Is it realistic for rural areas to close the wage gap? Probably not.

By: Kelly Asche, Senior Researcher

Most of rural Minnesota is discussing ways to grow the labor force. Increasing the affordable housing stock and childcare capacity are two primary strategies being discussed at the legislature. One of the underlying issues that makes these two strategies difficult in rural areas is lower wages. These lower wages in rural Minnesota compared to metro areas of the state make the high costs of building more housing and providing high-quality childcare untenable.

A common comment we hear is that employers in rural areas should be paying higher wages, based on the belief that free markets should be able to solve this problem: if we pay people more, they will show up. This is a simplistic way to look at the problem and an unrealistic solution, however. The following analysis is one part of a longer series of posts looking at wages in rural Minnesota.

A gap in wages

There is definitely a gap in wages between the seven-county metro and rural areas. Figure 1 shows that between 2001 and 2022, the seven-county metro has had a consistent $250 to $500 higher average weekly wage compared to other areas of the Minnesota.

Figure 1: Since 2001 there has been a $250 and $500 gap between the seven-county metro and the rest of Minnesota. Data: MN DEED – QCEW

The interesting part is that regions outside of the seven-county metro have experienced more growth in average weekly wages than the Twin Cities. In fact, Figure 2 shows that the largest increases have occurred in some of our more rural areas of the state—the average weekly wage grew by 106% in the Southwest and by 101% in the Northwest region, while the seven-county metro region grew by only 84%.

Figure 2: The largest growth in average weekly wages has occurred outside of the seven-county metro. Data: MN DEED – QCEW

Is closing the wage gap realistic?

If the largest increases in average weekly wages are occurring in rural Minnesota, why doesn’t the gap between these regions and the seven-county metro close? It’s because a change in a smaller amount always yields a bigger percent change than the same change in a larger amount.

The 84% increase in weekly wages since 2001 in the seven-county metro is a change of $673. This is significantly more than Southwest, which had the largest percentage increase at 106%, but it only equaled a $503 increase.

So, what sort of an increase would it take for rural wages to close the gap? Let’s use Northwest as an example. In 2001, the average weekly wage was $472. It grew to $948 by 2022—a 101% increase that equaled only $476. If Northwest were to close the wage gap between itself and the seven-county metro, it would have to go from $472 to $1,476. This would be a 213% change. And that’s if the metro only grew it’s wages by 84%.

Is this realistic? Can a rural region increase its wages by over 200% in twenty years? Probably not. And even if it did, it’s likely the seven-county metro would experience similar wage increases, because the state’s economy is very interconnected.

Wage statistics are complicated

This was a very simple way to compare wages across regions. And even though it shines a light on whether it’s realistic for the gap in average wages to close across the state, it doesn’t explain anything about the occupational and industrial diversity within each region. Metro regions typically have a larger proportion of their workforce in higher paying occupations and industries such as the financial sector, which drives the averages higher in the Twin Cities metro. Rural areas tend to have a larger percentage of their occupation and industrial employment in sectors that are more middle income. We will explore this more in future posts, but the key takeaway is that the phrase “employers need to increase wages” to solve some of these market failures is too simplistic and unrealistic.