Four takeaways from the October Economic Update

Monday’s October Revenue and Economic Update gave us some unwelcome news. The quarterly report from Minnesota Management and Budget (MMB) showed that while revenues for FY 2016 came in above projections, state revenues are starting to come in lower than expected, and forecasters have once again lowered their projections for national economic growth.

1. FY 2016 ends above projections, FY 2017 begins behind projections. FY 2016 ended on June 30, 2016, with revenues $220 million above projections; that’s $10 million less than reported in the July update. State revenues from the first quarter of FY 2017 were $97 million, or 2.1 percent, lower than projected in the February 2016 Economic Forecast adjusted for legislative changes.

2. Lower national economic growth projected for 2016 and onward. Expected U.S. economic growth for 2016 has been lowered to 1.4 percent. Real GDP growth is then expected to be above 2.2 percent each year from 2017 to 2019; these are lower rates of growth than prior projections. These new growth projections are associated with uncertainty around the outcome of the presidential election, whether the Federal Reserve will raise interest rates, and around OPEC’s oil production and pricing decisions. The impact of Hurricane Matthew is another source of uncertainty.


3. Unemployment remains low. Despite the slower economic growth projections, the economy is expected to continue to see low unemployment of 4.9 percent, a level that traditionally has been characterized as “full employment.”

4. This is the last update before the November Economic Forecast. The quarterly economic updates are helpful in giving us an idea of how revenues and the national economy stack up to previous projections. However, for a fuller picture, we look to the more comprehensive November and February economic forecasts, which project both state revenues and expenditures. The November Economic Forecast will give Governor Mark Dayton the baseline information he needs to put together his proposed budget for the FY 2018-19 biennium that he will release in January.

-Clark Biegler

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What matters more for competitiveness: rankings or results?

It’s a good time to visit public finance expert Peter Fisher’s comprehensive work over at Grading the States, which digs deep into the details of business climate rankings and what does – and doesn’t – matter for building prosperity in the states.

That’s because the Tax Foundation has released the latest edition of its State Business Tax Climate Index, which it argues measures elements of a state tax system that impact its business competitiveness. As Dr. Fisher reminds us, there are serious flaws with this index that make it a poor guide for policymakers – and can even cause them to take their eyes off the ball in terms of what really matters for economic prosperity.

The State Business Tax Climate Index is not a measure of the level of taxes paid by businesses. If it were, it would likely put Minnesota in the middle of the pack. That’s where Ernst & Young ranked Minnesota in a report it prepared for the Council on State Taxation that measured what share of each state’s private sector gross state product went to state and local business taxes.

This index also doesn’t measure “competitiveness” by looking at economic performance. There are a myriad of data points that can be used to measure a state’s economic performance, but here are just a few:

  • Minnesota ranks 2nd for the number of Fortune 500 companies per capita.
  • Minnesota ranks 2nd for our labor force participation rate and our 4.0 percent unemployment rate is better than the national figure.
  • Minnesota ranks 10th for median wages and 13th for median household incomes.

Those rankings paint a picture of Minnesota as having a relatively strong economy with room to improve further. That picture doesn’t square with Minnesota being ranked 46th by the Tax Foundation’s index, which only measures to what degree a state has the tax policies that the Tax Foundation prefers and has incorporated into its index.

We shouldn’t be concerned that Minnesota doesn’t do well measured against this particular set of tax policies; Dr. Fisher finds the index and its component parts are a “poor measure of growth potential.” There are a number of concerns about how the index is constructed that raise questions about its utility; Grading the States, and former Federal Reserve Bank of Boston economist Robert Tannenwald are two good resources for readers wanting to dig into those details.

It seems to me that the ultimate result of being “more competitive” should be having a strong economy that translates into economic opportunity and high living standards for the state’s residents. And while Minnesota has some serious work to do to become a state where economic opportunity is truly available to everyone, we’re doing relatively well on broad measures of economic performance.

Policymakers are right to think about what we as a state should be doing to support economic growth and broader prosperity. That means taking a broader view than just taxes. Dr. Fisher notes the important role of public sector research and development, investments in education, and technical assistance for entrepreneurs in promoting economic growth. He also notes that “public policies that reduce risk increase the opportunities for entrepreneurial activity” – that when families have health insurance and affordable health care, and they aren’t saddled with too much college debt, that provides the baseline of economic security that can enable individuals to take the risk of starting a new business. These are the kinds of public investments that too much fixation on “tax competitiveness” can put at risk.

-Nan Madden

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Policymakers’ equity work makes strides, but much more to do

From Governor Mark Dayton’s State of the State address to the final bills put together at the very end of the 2016 Legislative Session, equity was a major theme at the Capitol this year. But even with the progress made, it’s clear that Minnesota should go further.

