Why US Unemployment Must Rise

An unemployment problem, as it is normally understood, occurs when many people cannot find work. Northfield, a town in Minnesota with a population of 20,000, illustrates the problems that arise at the opposite end of the spectrum: when unemployment is so low that many businesses and organizations cannot find workers. Along with Utah, Minnesota has the lowest unemployment rate of any US state at 2.1%. And in Minnesota, Northfield has about the lowest unemployment rate of any city, just 1.2%.

Listen to this story.
Enjoy more audio and podcasts on iOS Where Android.

Your browser does not support the item

Save time by listening to our audio articles while you multitask

If an authoritarian regime were to report such a figure, it would elicit groans of disbelief. In Northfield, moans are embarrassing. Policemen, teachers and factory workers are all in short supply. The local hospital needs auxiliary nurses and surgical technicians. The town’s main nursing home has empty units but not enough staff, resulting in a long waiting list. Unable to hire enough servers, a popular restaurant closed this summer and a favorite cafe cut its hours. The local newspaper, meanwhile, has just lost its only sports reporter, who has taken a better-paying job as a forklift driver.

Minnesota, and this corner in particular, may seem like an outlier. They are, in fact, extreme cases of a dynamic now common to all of America. Nationally, there are almost two vacancies for every unemployed person, slightly less than the record high reached a few months earlier. In Minnesota, the ratio is an impressive 3.5 vacancies per unemployed person, also just below a recent record and higher than any other state. Minnesota’s ultra-tight labor market highlights three issues for the country as a whole. How did things get so overflowing? What are the consequences of this degree of tightness? And will the balance ever be restored?

Employers big and small in Northfield, which is a scenic settlement straddling a river, agree the covid-19 pandemic was the dividing line. With about 700 employees, Post Consumer Brands, a cereal manufacturer, is one of the largest manufacturers in the city. Before the pandemic hit, it regularly had a vacancy rate of 1% or less. Now the rate is more like 5%. At Minnesota Soulstice, a clothing store, the owner was so understaffed that at one point she had to personally work 18 days straight. Even when positions are filled, the number of applicants is declining. When the city advertised for a police job in 2017, it received 55 applications. In September, he advertised three positions and received 15 applications.

Just like elsewhere in America, there is a litany of explanations for the labor shortage. Older residents exited the workforce in 2020, preferring early retirement to the dangers and hassles of working at the height of the pandemic. The cancellation of school meant that many parents, most often women, had to take care of the children. With two liberal arts colleges in town, Northfield typically has many part-time students. But many are now less inclined towards off-campus jobs. Personal savings have soared in recent years, due to a combination of stimulus checks and reduced spending on things like concerts and travel. This has given some students a useful financial buffer.

Sandwiched between Minnesota’s largest cities – Minneapolis and Rochester are an hour’s drive in either direction – Northfield can tap into a large labor pool. But the pool is smaller than it was. In the early 2010s, the state received more than 15,000 immigrants per year. Over the past five years, entries have slowed to a trickle, under the weight of pandemic border closures and Donald Trump’s anti-immigration stance. Minnesota was also one of the states that lost residents to other parts of the country during covid. About 13,500 left between April 2020 and July 2021, many attracted by opportunities in warmer climates. “Before, the workers were there and we just had to figure out how to get them into manufacturing,” says Bob Kill, president of Enterprise Minnesota, a consulting firm. “The difference this time is that the bodies don’t exist to fill the jobs.”

For those who are looking for a job, everything is fine. Not only is employment plentiful, but wages are rising. Private-sector wages in Minnesota’s main metropolitan group, which includes Northfield, rose 5.7% year-on-year in September in nominal terms, ranking third in the nation. Businesses have also become more attentive. Mr. Kill says the old manufacturing schedule of eight hours a day, five days a week is all but over. Companies now let workers opt for four ten-hour days. At the Post factory, bosses recently encouraged a worker about to retire to stay two days a week, an arrangement rarely seen in the past. “We need to retain a very qualified person to do the work we need,” says Henry Albers, a manager.

