Putting Minnesota’s record-low unemployment numbers in context

Minnesota set a record in June with an unemployment rate of 1.8%, the lowest number recorded for any state ever since the data began to be collected in 1976. While this is good news, the headline unemployment number must be put in proper context. In Minnesota, and across the country, payroll employment and labor force participation are still down considerably from before the pandemic. Policymakers should resist the temptation to treat a low unemployment rate as proof the economy is overheating, and instead should continue pursuing policies to bring workers into the workforce, raise wages, reduce barriers to employment, and promote racial and gender equity.

The unemployment rate is an important measure, but it doesn’t tell the full story

A 1.8% unemployment rate means that only 1.8% of Minnesotans looking for jobs report that they’re unable to find one. That’s good news. And it’s not just Minnesota that’s doing well. The June 2022 unemployment numbers also showed Nebraska at 1.9% unemployment, New Hampshire and Utah at 2.0%, and Vermont at 2.2%. Eighteen states, in total, had a June unemployment rate below 3%.

And yet, every single one of these states still had fewer jobs in June than before the pandemic. EPI’s Economic Indicators page shows that the United States is still down 524,000 jobs from its pre-pandemic peak. If we account for population growth over the last 2.5 years, the country has 3 million fewer jobs than we would expect if pre-pandemic trends had continued.

Why the discrepancy between the unemployment rate and the number of jobs? The unemployment rate only considers two groups—people with jobs and people actively looking for a job who can’t find one. These two groups are what the Bureau of Labor Statistics (BLS) officially considers the labor force. The labor force does not include people capable of working who, for one reason or another, aren’t actively trying to find a job. With each release of unemployment data, the BLS also publishes a labor force participation rate (LFPR)—the share of the civilian, non-institutionalized adult population that is in the labor force (i.e., those currently employed or actively seeking work.)

In Minnesota, the LFPR in February of 2020 was 70.8%. This was considerably above the national average of 63.4%, reflecting Minnesota’s strong employment numbers. By June of 2022, however, Minnesota’s LFPR had dropped 2.3 percentage points to 68.5%. That is larger than the national drop of 1.2 percentage points, from 63.4% to 62.2%. This means that while there is a historically low share of Minnesotans who say they’re looking for work and can’t find it, there is also a substantial share of adults in Minnesota who, since the pandemic hit, are no longer working and not looking for work. In fact, Minnesota’s decline in labor force participation from February 2020 to June 2022 is the 9th largest in the country. Several other states with low unemployment rates—such as Vermont, New Hampshire, and Wyoming—have also experienced notable declines in labor force participation during the pandemic.

However, there is reason to believe that there is plenty of room for the LFPR to grow. In June, 73.1% of people who were newly employed were not counted as part of the labor force the month before. That is, according to the data, nearly three-quarters of the people who got a job in June weren’t looking for a job in May. This strongly suggests that there are many people interested in re-entering the labor force if there are good jobs available to them, jobs that allow them to balance work and care responsibilities, and jobs that adequately protect their health and safety.

Moreover, a low overall unemployment rate hides very real racial employment disparities. Unemployment for Black workers continues to run nearly twice as high as that for white workers, and Hispanic workers have an unemployment rate 30% higher than white workers. These disparities persist—in both employment and wages—even when controlling for education and qualifications.

The right policy decisions can increase labor force participation and fight inflation at the same time

With inflation at its highest point in years, it has become tempting for policymakers to blame rising prices on a tight labor market—an impression that is strengthened by looking only at low unemployment rates. However, looking at the whole picture makes clear that labor market tightness isn’t what’s driving inflation.

EPI’s Josh Bivens has explained in detail how current high levels of inflation are the result of global supply-chain problems caused by the pandemic and corporations exploiting the situation to extract larger profits than normal. If low unemployment was a primary driver of inflation, we would see an increase in wages above the rate of inflation, but the opposite is happening. Wages, far from contributing to price increases, are lagging behind price increases, and wage growth is decelerating significantly.

Given these dynamics, policymakers should prioritize policies that bring more workers into the labor force. This would not only make state labor markets unambiguously stronger but would also help ease any possible impact that tight labor markets are having on prices.

One of the key reasons why so many workers are still out of the labor force is because of a lack of child care, as well as the need to care for elderly family members. Investments in the care economy would create more opportunities for workers to enter the job market.

Investments in affordable housing would also relieve pressures on family incomes, and potentially allow more workers to live in areas with better job opportunities. This would be especially helpful for reducing the nation’s persistent racial disparities, creating more opportunities for Black and brown workers to become homeowners and build generational wealth.

Criminal justice reform would reduce barriers to employment for individuals affected by incarceration and especially help workers of color, who are disproportionately likely to have criminal records used as a reason to deny them employment.

A key way to raise labor force participation is to implement policies to increase worker wages and worker power. Simply put, higher wages attract people to the workforce. For example, shortages of teachers, school bus drivers, and other education employees are directly tied to the low wages of those jobs. States must also set higher wage benchmarks for home health care workers, too, as demand for those jobs is set to skyrocket in coming years. Additionally, supporting workers’ rights to organize unions is a vital tool in building a strong economy for all Americans.

Last, but by no means least, the minimum wage needs to be increased. Many states and cities have increased their minimum wages in recent years, with no discernible impact on the price of gas and oil, food, cars, or semiconductors. A federal $15 minimum wage would lift wages for tens of millions of low-wage workers across the country. In terms of purchasing power, the federal minimum wage is at its lowest level since 1956. A higher minimum wage could make jobs more attractive to those sitting on the sidelines of the labor force.

In short, the country still needs policies that bring more people into the workforce, pay higher wages, and reduce racial disparities. Minnesota’s record-low unemployment is good news, but it’s far from the whole story, and if policymakers ignore other contextual factors because they’re looking at one headline number, we will lose the opportunity to make lasting change to benefit workers and families.