Tightening labor market means
state cannot afford to leave any workers on the sidelines
A Civic Caucus
Focus on Human Capital
Interview January 9, 2015
John Adams, Dave Broden
(vice chair), Pat Davies, Paul Gilje (executive director), Randy
Johnson, Dan Loritz (chair), Dana Schroeder, Clarence Shallbetter,
Fred Zimmerman. By phone: Janis Clay, Paul Ostrow.
The aging of the
population is resulting in a slowing of labor force growth in the U.S.
and in Minnesota, according to Minnesota State Economist Laura
Kalambokidis. This slower growth is one of the reasons that, while
forecasters still expect growth in U.S. GDP over the next year, the
rate of that growth will be slower going forward than forecast
Kalambokidis reports that the average annual
growth in Minnesota's labor force was 0.9 percent from 2000 to 2010,
but that figure is predicted to fall until it reaches an average
annual growth rate of 0.1 percent between 2020 and 2025. With that
slower labor force growth, she says, improving productivity (output
per person) will be key to keeping Minnesota's economy healthy.
Kalambokidis says Minnesota's low
unemployment rate, low layoff rate, high job vacancy rate, and the
high and increasing average number of hours worked per week in the
private sector all point to a tightening of the labor market in
Minnesota and more competition for the workers we have. But, she
notes, the wage growth these conditions were expected to bring did not
occur in 2014 and will be lower going forward than forecast earlier.
She confirms that with its tightening labor
market, Minnesota will be in competition with all other states for
workers, since other states, too, face the same challenges. She's
optimistic about Minnesota's economy, but cautions that going forward,
the state is looking at a labor market where we need everybody
in the game and no groups of people on the sidelines.
Laura Kalambokidis is Minnesota
State Economist, a position she has held since July 2013. In that
position, she heads Economic Analysis at the Minnesota Department of
Management and Budget (MMB), which is responsible for producing and
presenting the state's revenue and economic forecasts.
She is also a Professor in the Department of
Applied Economics at the University of Minnesota and an Extension
Economist there. She teaches public finance and does research on a
range of federal and state tax issues. Her current research concerns
tax incentives for economic development, state business tax policy and
subsidies for charitable contributions.
Kalambokidis was a member of the Minnesota
State Budget Trends Study Commission in 2007-2008 and the Minnesota
Tax Expenditure Review Study Group in 2010-2011. Prior to joining the
University of Minnesota, she worked as a financial economist in the
U.S. Department of Treasury's Office of Tax Analysis, where she
provided economic analysis of tax policy issues and developed models
to estimate the revenue effects of proposed tax changes.
She holds a Ph.D. in economics from the
University of Michigan and an undergraduate degree in economics from
the University of Minnesota.
Since the Civic Caucus issued
its statement on human capital
in September 2014, it has concentrated on learning more about the
challenges to maintaining a strong workforce in Minnesota in the
coming years. The Civic Caucus interviewed State Economist Laura
Kalambokidis to get her perspective on the implications of a
slower-growing workforce for Minnesota's economy.
The U.S. economy and
the Minnesota economy are closely tied. According to State
Economist Laura Kalambokidis, much of the volatility in the Minnesota
economy is connected to volatility in the U.S. economy. The state
released its latest economic forecast on December 5, 2014. The U.S.
economic outlook has weakened since the last state forecast in
February 2014, so while forecasters still expect growth in the U.S.
GDP over the next year, the rate of growth will be slower going
forward than forecast earlier.
The 20-year average annual growth in U.S.
real GDP prior to the 2008-2009 Great Recession was 3.1 percent. In
February 2014, real GDP growth was forecast to be equal to or above
3.1 percent for the next three years: 2015, 2016 and 2017. As of
November, however, the real GDP growth forecast for those three years
is now 2.6 percent, 2.8 percent and 3.0 percent, respectively.
One of the reasons for the slower rate of
growth in the U.S. economy is a slowing in the nation's labor-force
growth. Kalambokidis said the aging of the population is resulting
in slower labor-force growth in the U.S. and in Minnesota. From 2000
to 2010, the average annual growth in Minnesota's labor force was 0.9
percent. This figure is expected to drop to 0.5 percent for 2010 to
2015, to 0.3 percent for 2015 to 2020 and to 0.1 percent for 2020 to
With the lower labor-force growth,
productivity growth will be a key element in keeping the economy
healthy both in Minnesota and in the U.S., she said. In order to
produce the same amount of output with fewer people, the output per
person must increase.
