllinoisMassachusetts

PennsylvaniaVermont

OklahomaMichigan

IndianaNew York

OhioArizona

Rhode IslandCalifornia

TexasVirginiaNevada

KentuckyMaryland

HawaiiNew Mexico

DelawareFlorida

West VirginiaTennessee

GeorgiaSouth Carolina

ArkansasNorth Carolina

AlabamaLouisiana

Mississippi

0

SOURCE: HANUSHEK, RUHOSE, AND WOESSMANN

20 40 60 80 100

83.181.981.7

80.379.879.679.579.479.379.178.678.4

77.877.677.476.976.776.476.376.276.175.775.675.575.174.974.8

73.973.673.573.472.972.672.5

71.571.070.870.670.570.570.5

69.969.269.1

68.568.0

67.266.5

63.663.0



Net Flow of Taxpayers and Dependents to Minnesota by Income of Primary Taxpayer, 2011-2018

FIGURE 27

SOURCE: INTERNAL REVENUE SERVICE

10,000

-5,000

-20,000

-15,000

0

20,000

5,000

-10,000

15,000

$1 to $10,000 $10,000 to $25,000

$25,000 to $50,000

$50,000 to $75,000

$75,000 to $100,000

$100,000 to $200,000

-25,000

$200,000 or more

3,647

16,294

1,748

-5,604

-8,370

-22,344

-15,973



Patents Per Million of the Population, 2019FIGURE 28

MassachusettsCalifornia

WashingtonConnecticut

OregonMinnesota

New HampshireMichiganColorado

UtahVermont

IdahoNew Jersey

United StatesNew York

WisconsinIllinoisTexasOhio

District of ColumbiaArizona

Rhode IslandNorth Carolina

IndianaMaryland

IowaPennsylvania

VirginiaNevadaKansas

GeorgiaDelawareMissouri

New MexicoSouth Carolina

FloridaNebraskaWyomingMontanaArkansas

TennesseeSouth DakotaNorth Dakota

KentuckyMaine

OklahomaAlabama

LouisianaHawaii

West VirginiaMississippi

Alaska

0

SOURCE: UNITED STATES PATENT AND TRADEMARK OFFICE

800 1,000 1,200 1,400400 600200

1,3101,282

1,195999

959874

836832

657654

596591586

567557

518510

463458

446442441

409406400

390370

343314313312310

283278

264258

220219

210199198194194191185

175128

110109

927775



New and Young Businesses as a share of all businesses, 2020

FIGURE 29

0% 40% 50% 60%20% 30%10%

49.2%46.4%

44.1%44.1%

42.9%42.5%42.2%41.9%

40.3%39.9%39.7%39.6%

39.1%39.0%38.8%38.8%

38.3%37.7%

37.0%36.8%36.7%

35.3%34.8%34.8%34.6%34.3%34.1%34.0%33.9%33.8%33.7%

33.1%33.0%

32.4%32.2%32.2%32.1%31.8%

31.3%31.3%

30.9%30.9%30.8%30.6%

30.1%29.9%29.6%29.5%29.5%29.3%

28.9%28.8%

WashingtonDistrict of Columbia

CaliforniaIdaho

FloridaNevada

UtahColoradoDelawareMissouriGeorgiaArizona

New JerseySouth Carolina

VirginiaTexas

MassachusettsUnited States

New MexicoNorth Carolina

TennesseeOregon

New YorkRhode Island

OklahomaNew Hampshire

MontanaMarylandKentuckyWyomingArkansas

IllinoisAlabamaNebraska

WisconsinKansas

MichiganMaine

MinnesotaLouisiana

North DakotaConnecticut

HawaiiSouth Dakota

VermontIndiana

PennsylvaniaIowa

MississippiAlaska

OhioWest Virginia

SOURCE: BUREAU OF LABOR STATISTICS



49.2%46.4%

44.1%44.1%

42.9%42.5%42.2%41.9%

40.3%39.9%39.7%39.6%

39.1%39.0%38.8%38.8%

38.3%37.7%

37.0%36.8%36.7%

35.3%34.8%34.8%34.6%34.3%34.1%34.0%33.9%33.8%33.7%

33.1%33.0%

32.4%32.2%32.2%32.1%31.8%

31.3%31.3%

30.9%30.9%30.8%30.6%

30.1%29.9%29.6%29.5%29.5%29.3%

28.9%28.8%

Percentage Point Change in New and Young Businesses as a Share of All Businesses, 2000-2020

