Minnesota has the second lowest unemployment rate in the country. Is it good?


About a dozen states now have record unemployment rates — and Minnesota’s is nearly the lowest of them all.

At 2%, the state’s unemployment rate is the second-lowest in the nation, tied with Utah, and is about a percentage point lower than it has been for most of the two last decades. This is also well below that of the rest of the country — 3.6%.

Only Nebraska, a state about a third the size of Minnesota, comes in lower at 1.9%.

The state is also grappling with one of the tightest job markets ever, and Minnesota has recovered only about 80% of the jobs lost during the pandemic. So, is the low unemployment rate a good thing?

“It’s one of those classic economic questions where you have to say, ‘On the one hand, and on the other hand,'” said Louis Johnston, professor of economics at the College of St. Benedict and St. John’s. University in St. Joseph, Minnesota.

For workers, a historically low unemployment rate is a very good thing.

“That means if you’re out there looking for a job, your odds are probably as good as they’ll ever be right now,” Johnston said.

And because there’s a smaller pool of people looking for jobs, they’re likely to see larger pay increases as employers offer more incentives to attract them. Wages have increased over the past year, especially for the lowest paying jobs.

But for consumers and businesses, that’s not necessarily such a good thing, said Alan Benson, a professor of applied economics at the University of Minnesota.

“You don’t get to 2% unemployment without some other warning signs,” he said. “One of the big challenges is that when you get to this low unemployment rate, it can be very difficult for some employers to recruit people with the skills they need.”

In addition to having to pay higher wages, productivity can drop if companies cannot find candidates to fill these positions. And costs to consumers may increase.

“When you see rising costs and falling productivity, that’s really a recipe for inflation,” he said. “So the unemployment rate, inflation and growth really go hand in hand.”

Wages have risen an average of 3.4% in Minnesota and 5.5% in the United States over the past year. But given that inflation in the United States is at 8.6% right now, that “really isn’t an increase at all,” Benson said.

“What we’ve traditionally thought is that we’ll start to see that unemployment has gotten too low when wages start to rise excessively,” said Mark Wright, director of research at the Federal Reserve Bank of Minneapolis. “I have to point out that wages overall are not rising very quickly relative to the rate of inflation, although they are rising rapidly for some workers and not for others.”

He added that you wouldn’t necessarily want unemployment to drop to zero because there’s a natural turnover in the market, with some people quitting their jobs and taking a bit of time to find new ones.

“It’s healthy to some degree,” he said.

The Federal Reserve has a dual mandate to use its tools to achieve a balance between stable prices and “maximum employment”. Until a few years ago, many economists believed that the latter could be achieved with a US unemployment rate of between 4 and 5%. But as it fell to 3.5% in 2018 and 2019, and inflation remained low, some economists began to revise their expectations.

But those particular targets for the unemployment rate aren’t as meaningful at the state level, Wright said.

“It obviously varies from state to state,” he said. “And Minnesota has traditionally had a slightly lower unemployment rate than many other states.”

This is due to the state’s diverse economy and relatively high proportion of residents with a college education.

Over the next few months, the Fed will continue to raise interest rates to bring down inflation. As the economy slows, some people are likely to be laid off, which will cause the unemployment rate to rise.

“But we’re trying to avoid a situation where it increases a lot,” Wright said.

Just two years ago, Minnesota’s unemployment rate hit its highest level since it began being tracked in 1976. It reached an all-time high of 10.8% in May 2020 during the first painful month of the pandemic.

It has continued to decline since then.

At one point, it was shrinking but “for the wrong reasons,” said Steve Grove, commissioner for the Minnesota Department of Jobs and Economic Development. People were dropping out of the labor force, resulting in a smaller labor pool and lower unemployment rate.

But the more recent declines are due to people returning to the workforce, which is a good sign, he said.

Still, there are about 78,000 fewer workers in Minnesota’s labor force than before the pandemic. And employers are eager to hire, with vacancies at record highs, outpacing the number of unemployed by more than two to one.

DEED calculates that Minnesota now has the fifth tightest job market in the nation.

Growing the state’s workforce is a top priority for the agency, Grove said. One challenge: Minnesota’s overall population in this decade will grow at the slowest rate in state history.

It encourages companies to raise wages further to help attract more workers to the sidelines. He noted that the state’s black unemployment rate actually rose last month to 6.9%.

“You have a lot of labor available that is not being exploited,” he said. “If we can’t find a way to reduce these vacancies, we’re going to underperform as an economy because we don’t have the people to do the job.”


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