Minnesota or Indiana? II

By • on July 18, 2013

So if so-called business friendly policies, as we explored in my last post, is not the path to more and better jobs, what is? Lets explore how the Minnesota and Indiana economies have been changing over the past two decades to try to find the answer.

As we saw in the last post the main difference between their economies is in private sector employment earnings (wages and benefits) per capita. Minnesota’s per capita income is nearly $9,000 higher than Indiana’s. $7,000 of that difference comes from higher private sector employment earnings per capita. Of course, private sector employment earnings are also what every state wants more of. Its the chief way you get to more and better jobs.

So what explains Minnesota being 6th in the nation in private sector employment earnings per capita and Indiana 31st? Basically industry mix. Minnesota is over concentrated compared to the nation in the faster growing, higher wage knowledge-based industries and Indiana is under concentrated in those industries. Almost end of story!

More than $4,000 of Minnesota’s $7,000 private sector employment earning per capita advantage over Indiana has come from growth since 1990. The period in which globalization and technology have fundamentally reshaped the American economy. To one that is far more concentrated in services, particularly knowledge-based services. As you can see in the table at the end of this post the growth in real private sector employment earnings per capita is being driven by what is labelled as high and middle education attainment services. That category accounts for more than all of the growth  from 1990 – 2011 nationally, 91% of Minnesota’s growth and 93% of Indiana’s.

The goods producing sectors of the economy –– natural resources and mining, manufacturing and construction –– has seen declining real growth in private sector employment earnings. Manufacturing is the only industry nationally  which experienced declines during both the 1990 – 2001 boom and the anemic growth of 2001 – 2011. The lower level of real manufacturing employment earnings decline helped Minnesota’s relative performance, but are not a major factor in its out performance.

The low education services are retail, hospitality and temporary services. These low wage industries saw gains in employment earnings from 1990 -2011. But the prime driver of real private sector employment earnings per capita growth are the parts of the service sector which we have identified in our annual reports as the core of knowledge-based economy –– private health care and social services; private education; finance and insurance; professional and business services; management of companies; and information. They account for $5,512 of Minnesota’s gains, $2,907 of Indiana’s and $3,585 of the nation’s.

The remainder of the high and middle education attainment industries –– real estate; wholesale trade; utilities; arts and museums; and membership organizations –– add $1,207 to Minnesota’s real private sector employment earnings per capita growth compared to a small decline in Indiana and a gain of $945 nationally.

Whether we are willing to accept it or not ––  in Michigan’s case it appears still not –– globalization and technology are reshaping the American economy to be largely service based. Manufacturing as a source of employment earnings will no longer support a mass middle class. And, with the exception of a few states, natural resources and mining are a very small component of state’s economies. The states and regions that do best will be those that are over concentrated in knowledge-based service industries. Far broader than just high tech. That is the path Minnesota has travelled to higher prosperity and Indiana hasn’t.

Unfortunately Michigan also is on the Indiana path. Its the path to fewer jobs and lower income, not to more and better jobs.

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