FIGURE 30

MissouriIdaho

North DakotaWashington

District of ColumbiaMassachusetts

WisconsinNebraska

IowaVirginia

Rhode IslandSouth Dakota

South CarolinaKentuckyVermont

WyomingNorth Carolina

ArkansasConnecticut

United StatesCalifornia

TennesseeMontana

IllinoisMinnesota

TexasColorado

FloridaHawaii

New JerseyNew Mexico

OregonIndianaGeorgia

MichiganMaine

West VirginiaOklahomaLouisianaAlabama

OhioDelaware

New HampshireArizona

PennsylvaniaKansas

MarylandMississippi

New YorkUtah

AlaskaNevada

-8

SOURCE: BUREAU OF LABOR STATISTICS

-6 -4 -2 0 4

3.32.92.8

1.90.6

-10

-0.1-0.4-0.5

-0.8-1.7

-2.1-2.2

-3.1-3.2

-3.6-3.7

-3.8-3.8

-4.1-4.2

-4.3-4.3

-4.4-4.4

-4.6-4.6

-4.8-5.2-5.2-5.3

-5.5-5.7

-5.9-6.1

-6.3-6.4-6.5

-6.6-6.9-7.0

-7.3-7.3

-7.4-7.6

-7.8-8.3

-8.7-9.1

-9.4-9.8

-10.1-11.5

2-12-14



Minnesotans typically have high incomes rela-tive to residents of other states, but much of this is a legacy of growth in the past. In more recent years, our state’s per capita income growth has both lagged that of the United States generally and been overly reliant on increases in transfer income. This is not sustainable.

The main problem underlying Minnesota’s below average growth is its blow average level of and growth of labor productivity. Solving this is the key economic issue facing our state and the United States generally.

The policy tools available to state government generally fall into one of two categories: regulato-ry and fiscal policy. Regulatory policy is law, such as a legally mandated minimum wage rate. Fiscal policy covers taxing and spending.

RegulationTax rates and, to a slightly lesser extent, their

actual burdens, are, by their nature, relatively easy to quantify. But how do we quantify a regulatory burden? A great deal of work has been done to quantify the burden of federal regulations but much less work has been done on calculating the burden of state regulations. Economists at the Mercatus Center at George Mason University lead the field here. They:

…gathered and analyzed the regulations of 46 states plus the District of Columbia. (Unfortunately, the regulatory codes of Arkansas, Hawaii, New Jersey, and Vermont were not able to be analyzed owing to data limitations.) Mercatus researchers then used text analysis and machine learning algo-rithms to quantify how many words and reg-ulatory restrictions each state’s regulations contain as well as to estimate which sectors and industries of the economy those regu-

lations are likely to affect. As in all RegData datasets, regulatory restrictions are a metric designed to act as a proxy for the number of prohibitions and obligations contained in regulatory text, as indicated by the number of occurrences of the words and phrases “shall,” “must,” “may not,” “required,” and “prohibited” in each state’s regulations.30

While this attempt is to be applauded and will hopefully be refined over time, there are two prob-lems with it at present.

First, how tightly drafted are the regulations? It might be less burdensome to have 10 precisely worded regulations containing words like “shall,” “must,” “may not,” “required,” and “prohibited” than one loosely worded one. In the former case, individuals know exactly what the situation is. In the latter, there will be substantial uncertainty. For a business, the former situation will usually be preferable to the latter.

