The Changing Economic Picture of Northeast Minnesota

by Drew Digby - drew.digby@state.mn.us
August 2009

A recession has come, and, for once, Northeast Minnesota is not at the top of the list of hardest-hit locations with thousands in line for jobs and support. That is not to say that the recession has not hit hard – Hibbing reported 18.7 percent unemployment in June – but in other parts of the Northeast the effect has been much milder. That is raising a lot of questions for regional leaders about their next steps in economic and workforce development.

While mining and manufacturing have been hard hit, parts of the region with significant health care and higher-education facilities have been spared the worst of unemployment and economic downturn. At one end of the scale has been Duluth, where unemployment was 8 percent in June. At the other end are mining towns like Hibbing and Virginia, where unemployment was 18.7 percent and 17 percent respectively.

But determining if this means the area needs to change its focus for economic development and workforce development is not a simple task. Regional leaders working on a strategy to create a stronger strategic plan that better aligns workforce development with economic development are not willing to give up on the industries that have been hardest hit in the current recession.

Mining is a great example. According to the Quarterly Census of Employment and Wages, employees in mining in Northeast Minnesota earned an average weekly wage of $1,518 in 2008 or nearly $79,000 a year (see Table 1). Yet in June 2009 more than 2,000 workers in the mines, or more than half the total of 3,926 in 2008, filed continuing claims for unemployment.

The Northland Works Regional Economic Development Strategy Project, funded by a Regional Innovation Grant from the U.S. Department of Labor, has brought together economic development and workforce development leaders from across Northeast Minnesota and Northwest Wisconsin to work out a strategic plan to align resources moving forward better. What to do about mining, and the role it should play in economic development and workforce development with its high wages and strong potential is among the key issues facing the group.

In addition to the high wages – and heavy layoffs in the current recession – mining is also a key issue to the region because many of the companies involved in mining have already invested or plan to invest up to $3.5 billion to upgrade and expand their operations on the Iron Range. Some of the investments are being held up for environmental review. Polymet, for example, wants to build a $600 million non-ferrous open-pit mine that would extract copper, nickel, cobalt, palladium, platinum, and gold. Other projects are on hold or moving slowly until the demand for iron ore returns when the recession ends. But some upgrade projects have been completed and others are continuing.

For workforce planners the potential expansion of mining has been a key concern, in part because of the age of the workforce. For example, according to Quarterly Workforce Indicators for St. Louis County 23.5 percent of the workers in the mining industry were over the age of 55 in the third quarter of 2008, compared to just 14.7 percent in all industries in the county. Finding qualified replacement workers has been a big concern for the industry, but with the economic downturn the question turns to when those new workers might be needed. How much focus should economic development and workforce development officials put on industries like mining? Is it a better use of time to focus on other industries that have grown in the shadow of the natural resources economy?

One option is to focus on industries that may have sprung up from original strengths in the natural resources and manufacturing economy but have expanded beyond it. A good example of this is architecture and engineering firms. In Northeastern Minnesota, between 2003 and 2008 these firms’ employment grew by 57.8 percent, in part by servicing developments in the mining industry (see Table 1). But some of the biggest players have moved far beyond the mines and specialize in the designing and engineering of environmentally friendly buildings. These firms are strongest in Duluth where architecture and engineering employment grew by 72.4 percent compared to total employment growth in the city of 4.3 percent.

To determine how to align resources better, the Northland Works leadership group has been trying to get a better understanding of the changes in the region’s economy by using data compiled by the University of Minnesota Duluth’s Bureau of Business and Economic Research as well as the Minnesota Department of Employment and Economic Development (DEED) and Wisconsin’s Bureau of Economic Advisors. The most basic finding is that many of the industries that have long driven the region’s economy, while still important to total economic output, are employing far fewer workers than they once did.

For example, UMD’s Bureau of Business and Economic Research shows that while mining makes up 8 percent of the total dollar value of sales in the region, it makes up only 2 percent of total employment (see Table 2). The most extreme example of the output to employment equation for local planners: the Murphy Oil refinery in Superior, Wisconsin, employs about 150 workers, but has sales of $780 million.

Being at the other end of the scale, though, doesn’t mean that the regional leaders have given up on those industries. The second-lowest ranking industry for output per worker was performing arts companies, and several members of the Northland Works strategy group have been pursuing arts-based economic development projects in parts of the region. Their rationale is that investment in the region is driven in part by people’s love of Lake Superior and the countryside, and enrichments like the arts and natural environment will help the region draw more investment in a variety of industries. They have proposed investing in the infrastructure of the region – both bricks and mortar issues like roads, bridges, and broadband and in the cultural, artistic, and natural resources. Hard choices face the leaders of the new economic development strategy.

Many of the economic development leaders are still big believers in finding ways to build on the area’s existing manufacturing and transportation strengths. They want to find a way to attract a piece of the growing alternative energy market either through manufacturing, producing energy, or servicing wind and solar energy producers.

Others are looking to find ways of building on the growing education levels of workers in the region. In Duluth, for example, the number of residents 25 years old and higher with a bachelor’s degree has risen from 22.5 percent in 1990 to 31.9 percent in 2007. Some of the leaders are worried that the rest of the region is not following suit and that educated residents are leaving the area.

The relative mildness of the recession, though, has led more people to stay in the area. According to DEED’s Local Area Unemployment Statistics, the adult labor force in Northeastern Minnesota grew 1.4 percent in the 12 months ending in June, adding 2,332 people. While labor force numbers often go up in a recession, Northeast’s numbers were higher than the state’s increase of 0.9 percent.

Generally, what the leaders have found, however, is that while mining, wood and paper products, and manufacturing are still key to the total economy of the region, they have been employing fewer and fewer workers. Between 2002 and 2009 the total number of employees in the combination of mining, manufacturing, and agriculture and forestry dropped by 11 percent, falling from 15.2 percent of the workforce to just 13.4 percent of the workforce.

The Northland Works strategy group is now trying to assess the drivers of the regional economy. It plans to start meeting with representatives of key groups to assess opportunities in a range of fields in the near future.

Some of the initial conclusions of the leadership team, however, are driving the work:

• With the current decline in home construction, the increase of new technologies and the green movement, the forestry and wood products industry needs to be pushed to consider innovative manufacturing techniques and new uses for fiber products.
• The area’s “Creative Cluster” is different from other regions and focuses on architecture and engineering services, information technology, and business and financial services but has significant employment in health care and higher education.
• The kinds of manufacturing that will continue to be successful in the region will require a substantial investment in new technology, require a highly skilled workforce, and may not employ the same numbers of workers as the old manufacturing base. But those same factors, which boil down to extremely high productivity in advanced manufacturing, will also help the industry thrive competitively.
• The area already has a strong entrepreneurial support network, through the combination of Small Business Development Centers and the Northeast Entrepreneur Fund, but it needs to continue to develop additional resources for “second-stage” businesses, those that are expanding in the 10-50 employee range.

Much has already been made of the development of knowledge industries across Northeastern Minnesota. In the two-state 17-county region covered by The Northland Works project, knowledge industries have already risen from 24.4 percent of the workforce in 2003 to 26.2 percent of the workforce in 2008, and projections show their share continuing to rise.

Thus far The Northland Works group has agreed they need to use the data on what drives the economy to make more knowledgeable investments for the future. A series of proposals will be unveiled throughout the fall for consideration by a large number of leaders from a variety of stakeholders ranging from business and union leaders to public officials and the general public. The economy 10 years from now will continue to have a very different employment-to-output look.