State and national job markets: Why they’re on different paths

From economist Louis Johnston, St. John's University | College of St. Benedict

The latest data on unemployment in Minnesota will be released tomorrow. In June, the unemployment rate was 6.8 percent in Minnesota and 9.5 percent nationally.

(8/19 UPDATE: Minnesota's July rate came in at 6.8 percent, unchanged from June.)

The unemployment rate has behaved very differently in Minnesota than in the nation as a whole.

National unemployment rose above 9 percent in May 2009, reached a peak of 10.1 percent in October 2009, and fell to 9.5 percent in July 2010.

By contrast, Minnesota's unemployment rate peaked in May and June 2009 at 8.4 percent and fell steadily since then. (Click on the chart for a larger view.)

Why have the state and national labor markets behaved so differently?

A good place to start is to examine types of unemployment and examine their causes. Economists divide unemployment into three broad varieties: frictional unemployment, structural unemployment, and cyclical unemployment.

The function of the labor market is to match available jobs with available workers. If all jobs and workers were the same, or if the set of jobs and workers were static and unchanging, this matching process would be quick and easy.

In the real world, however, this process takes time and thus workers will be unemployed while firms and workers try to make good matches.

This process creates two types of unemployment even when the economy is operating at normal levels. Frictional unemployment is the short-term unemployment associated with this process. Structural unemployment is the long-term and chronic unemployment created by long-term mismatches.

By contrast, cyclical unemployment is the extra unemployment that occurs during a recession. Recession-induced declines in sales force firms to reduce their hiring and even fire currently employees.

The unemployment rate was about 5 percent in the U.S. and Minnesota before the recession. Almost all of this unemployment was either frictional or structural.

Since December 2009, frictional, structural, and cyclical unemployment have all risen.

It is too early to say with certainty why Minnesota has been done better than the nation as a whole. However, when the dust settles it will probably be because of two factors.

First, cyclical unemployment likely fell more rapidly in Minnesota than in the rest of the country.

The 2008 and 2009 stimulus plans in may have had a bigger effect on Minnesota than on the national economy. Or, the mix of Minnesota industries might have recovered more quickly from the financial crisis of 2008 than did other state economies.

Second, structural unemployment did not rise as much in Minnesota as it did nationally.

For instance, the collapse of General Motors, Chrysler, and to a lesser extent Ford decimated labor markets Michigan, Ohio, Wisconsin, Illinois, and Indiana.

Many of these jobs are never coming back, and this will keep structural unemployment high in these areas.

The collapse of the housing bubble also contributes to structural unemployment, since building activity will probably not approach mid-2000s levels for many years.

Carpenters, electricians, and the like will have a difficult time matching their skills with available openings; in many cases, these job-seekers may have to leave this sector and retrain for work in other industries.

Johnston teaches economics at St. John's University and the College of St. Benedict and is a regular voice on MPR News.

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