Second, the regulatory burden is only partly a function of the wording of regulations. It is also partly a function of how those regulations are en-forced. In 2007, for example, the Supreme Court ruled that the Environmental Protection Agency (EPA) was required to regulate greenhouse gases but, citing the so-called "Chevron deference," the Bush administration ignored this ruling. Then, when the Obama administration took office, the EPA issued new rules to comply with the decision. The regulatory burden was markedly different be-cause of their enhanced enforcement, not because any wording had changed.

Policies to support employment growth

Given Minnesota’s already high level of em-ployment and the limits that exist to adding labor inputs, the scope for the state to generate per

Conclusion



capita income growth from more labor is limited. There are, however, sections of the population where employment could reasonably be higher, specifically among younger and black/African American Minnesotans, whose employment ratios are lower than they were in 2000. In our 2019 report "Minnesota’s Workforce to 2050," we outlined six policy measures that would help: » Keep taxes on capital intensive manufacturers

low.

» Assist reskilling with support for lifelong learning.

» Restrict the eligibility for dis-ability benefits to those genu-inely in need.

» At least freeze minimum wages at current levels.

» Pass a “Clean Slate” bill like those in Pennsylvania and Utah and repeal our “Ban the Box” law.

» Halt the growth in occupation-al licensing coverage in Minnesota and enact a mutual recognition law such as that passed in Arizona.31

Policies to increase capital investment

Our state’s workers are equipped with about the average amount of capital per worker so there is scope for growth here, although, once again, only up to a limit. There is, at present, little research on what drives capital investment at the state level. What we can say is that Minnesota’s manufac-turing employment held up relatively well in the face of the “China Shock,” which could have been helped by the state’s uncharacteristically low tax rates on capital intensive manufacturers — we rank 2nd lowest in the United States.32 Given headwinds for businesses in the state, this might also help ac-count for Minnesota’s levels of capital per worker. » Minnesota’s low tax rates on capital intensive

manufacturers should be maintained and tak-

en as a lesson on how state fiscal policy can support economic growth.

Policies to improve our human capital

Human capital is not subject to the limits that the quantity of labor provided and capital per work-er are. This offers us scope for sustained per capita economic growth.

We can improve our human capital with more effective education, particularly among our mi-

nority students. More spending, however, should not be part of the equation. Research shows that in Minnesota, between 1970 and 2011, SAT scores adjusted for participation and demographics showed no noticeable increase while, over the same period, in-flation adjusted per pupil spend-ing increased by 80 percent.33 Instead, as we noted in our 2020 report "Allergic to Accountability: Minnesota’s public schools have

little to show for decades of increased spending," we should: » Expand the school choice continuum.

» Restore discipline in classrooms.

» Learn from other states.

We can also identify and enact policies that will help to attract and/or retain highly skilled workers. Minnesotans are some of the most highly taxed citizens in the United States and there is evidence that such high rates are a driving factor in popula-tion flows.34 » Minnesota’s personal income tax rates need to

be reduced across the board.

Policies to increase innovation and entrepreneurship

Finally, we need to foster a more entrepreneur-ial climate in Minnesota so that it is a more attrac-tive place to start businesses and nurture them to maturity.

The main problem underlying

Minnesota’s below average growth is its blow average level of and growth of

labor productivity.



Once again, Minnesota’s corporate income tax rates are some of the highest in the United States. Research has found that corporate income taxes have a large negative effect on aggregate invest-ment and entrepreneurial activity,35 are a major influence on foreign investment decisions,36 reduce

entrepreneurship,37 significantly influence firm and household location,38 and may also uniquely harm entrants over incumbent firms.39

» Minnesota needs to cut its corporate income tax rate. •



1 Martha Njolomole and John Phelan, “Closing Minnesota’s Budget Deficit: Why we should make spending cuts and not raise taxes,” Center of the American Experiment, Minneapolis, 2020.

2 U.S. Business Cycle Expansions and Contractions, available at http://www.nber.org/cycles.html (accessed September 24, 2020).