Minnesota's distribution of employment
across industrial sectors is diverse and very similar to that of the
U.S. as a whole. Kalambokidis said there are, however, several key
sectors in which we're different from the U.S. "We're overrepresented
in the health care sector," she said. "Health care and private
education is the largest industrial sector in Minnesota." She called
that positive, because that sector grew during the recovery.
She said Minnesota is also overrepresented
compared with the U.S. in durable and nondurable manufacturing, but
not as much as some other Upper Midwest states are. The manufacturing
sector added jobs in Minnesota during the recovery and is continuing
to add jobs.
Minnesota will be in competition with all
the other states for workers. Kalambokidis said there is already a
labor-force tightening in Minnesota. She pointed out that Minnesota
has recovered all the jobs it lost during the recession. Minnesota's
unemployment rate is 3.6 percent (seasonally adjusted), compared with
5.6 percent for the U.S. The 3.0 percent November 2014 unemployment
rate in the Minneapolis-St. Paul metropolitan region was the lowest in
the country among large U.S. metro regions. The unemployment rates in
all of the state's major regional metro centers fell between November
2013 and November 2014. And the number of unemployed people in the
state is falling.
The layoff rate is very low right now, the
number of hours worked per week in the private sector is high and the
job vacancy rate is high, she reported. The average number of hours
worked per week in the private sector in Minnesota is 34.4 hours,
which Kalambokidis called high. And she said it's increasing, as
employers are adding hours.
"All of those things are pointing to a
tightening of the labor force and competition for the workers we do
have," she said. Those conditions should bring about wage growth, but
that didn't happen in 2014. "We still expect wage growth to
accelerate, but we're forecasting lower wage growth now, since the
wage growth we forecast for 2014 did not take place," she said.
An interviewer pointed out that while wages
may not have grown, total compensation has grown, as health care
benefit costs continue to increase. Kalambokidis replied that there
might be some shifting between wages and total compensation. She also
said that during the recovery from the Great Recession, many part-time
and temporary jobs were added, which typically pay less.
In some sectors, wages need to come up
before we can be sure there's a skills gap. Kalambokidis said in
theory, excess demand for labor should mean employers raise wages.
Workers are then attracted to that sector. If they don't have the
skills to work in that industry, they would seek the necessary
training. "That's the way we would expect this to happen," she said.
"When that doesn't happen, we ask, 'Is there
some reason people are not seeing that wage signal? Is the wage signal
not there? Or is there a barrier to people getting the training they
need to move into that industry?'" Kalambokidis asked. She added that
transition costs can keep this process from happening smoothly.
The disappointing wage growth is not unique
to Minnesota; it's true nationally. Some of the explanations
offered for this, Kalambokidis said, are (1) that the jobs added
during the recovery are lower-paying than the jobs lost in the
recession; (2) that younger people are paid less than the older, more
experienced people who are retiring; and (3) that during the
recession, employers didn't bring workers' wages down that much, so
now they don't have enough room to raise wages.
"We do anticipate wage growth," she said.
"We just had to lower the forecast rates of growth, because wage
growth didn't materialize in 2014."
In order for Minnesota to meet the supply
challenge of slowing labor force growth and still thrive economically,
we will need to increase the productivity of the workers we do have.
In some industries, technology has brought
productivity up enough that we don't need as many people in those
sectors. Kalambokidis offered the example of agriculture, where
capital has replaced labor to a large degree.
In the on-demand economy, people are using
technology to match service needs with workers. Kalambokidis said
people with available time, skills and equipment are matched to
employers who need those things. "From an economist's standpoint, this
is grand," she said. "It takes excess capacity and uses it. It offers
people flexibility in choosing where they work and when they work.
It's important and increases efficiency. It's just part of the shift
the U.S. economy has made away from a goods-producing economy to a
service economy. The on-demand economy is about services. But the
on-demand economy is not creating high-paying jobs; it's creating
efficiency in lower-paying jobs."
The choices that leaders make today will
influence the state's ability to thrive in the future.
