Southern U.P. finding its legs, looking for workers

Economic transitions are often hard and slow. Maybe no place in the Ninth District knows that better than the Upper Peninsula of Michigan, which has had to grind through a long transition of dependence on resource-extraction industries like mining and forestry. It’s difficult to know where exactly the U.P. is on the recovery pendulum, but a recent visit to its southern region showed numerous signs of long-awaited growth.

Minneapolis Fed President Neel Kashkari traveled there in late May to hear directly about business and community conditions in the U.P. and particularly the south-central region of Delta and Menominee counties. While in Escanaba (the seat for Delta County), Kashkari met with more than 125 people from a wide cross section of regional stakeholders, including business owners, leaders from the Hannahville Potawatomi Indian Community, workforce development officials and community leaders.

On the surface, economic conditions in the region still have room for improvement. While unemployment across the U.P. has declined considerably in recent years, it still sits around 7 percent, well above both Michigan and national levels. The south-central U.P. has followed this general trend, though Menominee County dropped to 5 percent unemployment this spring (Chart 1).

Maybe more concerning is the fact that the U.P. has been steadily losing population, with some evidence that the trend is accelerating, especially in western counties. Population loss has been marginally slower in Delta and Menominee counties (Chart 2).

Total employment levels in Delta and Menominee counties have been flat since 2010. That’s both bad and good news. Job growth is generally the norm in healthy economies. But given the pernicious decline in both population and labor force, in some ways, stable job levels are a U.P. success story.

Still other indicators—confirmed by dozens of local sources—suggest a strengthening regional economy. For example, officials with the Hannahville Potawatomi Indian Community were very upbeat about casino operations and the positive effects they have had on the tribe and its members. The Island Resort and Casino in nearby Harris, Mich., has been doing well, tribal leaders said. Casino revenues have grown consistently, and the resort opened a second championship-level golf course.

Tribal leaders tied that success to their priority of first taking care of casino operations and reinvestment needs, and funding tribal operations afterward. Consistent tribal governance and leadership have been critical in achieving this and other long-term sustainability goals. Chairman Kenneth Meshigaud has been in office for more than three decades; previously, leaders typically served only a few years. This leadership stability has helped hold annual tribal spending increases to 3 percent or less for 17 consecutive years. Tribal officials also noted that the tribe has become more sophisticated and successful in identifying and securing government grant money to fund tribal operations, which relieves pressure on casino profits to fund tribal programs.

Jobs are plentiful and growing at the casino. Said one tribal leader, “The opportunities are there. If you want to work, we have a job.” He added that the casino had a $10 minimum wage and often paid $1 more per hour than similar jobs in the region. Many jobs are part time, however, due to the cost of benefits, as well as the timing of peak activity at the casino over weekends and during warmer months.

But strong hiring demand was not limited to Hannahville and the casino. Data from Michigan Works showed 4,200 job postings across the U.P. in April, an increase of almost 30 percent over a year earlier. Anecdotes about job growth were also plentiful in Escanaba. Numerous business leaders told Kashkari they were looking for workers and that business overall was good. Job growth would be stronger—across Escanaba and the U.P.—if they could only find qualified employees. The owner of a waste-hauling business said operations had grown substantially in recent years and current business activity was robust. “But now you can’t find drivers. It’s tough to find anybody.”

In fact, one of the perplexing challenges in the region is the disconnect between high unemployment and businesses desperate for workers. The matter might be even worse than it appears on paper, as some evidence suggests there is a significant pool of working-age adults who are not in the labor force at all, and thus not counted by official statistics.

Local contacts cited numerous reasons for this disconnect between available jobs and the nonworking population. One reason likely stems from wages that have historically been lower than state or national averages; since 2010, median inflation-adjusted wages in Delta and Menominee counties have actually declined (Chart 3).

Like elsewhere, opioid and other drug addiction is also a problem. In December, the city of Escanaba joined more than 100 other municipalities in a nationwide mass lawsuit against manufacturers of pharmaceutical opioids in an effort to curb marketing of these products.

Numerous contacts pointed to the preponderance of people receiving government assistance and the “cliff effect,” whereby small increases in earned income can mean big cuts in food, housing and other government assistance received by households. One manufacturer told Kashkari that he had a worker turn down a $2 an hour raise because it would have meant an even larger cut in government assistance to the worker.

Working-age disability has also played a role. In Delta and Menominee counties, roughly 4,200 adults are on two federal disability programs (Social Security Disability Insurance and Supplemental Security Income), an increase of about 60 percent since 2000 (Chart 4). These programs cover developmental (life-long) disability as well as disability incurred at some point, typically during working-age years. The large majority of enrollment growth is among working-age recipients. Yet another 1,400 military veterans in the two counties currently qualify for at least partial disability benefits.

At face value, these three federal disability programs involve 17 percent of eligible workers from the local labor pool. It’s unknown how many disability recipients work, and to what extent. But the very design and intent of disability benefits is to fill a work (and related income) gap created by a disability. Programs typically have tight thresholds for earned income (for SSDI, about $1,200 a month) and significant disincentives for exceeding income caps, including the total loss of stipends and medical care (typically Medicaid). Among those who qualify for disability, only a tiny fraction ever leave its enrollment.

Other obstacles also impede labor force participation—as one official said, “There is a lot of [untapped] capacity, but a lot of barriers.” Workforce development professionals told Kashkari that a lack of mental health support, drug and alcohol treatment, affordable daycare and transportation, and even empathy from employers were also major obstacles to transitioning underemployed individuals into sustainable, well-paying careers. “There are always so many underlying layers” when it comes to underemployment, said one local source. “Culturally, we are in denial, and so are employers. [Many] haven’t changed their views on employment in 25 years.”

But some believed that labor scarcity is forcing employers to rethink how they approach hiring, particularly among certain workers they otherwise would have avoided, like those with criminal records and drug users. For example, some businesses were rethinking drug tests for jobs where public safety protocols did not come into play.

The U.P. still has a lot of economic stake in legacy industries like forestry and mining. In fact, the most notable—and controversial—near-term opportunity for significant economic growth involves a proposed gold, zinc, silver and copper mine at the very southern end of Menominee County. Mine owner Aquila Resources says the mine would create thousands of jobs and $20 million in annual tax revenue, along with more than $150 million in annual economic spillovers. Opponents point to its location immediately adjacent to the Menominee River that divides the U.P. and Wisconsin, fearing contamination of a major regional asset.

Sand Point Lighthouse is one of a growing number of tourist attractions in the Escanaba region.Chris Long/Minneapolis Fed

But in the end, long-term growth in the region arguably depends on what else is developed there. Tourism has picked up in the region, but its seasonality and modest wages make it a better economic supplement than an anchor.

Vicki Schwab, director of the Delta County Economic Development Alliance, said businesses in the region “are experiencing cautious optimism and managed growth,” with local manufacturing firms seeing growth in exports. Manufacturing and other businesses also told Kashkari that their 2018 outlook was positive.

But Schwab added that “talent is a top concern for the majority of businesses we work with,” and efforts are afoot with local education and workforce partners to develop a better workforce and talent pipeline, including programs to expose school-age students to local manufacturing, transportation and other well-paying career opportunities with immediate openings.

The Hannahville Potawatomi Indian Community offers a useful portal to the continuing economic transition in the region. The tribe has been stressing higher education to its members because its professional needs—lawyers, accountants, managers—have been increasing.

“We’re working hard to steer people into careers,” said a tribal official. “You used to work for the tribe as a job. Now you work for the tribe as a career.”