3 Charles I. Jones & Dietrich Vollrath, Introduction to Economic Growth (Norton, New York), 2013, p. 6.

4 GDP, PPP (current international $) https://databank.worldbank.org/data/source/world-development-indicators#

5 GDP is the most commonly used measure of economic perfor-mance. It measures the total market value of goods and services produced within an economy in a given period.

6 A Metropolitan Statistical Area (MSA) is a geographical region with a relatively high population density at its core and close economic ties throughout the area.

7 Personal Income measures how much money is received by people in an economy from their economic activity. It includes wages, benefits, proprietor income, dividends, interest, rent, and transfer payments like Social Security and veteran’s benefits.

8 “Consists of income payments to persons for which no current services are performed and net insurance settlements. It is the sum of government social benefits and net current transfer receipts from business.” https://www.bea.gov/help/glossary?ti-tle_1=All&title=&page=5 (accessed February 15, 2021).

9 Louis D. Johnston, “That Center of the American Experiment Report on the Minnesota Economy? It’s Politics, not Economics,” MinnPost, August 23, 2016.

10 Robert Barro and Xavier Sala-i-Martin, “Economic Growth and Convergence Across the United States,” National Bureau of Economic Research working paper, No. 3419, 1990.

11 Peter Ganong and Daniel Shoag, “Why Has Regional Income Convergence in the U.S. Declined?” National Bureau of Economic Research working paper, No. 23609, 2017.

12 Elisa Giannone, “Skilled-Biased Technical Change and Regional Convergence,” Research working paper, 2017.

13 David Weil, Economic Growth (Prentice Hall, New Jersey), 2004, p. 531.

14 Charles I. Jones & Dietrich Vollrath, Introduction to Economic Growth (Norton, New York), 2013, p. 80.

15 George J. Borjas, Labor Economics (McGraw Hill Education, New York), 2020, pp.19-75.

16 Steve Hine and Cameron Macht, “Immigrants and the Econo-my,” Minnesota Economic Trends, December 2017, pp. 2-7.

17 It has been argued that more people means more productiv-ity enhancing ideas so that population growth can increase per capita incomes. However, this is an argument for having more children, not for moving around the adults that there are via immigration. See Michael Kremer, “Population Growth and Tech-nological Change: One Million B.C. to 1990,” Quarterly Journal of Economics, 1993, 108(3): 681-716.

18 Paul Krugman, The Age of Diminishing Expectations (MIT Press, Cambridge), 1994, p. 9.

19 The first year for which there is data.

20 Makram El-Shagi and Steven Yamarik, “State-Level Capital and Investment: Refinements and Update,” Research working paper, 2018.

21 Gary S. Becker, Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education (University of Chi-cago Press, Chicago), 1993.

22 See Roberto Cardarelli and Lusine Lusinyan, “U.S. Total Factor Productivity Slowdown: Evidence from the U.S. States,” IMF work-ing paper 15/116, 2015.

23 Eric A. Hanushek, Jens Ruhose, and Ludger Woessmann, “Knowledge Capital and Aggregate Income Differences: Devel-opment Accounting for US States,” American Economic Journal: Macroeconomics, Vol. 9, No. 4, 2017, pp. 184-224.

24 Stan J. Liebowitz and Matthew L. Kelly, “Fixing the Bias in Current State K–12 Education Rankings,” Cato Institute Policy Analysis, No. 854, November 2018.

25 Catrin Wigfall, “Allergic to Accountability: Minnesota’s public schools have little to show for decades of increased spending,” Center of the American Experiment, Minneapolis, 2020.

26 Julian Simon, The Ultimate Resource (Princeton University Press, Princeton), 1998.

27 Charles I. Jones & Dietrich Vollrath, Introduction to Economic Growth (Norton, New York), 2013. p. 80.

28 Ibid, p. 81.

29 Ibid, p. 92.

30 James Broughel, Michael Kotrous, Patrick McLaughlin, "Quantifying Regulation in US States," Mercatus Center. https://www.mercatus.org/publications/regulation/quantifying-regula-tion-us-states (accessed Feb. 10, 2021).

