The news of a $7.7 billion budget surplus (in a state budget of about $52 billion per biennium) was welcome for Minnesotans worried that the pandemic would lead to cuts in state services and/or increases in taxes. The fall in Minnesota’s unemployment rate, from 3.5 percent in October to 3.3 percent in November, along with 8,600 net new jobs during that period meant that Minnesota’s labor market was also healing from the shock of the 2020 shutdowns.
But there was more good news that did not get the attention it deserves. The federal Bureau of Economic Analysis reported the latest figures on personal income by state and Minnesota is doing well on several dimensions. Let’s look at some of the details regarding personal income and dig into what they tell us about the state’s economy during the pandemic.
Personal income in the U.S. and Minnesota
Personal income measures the income that residents collect from all sources, including (i) employment, (ii) certain gains from businesses and financial assets, and (iii) government transfer payments such as Social Security and unemployment insurance. Personal income therefore gives economists a picture of the resources available to households to purchase goods and services.
According to last week’s release, personal income in the U.S. grew by 2.6 percent on an annual basis during the third quarter of 2021. Minnesota’s personal income grew by 1.7 percent over the same period. Comparing the two numbers makes it looks like Minnesota isn’t doing very well. However, this headline number obscures some important details.
If we examine the three sources of personal income, we see that net earnings for Minnesotans grew 9 percent, compared to 9.3 percent for the nation, while dividends, etc. grew a bit higher than that national average (3.4 percent versus 3.3 percent).
The big difference is in the third category: transfer receipts. Nationally, these fell 15.6 percent in the third quarter as the U.S. labor market improved and unemployment compensation fell. Minnesota did even better: because the state unemployment rate fell further and faster than the national rate, transfer receipts (in particular, unemployment compensation) to Minnesotans fell 21.1 percent. Thus, overall, the decrease in unemployment payments reduced the growth rate of personal income and made Minnesota’s economic performance look worse than it really was. In brief, Minnesotans were earning more through work and investment and less through unemployment insurance.
Minnesota and its neighbors
When we focus on income earned through work and investments during the third quarter, Minnesota grew at about the national average. But how did we do compared to our neighbors? While average income growth may not sound very impressive, it looks pretty good when we compare Minnesota to the rest of the five-state area.
First, falling farm income led to declines in total personal income for North Dakota, South Dakota and Iowa. This will probably lead to declining tax revenues for all levels of government in these areas along with slower total employment growth. North Dakota, of course, has oil production and this helped income growth but that industry is also subject to booms and busts just like those in agriculture. Further, the sharp increases in oil prices during the first half of 2021 are abating and this will hurt North Dakota’s personal income in the coming months.
Second, Wisconsin’s personal income grew 2.7 percent during the second quarter compared to Minnesota’s 1.7 percent. That doesn’t look so good for us but, as was the case with the national comparison, this difference obscures the fact that transfer receipts fell less rapidly in Wisconsin than they did in Minnesota. Wages and salaries in Wisconsin grew only 7.7 percent (versus 9 percent for Minnesota) and dividends/interest/rent grew 3.1 percent (as opposed to 3.4 in Minnesota). Thus, income from employment and investments grew faster in Minnesota than in Wisconsin.
Further, Minnesota looks good compared to Wisconsin when we look at the income generated by individual industries. Income from wholesale trade grew more slowly in Wisconsin (only about 57% of Minnesota’s growth rate) while income from professional/scientific/technical services grew twice as fast in Minnesota as in Wisconsin.
Strong income growth, rising employment, falling unemployment and a healthy budget surplus reflect good economic performance in Minnesota during 2020 and 2021. The state’s economy has navigated its way through the ongoing pandemic successfully. Now we need to take stock of the damage and think long term about how to help those who need a hand to recover and how to reform those aspects of our economic policy we will need to face future emergencies.