Last week, I asked why Minnesota’s per capita income growth has lagged that of the United States since 2014. Using a technique called “growth accounting,” which breaks down the growth rate of per capita GDP into its components — the per capita growth rate in human capital, physical capital, and Total Factor Productivity (TFP) — I found that, “across each of the sources of real per capita GDP growth, Minnesota performed worse than the United States generally.”
To find out why that is, we can look at the data on each of these sources in turn.
Human capital
The first of our sources is “human capital,” which is the quantity and quality of the labor performed in an economy.
We estimate the total stock of human capital in each state (H) by multiplying the number of people employed (E) by the average number of hours each worker works annually (hours), by the average human capital — or skills — possessed by each worker arising from education (eEduc), by the average skills each worker possesses arising from experience (eExp). The first two components — employment and hours — can be thought of as “raw labor,” and the second two — skills arising from education and experience — as “knowledge capital.”
We then divide this total stock by the population (N) to derive a per capita number (h). Mathematically, if we use the growth rate of employment as a share of the population (E/N) along with the growth rates for hours and skills, we can break down the growth rate of human capital per capita into its components. Finally, we can take this a step further and decompose changes in the employment ratio into those coming from changes in employment or population as in the following equation:
Using this method, Table 1 breaks down the unweighted growth rates of Minnesota’s and the nation’s per capita stocks of human capital between 2014 and 2024 into the shares derived from the raw labor and knowledge capital components. Over that period, human capital per capita in Minnesota decreased at an average rate of -0.1% annually while it increased for the United States generally at a rate of 0.6%.
Table 1: Growth Accounting for Minnesota and the United States, Human Capital
Looking first at raw labor, we see that population growth in our state matched employment growth, so the employment ratio didn’t increase and there was no increase in per capita human capital from this source. For the United States generally, however, the average annual growth rate of employment outstripped that of the population by 0.5 percentage points, so the national employment ratio rose, and this raised per capita human capital. While average annual hours worked remained flat for the United States generally, in Minnesota it fell by -0.2% annually, on average, and this was a downward pressure on per capita human capital.
Turning to knowledge capital, we see that education per worker increased in Minnesota at an average annual rate of 0.1% but that this was half the rate for the United States. On experience per worker, our state performed better. While there was no growth here in Minnesota, this was still better than the national performance, which saw an average annual decline of -0.1% annually.
We have, though, only rolled the stone back another step. To see why these numbers are what they are, we will dig into the data underlying the estimates.