What America can learn from cities with super-low unemployment

4.1% unemployment, lowest in 17 years
4.1% unemployment, lowest in 17 years

In one sense, Ames, Iowa, has something any other city might envy: An unemployment rate of 1.5%, the lowest in America.

Buoyed by Iowa State University's main campus, this metropolitan area with about 100,000 people just 40 miles north of Des Moines has long had a tighter-than-average labor market, meaning that almost everyone who wants a job can find one. But there's a downside to having that many jobs: Businesses looking to expand or relocate have a tough time finding employees.

"If a company was doing a site search, and were basing it strictly on the unemployment rate, we would be out every time," said Dan Culhane, president of Ames' Chamber of Commerce. They're still able to find the workforce, Culhane explains, but it usually requires luring someone with the promise of higher pay or recruiting from out of town.

Ames' mixed blessing is an extreme version of what the U.S. may face should unemployment sink further past its current 16-year low of 4.1%: An undersupply of workers readily available for the work that needs doing. Economists at Goldman Sachs expect the rate to get as low as 3.3% by 2019, even if wages rise enough to draw people who had given up looking for jobs following the Great Recession back into the workforce.

chart economic health wages

That wouldn't be as much of a problem, of course, if unemployment were uniform across the country. There are still pockets with much higher unemployment rates, particularly in cities in California and New Jersey, where the housing bust hit hard.

So why don't people just relocate from those cities to places like Ames?

Related: How the federal tax overhaul could reshape state budgets

One big reason unemployment is low in the upper Midwest: It's hard to get people to move there.

The very tightest job markets are overwhelmingly concentrated in a small part of the country. Out of the 20 metro areas with the lowest unemployment rates in November 2017, 14 are in Minnesota, Iowa, North Dakota, and Wisconsin.

Those regions have seen a run of good economic luck. Most of them didn't overheat during the housing bubble, and thus didn't fall too hard during the crash. As the recession wore on, agricultural areas were bolstered by high prices for corn and soybeans. These economies relied on some manufacturing, but few whole towns depended on it or suffered terribly as factories disappeared, like those in Michigan and Ohio. The upper Midwest has also largely managed to escape the opioid epidemic that has swept through the rest of rural America.

Meanwhile, North Dakota's oil-rich Bakken shale formation drew people from its neighboring states during the fracking boom, and many of them stayed even when oil prices declined and the frenzy faded — leaving fewer workers to go around overall.

However, not all the jobs in the upper Midwest pay as well as working on an oil rig. Of the 1,700 jobs openings on the WorkInAmes.com job site, many are hourly positions in hospitality, transportation, or retail, paying between $10 and $20 an hour.

That can be a good thing. Such jobs don't require as much education, which helps keep unemployment low because the skills of the local labor force fit the work available — unlike in very high-skilled markets like Washington D.C., which have large populations that lack the education necessary to compete for the specialized jobs that exist there.

But those middle-skilled jobs don't usually pay enough to convince someone to move from, say, Merced, California or Ocean City, New Jersey. In fact, plenty of cities with low unemployment also have high poverty rates, since the jobs that are available still don't pay enough to live comfortably.

chart economic health college towns

Outside North Dakota, the Upper Midwest has seen relatively slow growth, in part because it also hasn't drawn the immigrant population that settled in border states and big coastal cities.

"The Bakken was an interesting anomaly, because wages were so high, it literally just sucked people in," said Ron Wirtz, outreach director at the Minneapolis Federal Reserve. "Everywhere else, you have normal labor market migration. And if you're not from the upper Midwest, it's probably a higher hurdle to move there, because of the weather."

Related: My road back from the Great Recession

Even if the upper Midwest did attract people from other areas, newcomers might not have as easy a time finding jobs.

The populations of places with super-low unemployment tend to be very white. People of color are no less willing to work there, said Alan Berube, deputy director at the Brookings Institution Metropolitan Policy Program. There are just fewer of them in the applicant pool to discriminate against. In more diverse places, white hiring managers are more likely to discriminate against people of color, which can keep a large chunk of the population on the sidelines.

In the homogenous upper Midwest, "you're just not going to have a lot of labor market discrimination, because the people doing the hiring are going to look like the people applying," Berube said. "It's not just Minnesota nice. It's sameness. I think sameness can work to alleviate labor market friction that other parts of the country are going to exhibit."

chart economic health map

Under those circumstances, cities in Minnesota, Iowa, North Dakota and Wisconsin are doing their best to lure the people most willing to give the middle of the country a try: People who already have a connection to it.

Related: The great debate: Will tax cuts trickle up or down?

Mankato, a southern Minnesota community with the nation's second-lowest unemployment rate, just launched a web site, MoreMankato.com, with 360-degree views of the city. They're preparing a social media advertising campaign targeting alumni from nearby universities, and helping local employers recruit from within the region.

"We are looking at areas of significant unemployment and letting them know that we do have job vacancies available," said John Considine, director of regional business intelligence at Greater Mankato Growth, the town's economic development organization. "We have to help people understand that we're not a frozen tundra wasteland."

Ames is doing that, too. But in convincing the city's student population to stick around, Culhane said he could use a little help from Washington in the form of immigration reform, which would allow those who came from overseas for their studies to work in the U.S. after they graduate.

"We've got a lot of really bright people who are from around the globe who are educated here, and we want them to stay," Culhane said. "We need them to stay. "

Personal Finance


CNNMoney Sponsors