Kalambokidis is referring to government leaders, business leaders,
community leaders and organization leaders. She said we must make
investments in the future to increase productivity.
Investments in educating the workforce will bring benefits, from
early childhood to technical education to retraining people so they
can move from sector to sector.
Health of the workforce will be important to productivity.
Innovation and technology that improve productivity will help.
Investing in infrastructure is important. Getting people from
where they live to where they work more efficiently will increase
Infrastructure is also important to moving goods. Manufacturing
jobs have helped Minnesota recover and we need to be able to move
commodities around the state. This is particularly important to
She said leaders must also resolve to leave
no worker or entrepreneur behind and to reduce uncertainty for
Manufacturing in Minnesota has more than
recovered the jobs lost during the recession. Kalambokidis said
Minnesota has outperformed some other places in that regard. One
reason for that is nondurable manufacturing, which in Minnesota is
dominated by food production, which is growing.
Where you can charge user fees for public
goods, you should do so, because it's more efficient. Kalambokidis
said, however, there are limitations to that principle. Sometimes
limitations to technology make it too inefficient to charge user fees.
Sometimes it's too difficult to tell who's benefitting from a general
public good to charge user fees. Also, if providing a public service,
like public transportation, to an underserved or low-income portion of
the community is benefiting the whole community, we consider it unfair
to charge user fees to those using the service.
"The benefits-received principle is the
ideal where we start, but let's fully recognize that in the real world
there are limitations on our ability to do that," she said.
The fact that Minnesota has a diverse
economy serves all of us, because a more diverse economy is more
resilient in downturns. Kalambokidis pointed out that with a
diverse economy, if one sector is contracting and releasing workers,
another part of the economy might be expanding and hiring workers. She
said it's easier to recruit workers if there is economic diversity in
a metropolitan area, since the workers may have spouses who will find
it easier to get jobs. Also, it's less risky for workers to move to an
area that is economically diverse than to a one-company town.
On net, Minnesota loses people to other
states through domestic migration. Kalambokidis said in the U.S.,
people tend to move from the Northeast and Midwest to the South and
West. But looking at overall migration, international and domestic,
Minnesota gains people on net, because international migration into
the state more than makes up for domestic migration out of the state.
From 2010 to 2013, Minnesota gained a net of 11,935 people through
international migration and lost a net of 4,358 through domestic
migration. So, the state posted a total net gain of 7,577 from all
She said Minnesota is in the same situation
as a lot of other states, facing the challenge of an aging population
and slowing labor force growth. Like Minnesota, they're all going to
try to attract productive workers to their states. "Not every state's
going to win that," she said, "because there are only going to be so
many people to go around."
Going forward, Minnesota is looking at a
labor market where we need everybody in the game. "We can't
afford to have groups of people on the sidelines," Kalambokidis said.
"Who's on the sidelines that we need to draw into the game? The
unemployed, especially groups like African Americans and Hispanics
with high unemployment rates. Let's get all those people into the
She said Minnesota must be a state where
people want to live and work and do business, with the natural and
cultural amenities that attract people to the state. We should also be
looking at drawing older people and disabled people into the
workforce, she said.
The employers who will thrive in the future
in Minnesota are the ones who can attract, train and retain workers.
Minnesota has limitations and challenges,
but it also has a great number of assets. Kalambokidis said she is
optimistic about Minnesota. The limitations and challenges facing the
state include an expected slower GDP growth in the U.S. and the fact
that lots of other states are facing the same situation of slowing
labor-force growth. But, she said, the state also has a number of
assets: a strong, diverse economy; a more educated and trained
workforce; and natural and cultural amenities that make Minnesota a
place where people like to live.
The Civic Caucus
is a non-partisan,
tax-exempt educational organization. The Interview Group
includes persons of varying political persuasions,
reflecting years of leadership in politics and
business. Click here
to see a short personal background of each.
S. Adams, David Broden, Audrey Clay, Janis Clay, Pat Davies, Bill
Frenzel, Paul Gilje (executive director), Dwight Johnson, Randy Johnson, Sallie
Kemper, Ted Kolderie,
Dan Loritz (chair),
Tim McDonald, Bruce Mooty, John Mooty, Jim Olson, Paul Ostrow, Wayne
Popham, Dana Schroeder, Clarence Shallbetter, and Fred Zimmerman