Employers have also managed to extract a little more return from their limited resources. This can be seen in Minnesota statewide data. Overall, its labor force is 3% lower than on the eve of the pandemic, but its gdp is almost 2% larger. At the Post factory, production lines producing delicacies such as Marshmallow Fruity Pebbles have long been automated, with workers monitoring computer screens and fixing robots rather than lifting heavy objects. But there is always room for more. Mr. Albers hopes to use high-tech tools to reduce training times for new employees. In schools, meanwhile, changes to licensing requirements have made it somewhat easier to recruit people without full qualifications. Northfield has its high school kitchen director who leads the consumer science class. “We never would have done this five years ago,” says Matt Hillmann, superintendent of Northfield Public Schools.

At the state level, officials are also considering how to attract more workers. Democrats swept Minnesota’s election earlier this month, retaining his governorship and state house, and adding the state senate. This puts them in a position to consider more ambitious legislation. One idea is to introduce state-paid sick and care leave for family members, which no state in the Midwest offers. “That could be a differentiator, saying, ‘Hey, if you work in Minnesota, we’ll take care of you,'” said Steve Grove, head of the state’s Department of Economic Development. Democrats also pledged to fund the construction of more affordable housing, a necessity for young workers. Indeed, one of the reasons Northfield’s unemployment rate is lower than neighboring areas is that, at an average price of around $350,000, its homes are expensive for a town of its size, which makes it difficult to live there without a job.

Minnesota’s labor market may be able to find a balance in several ways. Techno-optimists believe that an increase in automation will help companies get by with fewer workers. Some managers themselves are skeptical, noting that many processes are already automated. “You can’t automate thinking,” quips one manufacturing veteran. Northfield Hospital and Clinics, the region’s main healthcare provider, has embraced a handful of labor-saving technologies, from automated screening at entrances to greater use of telemedicine. “These are all Johnny Appleseed techniques,” says Steve Underdahl, president of Northfield Hospital and Clinics. In other words, it will take time to reap the benefits.

Broadening the pool of workers would help. Maybe Minnesota will manage to lure more Americans into its friendly, if sometimes frosty embrace. With plenty of job vacancies, Northfield has an attractive motto. Who doesn’t like “cows, colleges and contentment”? If Minnesota succeeds, however, it will export some of its labor puzzle to other parts of the country. More arrivals from abroad would be a much bigger help, but it’s hard to imagine the floodgates opening, given the toxic national policy around immigration. And Minnesota, like much of America, faces a demographic crisis. “It’s a math problem. We know baby boomers continue to drop out of the workforce,” says school principal Hillmann. Five of the city’s 25 police officers are expected to retire within the next two years.

There remains another, less pleasant solution: an economic slowdown that brings some slack back to the job market. The Federal Reserve raised interest rates. Virtually all economists believe that a slowdown in growth is inevitable next year, even if they wonder if it will amount to a recession. A critical variable is the extent to which firms are able to reduce their demand for new workers without laying off existing ones.

As the tightest corner of the ultra-tight U.S. labor market, Minnesota is worth watching. Its unemployment rate has started to rise, from 1.8% in June to 2.1% last month. It may sound perverse to call this good news, but one lesson from the past year is that excessively low unemployment really hurts: it constrains and corrodes the services offered by hospitals, schools, restaurants and more. . In Northfield, there is at least a small hint that relief might be at hand. After a difficult drought, the HideAway, a downtown cafe, has received four applications in the past two weeks. Among these, he hired two indispensable baristas. “We just got lucky,” says owner Joan Spaulding. Or was it a new trend?

For more expert analysis of the biggest stories in economics, finance and markets, sign up for Money Talks, our weekly subscriber-only newsletter.

Leave a Reply