31 John Phelan, “Minnesota’s Workforce to 2050,” Center of the American Experiment, Minneapolis, 2018.

32 Ibid, pp. 23-26.

33 Andrew J. Coulson, “State Education Trends: Academic Per-formance and Spending Over the Past 40 Years,” Cato Institute Policy Analysis, Number 746, 2014.

Endnotes



34 Peter J. Nelson, “Minnesotans on the Move to Lower Tax States 2016,” Center of the American Experiment, Minneapolis, 2016, and Peter J. Nelson, “Do Minnesotans Move to Escape the Estate Tax?” Center of the American Experiment, Minneap-olis, 2016. For more general evidence on the impact of taxes on interstate migration see Roger Cohen, Andrew Lai, and Charles Steindel, “State Income Taxes and Interstate Migration,” Business Economics, Vol. 49, Issue 3, July 2014, pp. 176-190; Enrico Moretti and Daniel Wilson, “The Effect of State Taxes on the Geograph-ical Location of Top Earners: Evidence from Star Scientists,” Federal Reserve Bank of San Francisco working paper, No. 215-06, March 2017; Enrico Moretti and Daniel J. Wilson, “Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy,” National Bureau of Economic Research working paper, No. 26387, 2019; Henrik Kleven, Camille Landais, Mathilde Muñoz, and Stefanie Stantcheva, “Taxation and Migration: Evidence and Policy Implications,” National Bureau of Economic Research working paper, No. 25740, 2019; Joshua Rauh and Ryan J. Shyu, “Behavioral Responses to State Income Taxation of High Earners: Evidence from California,” National Bureau of Economic Research working paper, No. 26349, 2019.

35 Simeon Djankov, Tim Ganser, Caralee McLiesh, Rita Ramalho, Andrei Shleifer, “The Effect of Corporate Taxes on Investment and Entrepreneurship,” National Bureau of Economic Research working paper, No. 13756, 2008; Mina Baliamoune-Lutz and

Pierre Garello, “Tax Structure and Entrepreneurship,” Small Business Economics, Vol. 42, No. 1, 2011, pp. 165-190; Abhiroop Mukherjee, Manpreet Singh, and Alminas Žaldokas, “Do Cor-porate Taxes Hinder Innovation?” Journal of Financial Economics, Vol. 124, No. 1, April 2017, pp. 195-221; Marco Da Rin, Marina Di Giacomo, and Alessandro Sembenelli, “Entrepreneurship, Firm Entry, and the Taxation of Corporate Income: Evidence from Europe,” Journal of Public Economics, Vol. 95, No. 9-10, October 2011, pp. 1048-1066.

36 James R. Hines Jr., “Altered States: Taxes and the Location of Foreign Direct Investment in America,” National Bureau of Economic Research working paper, No. 4397, 1993.

37 E. Mark Curtis and Ryan A. Decker, “Entrepreneurship and State Taxation,” Federal Reserve working paper, No. 2018-003, 2018.

38 Dan S. Rickman and Yihua Yu, “U.S. State and Local Fiscal Policies and Non‐metropolitan Area Economic Performance: A Spatial Equilibrium Analysis,” Papers in Regional Science, Vol. 92, No. 3, 2013, pp. 579-597.

39 Elie Applebaum and Eliakim Katz, “Corporate Taxation, In-cumbency Advantage, and Entry,” European Economic Review, Vol. 40, No. 9, 1996, pp. 1817-1828.

To obtain copies of this report or to subscribe to the Center’s free quarterly magazine, Thinking Minnesota, email Peter Zeller at [email protected] or call (612) 338-3605.

8421 Wayzata Boulevard Suite 110Golden Valley, MN 55426


the state of minnesota’s economy: 2020

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