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More Minnesotans are getting back into the workforce. But the state’s labor force participation rate may never be what it once was.

The shortfall is being felt by employers, who are still struggling to hire staff, but also by consumers.

The industries with the highest job vacancy rates right now include farming, fishing, and forestry, food preparation and serving and personal care and service.
The industries with the highest job vacancy rates right now include farming, fishing, and forestry, food preparation and serving and personal care and service.
Photo by Francisco Suarez on Unsplash

This month’s jobs report for Minnesota brought some good news: the state’s labor force participation rate was up, to 67.6 percent in January, according to the latest update from the Bureau of Labor Statistics.

Unemployment is down, too, to the lowest it’s been in a very long time, at 2.9 percent. But that can be a little misleading in the current economy, because it doesn’t include people who have dropped out of the workforce and aren’t working or actively looking for work.

By contrast, the labor force participation rate measures the share of the population 16 and up that is either working or actively looking for work. Because it includes all the non-institutionalized adults in the economy, it says more about the share of the population working than the regular unemployment rate.

In the not-so-olden days prior to 2020, a labor force participation rate of 67.6 percent wouldn’t have been good news. Minnesota has historically had one of the highest labor force participation rates in the country, and before the pandemic, that rate stood at about 70 percent.

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But the pandemic, with its shutdowns, supply chain disruptions and changes in what people need from jobs has made the labor force wobbly over the last two years.

While more Minnesotans are getting back to work lately, the state still has 119,000 fewer people in its workforce in January 2022, compared to January 2020 — a number roughly equivalent to the population of Rochester.

The gap is being felt by employers, who are still struggling to hire staff, but also by consumers. It’s part of the reason why, despite that more workers are back to work, store shelves can be sparsely stocked and why some neighborhood restaurants have reduced hours. And despite that recent increase in the labor force participation rate, there are several underlying factors that mean Minnesota might not regain its former rate any time soon.

More jobs; fewer workers

When COVID-19 hit in March of 2020, Minnesota’s unemployment rate skyrocketed, from a pre-pandemic level of around 4 percent to as high as 10.8 percent. Roughly a fifth of Minnesota’s workforce filed for unemployment in those early days.

The jolt to the labor force was more than the massive surge of layoffs: with kids at home and other family obligations, many people — disproportionately women — left the workforce to care for family members. Others left because of health concerns with the ongoing transmission of COVID-19. Another big factor was retirements.

Minnesota labor force participation rate, 1976–Present
Source: U.S. Bureau of Labor Statistics via FRED Economic Data

A big wave of retirements had been expected for a long time. Demographers have been warning of a “silver tsunami” as the very large Baby Boom generation reaches retirement age. Minnesota’s labor force participation rate had actually been steadily decreasing since 2000, largely due to our state’s aging population.

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Now, labor economists believe many retirements were accelerated by the pandemic, due to health concerns, family needs or because Baby Boomers with assets — whether a retirement plan or real estate — have seen those assets appreciate significantly, making retirement more financially viable for more people.

There aren’t state-level data that indicate how much of the labor force shrinkage is due to retirements, said Oriane Casale, assistant director of the Labor Market Information Office at Minnesota’s Department of Employment and Economic Development. But, she said, national data suggest that two-thirds of the U.S. labor force losses since February of 2020 were among workers age 55 and up. Just one-third was among workers ages 20 to 55.

“The labor force exits of the older group was driven by natural and accelerated retirements,” Casale said.

Coming back to work

By the summer of 2021, many people who had been laid off  early in the pandemic were back to work. An analysis by DEED Project Manager Alessia Leibert found that 77 percent of the 631,000 workers who filed for unemployment early in the pandemic were working again in the spring of 2021.

Yet Minnesota’s labor force participation rate had not recovered. In the summer of 2021, it has ticked up, from a low of 67 percent in March of 2021 to 67.3 percent in August, where it stayed until December.

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Leibert’s analysis suggests that Minnesotans of color were having a harder time making it back into the workforce, and labor force participation data suggest the same.

Though the numbers are improving, “our Black Minnesotans are having a harder time getting back into the workforce and finding employment compared to our white Minnesotans,” said Angelina Nguyễn, the Director of Research for DEED’s Labor Market Information Office, during the March jobs report briefing. The labor force participation rate for Hispanic Minnesotans, meanwhile, has increased but unemployment remains somewhat higher compared to white Minnesotans.

While women’s labor force participation was initially hit hard by the pandemic in Minnesota, data show it recovering mostly in tandem with men’s, Nguyễn said. The state data do not distinguish between women with small kids versus the general population.

Despite that many remain out of the workforce, the overall participation rate recently ticked up. Labor economists cite a few reasons for that. One, with a high percentage of the population at least somewhat immune to COVID-19, concerns about the virus seem to be ebbing, said Sinem Buber, lead economist at ZipRecruiter.

That’s evidenced by how much more consistent the workforce looked through the omicron wave (though many were out sick) compared to previous COVID-19 waves.

Household savings are also running lower. Research from JPMorgan Chase found the cash balances of families — particularly low-income families — increased substantially amid the supports of the pandemic, Buber said.

As of December, cash balances for low-income families was still 65 percent higher than it was in 2019, but that cushion is decreasing.

“It’s not a good way to look at it, but that’s one way people will come back to the workforce — when they run out of money, when their savings are going down,” Buber said.

Employers are also raising wages, and the wages for some of the lowest-paid workers are rising the fastest — something that should bring people back into the workforce.

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Looking ahead

Minnesota’s workforce woes are not unique, but they are, at least in some ways, worse here than in the rest of the country, Buber said.

While nationally, there are 1.7 open jobs per unemployed person, on average, there are more than 2.4 open jobs for every unemployed person in Minnesota, Buber said.

“Consumers keep buying. We changed our consumption patterns, but we didn’t give up on our consumption,” Buber said. “So there’s a strong consumer demand, which drives this record high number of job openings.”

The industries with the highest job vacancy rates in the most recent data included farming, fishing, and forestry, food preparation and serving and personal care and service — industries that pay less than the average job in the state.

To Aaron Sojourner, a labor economist and associate professor at the University of Minnesota’s Carlson School of Management, a big question is whether employers will improve job quality enough to entice more people into the workforce.

While some employers — for example, a neighborhood restaurant — may be operating on thin profit margins and  can’t easily to raise wages to compete for talent, many large corporations have seen growth in profits but are not raising wages or expanding employment, instead opting to have existing employers work more.

“We have a situation where, especially corporate profits, are at a record high. They’ve grown really fast and much faster than wages or prices,” he said. “I think the big question is, will employers improve job quality enough to entice people off the sidelines?” Sojourner said.

DEED Commissioner Steve Grove said last week during the job numbers release that Minnesota’s labor force shortage won’t budge much without work in three major areas: getting people to move here (10,000 people left the state last year); finding ways to employ people who are not in the labor market — such as increasing equity in employment and creating more opportunities for workers with disabilities; and automating more work, both to make jobs more attractive and to increase productivity.

“We were, because of demographic reasons, already predicting a drop in labor force participation before the very first COVID case hit Minnesota,” Grove said. “So this was in many ways just an acceleration of a trendline.”