When Equal Unemployment Rates Are Not Equal

Minnesota and Wisconsin currently enjoy low unemployment rates relative to the rest of the nation. In addition, both states enjoyed an above average decline in unemployment rates since the beginning of the Great Recession. However, this does not mean that the economies of these states have performed equally well. Minnesota achieved its low unemployment rate by matching its robust labor force growth with an even more robust increase in the number of jobs. Wisconsin, meanwhile, had both labor force and job growth well below the national average. In short, the similar unemployment rates in the two states conceal distinctly different economic trajectories.

The unemployment rate is a function of two numbers. The first is the number of unemployed people. The second is the labor force, which equals the number of people who are working plus those who are seeking work. The ratio of the first number—the number of unemployed—to the second—the total labor force—is the unemployment rate. In order to be considered “unemployed,” a person must be part of the labor force (i.e., seeking a job). When a person stops seeking a job, that person is no longer counted as unemployed or as a member of the labor force.

Not every reduction in the unemployment rate is achieved in the same way—and not all such reductions are necessarily positive. Take, for example, an economy with a labor force of 100, ten of whom are unemployed, for an unemployment rate of ten percent. If one of these workers finds a job, the unemployment rate drops to 9.0 percent, which all would agree is a good thing. On the other hand, let’s say that a worker gets discouraged in leaves the labor force. Because s/he is no longer in the labor force, s/he is no longer counted as unemployed. Hence, the number of unemployed and the total labor force shrink by one. The resulting unemployment rate is thus 9 divided by 99 or 9.1 percent.

In both of the above scenarios, the decline in the unemployment rate is approximately the same. The economic impacts, however, are distinctly different. In the first scenario, the rate was lowered by increasing the number of people who have a job. In the second scenario, a nearly equal reduction in the unemployment rate was not achieved through job creation, but by a discouraged worker simply giving up and dropping out of the labor force. The point of this illustration is to demonstrate that not all unemployment rates—or changes in the unemployment rate—are created equal. A dramatic reduction in the unemployment rate could indicate dramatic job growth; on the other hand, it could also indicate a low rate of job growth accompanied by an even lower rate of growth in the labor force.

This brings us back to the Minnesota-Wisconsin comparison. According to economists, the Great Recession began in December 2007.* At that time both states had nearly equal unemployment rates—4.8 percent in Wisconsin and 4.7 percent in Minnesota, based on Current Population Survey (CPS) data from the U.S. Bureau of Labor Statistics. Over the course of the Great Recession and subsequent recovery, the unemployment rates of the two states occasionally diverged, but by October 2017 (the most current month for which data is available)† the rates in the two states were once again nearly equal—3.4 percent in Wisconsin and 3.3 percent in Minnesota.


In each state, the current unemployment rate is well below the U.S. average. In addition, each state has experienced a decline in the unemployment rate of 1.4 percent from the beginning of the Great Recession until today—significantly greater than the national decline of just 0.9 percent.

The way in which the two states reduced their unemployment rates to the currently low level is, however, distinctly different. In Wisconsin, the rate of job growth since the beginning of the Great Recession has been a rather anemic 4.0 percent, 1.2 percent below the national average growth rate of 5.2 percent. Meanwhile, Minnesota’s rate of job growth is 7.1 percent, 1.9 percent above the national average. During this nearly ten year period, Minnesota’s economy added 196,000 jobs, compared to 117,000 in Wisconsin; in other words, for every job added to the Wisconsin economy, Minnesota added 1.68 jobs.


If Minnesota’s rate of job growth was so much greater than Wisconsin’s, why did the two states experience the same drop in their unemployment rate? The answer lies in the respective labor force growth rates in the two states. Wisconsin’s labor force has increased by just 2.5 percent since the beginning of the Great Recession, 1.7 percent below the national average growth rate of 4.2 percent. Meanwhile, Minnesota’s labor force increased by 5.5 percent—significantly above the national average. The number of people added to Minnesota’s labor force over this period is 161,000—more than double the 78,000 increase in Wisconsin’s labor force.

These numbers show that Minnesota reduced its unemployment rate by matching its robust labor force growth with even more robust growth in the number of jobs available for those seeking them. Indeed, the healthy increase in the number of jobs available undoubtedly enticed more people to seek work, hence contributing to the above average increase in the labor force. Meanwhile, a rather anemic rate of job growth in Wisconsin was matched by an even more anemic growth in that state’s labor force; the lack of job growth in Wisconsin almost certainly contributed to the low growth in the labor force, as more workers left the labor force (i.e., stopped trying to find jobs), while other potential workers declined to enter the labor force. While both states reduced unemployment rates to near historic lows, only one state—Minnesota—did so by means of strong economic growth.

The reasons for the greater rate of job growth in Minnesota relative to Wisconsin is due to many factors and cannot be attributed exclusively to more enlightened and progressive public policy choices in the Gopher State—although North Star has posited that such choices were likely a contributing factor. The above analysis, however, does indicate caution when considering claims of economic prosperity based exclusively on the level of unemployment and changes in the unemployment rate. In Minnesota, the decline in the unemployment rate denotes an economic success story—at least in comparison to other states. In Wisconsin, not so much.

 

*This analysis begins with the start of the Great Recession so as to encompass nearly one complete business cycle (i.e., the entire Great Recession plus much of the subsequent recovery). An examination of a complete business cycle is likely to produce a more meaningful comparison of growth rates between different states than an examination of a partial cycle.

October 2017 CPS data (i.e., labor force numbers, employment numbers, and unemployment rates) are preliminary and could be revised upward or downward in subsequent data releases. However, subsequent revisions to these preliminary numbers are unlikely to alter the gist of the above analysis.