State policymakers are increasingly aware that Minnesota is a place where many people are not benefiting from the state’s economic performance. For one, despite overall prosperity, economic disparities remain between white Minnesotans and Minnesotans of color. But economic opportunity should be available to Minnesotans regardless of their race, gender, or where they live. Especially in the context of Minnesota’s tightening labor market and an imminent labor shortage, it’s crucial for the state’s economic future that all Minnesotans can reach their fullest potential in the economy.

The governor proposed allocating $100 million in total for equity proposals in his budget. The Senate followed suit, establishing a Subcommittee on Equity and including $91 million in FY 2017 in their budget to expand opportunity to more Minnesotans. Both of these proposals were for one-time funding. The House also advanced proposals intended to promote equity, but they were not part of a specific equity bill. The final budget agreement passed this session included $35 million in FY 2017 and $35 million for the next biennium in equity provisions that are intended to reduce the state’s economic disparities. FY 2017 funding includes:

  • $6.9 million in grants for the Latino, Somali, Southeast Asian and American Indian communities to address educational, employment and workforce disparities, and to support youth;
  • $1.5 million to promote high-wage, high-demand non-traditional jobs for women;
  • $1 million for a Minnesota Youth at Work Competitive Grant Program that will connect youth with employment opportunities, targeted toward youth of color and others who face barriers in the job market;
  • $1 million for Pathways to Prosperity, which helps prepare low-wage workers for high-demand jobs; and
  • $500,000 for the Emerging Entrepreneurs Fund, which helps fund loans to businesses owned by disadvantaged groups, including people of color, women and people living with disabilities.

However, even with this progress, a recent report from Voices for Racial Justice finds that Minnesota has a long way to go to reach racial equity. Even though policymakers passed an important equity package, they also missed many opportunities to address issues such as:

  • Criminal justice, to create a more just and equitable system that “treats people with compassion and dignity, and that allows for second chances.” For example, this could include restoring voting rights for individuals who were formerly incarcerated.
  • Economic equity, to ensure that all Minnesotans have the opportunity to succeed. This includes increasing cash assistance in the Minnesota Family Investment Program (MFIP). MFIP supports some of Minnesota’s poorest families, but the cash grant hasn’t increased in 30 years. It also includes expanding the Working Family Credit, which supports lower-income families trying to make ends meet and makes the state’s tax system more fair.
  • Structural racism, to tackle policies, formal practices and other barriers that continue racial inequities. This could include instituting equity impact notes that assess proposed legislation on their ability to narrow or widen disparities.

Policymakers made some important strides this session to more directly address the state’s economic and racial disparities, but must come back in 2017 ready to continue this work.

-Clark Biegler

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Better jobs, higher education are 2 of 4 reasons to wish DACA a very happy 4th birthday

In 2012, President Barack Obama introduced a landmark executive action that allowed unauthorized immigrants who came to the United States as children to receive temporary deferred action from deportation and work authorization, provided they meet certain requirements. As Deferred Action for Childhood Arrivals (DACA) turned four this year, several studies look at how effective DACA has been at increasing economic opportunity, and the results are worth celebrating.

We take a look specifically at a new report from the Migration Policy Institute. Here are some of the highlights:

  1. DACA has enabled recipients to get jobs and get better jobs. Work authorization is making a difference. One survey showed over three-quarters of respondents getting a new job after enrollment in DACA, and over half getting a better paying one. Another survey showed that 66 percent “went from unemployed to employed after receiving DACA.”
  2. DACA supports advanced educational opportunities. One survey showed that almost one-third of respondents have gone back to school and are also better able to pay for their higher education because of the program’s work authorization component.
  3. Almost all DACA recipients are getting their driver’s licenses. Over 90 percent of respondents have received driver’s licenses, according to a few surveys. We’ve written about the economic benefits of a driver’s license: people with driver’s licenses are better able to access good jobs and are more flexible in the hours they can work, which can lead to higher earnings.
  4. DACA recipients feel more at home in the United States and want to more fully participate. A survey showed that 99 percent of respondents want to become U.S. citizens, though this is not currently an option for DACA recipients.

DACA is a common-sense way to recognize the contributions that immigrants are already making in our communities and reflect the investment that we have made in the young people who have grown up here. The initial evidence shows that recipients are benefiting from DACA, gaining education and job experience that enables them to better contribute to their communities.

In November 2014, Obama expanded the existing DACA program and created Deferred Action for Parents of Americans and Lawful Permanent Residents (DAPA). However, a split ruling this summer by the U.S. Supreme Court left in place a nationwide delay of Obama’s 2014 executive actions. Next steps for the executive action to proceed likely include another argument before the Supreme Court when there is a full court of nine justices again. Judging from the great success of DACA, it would be wise to expand economic opportunity to more unauthorized immigrants through Obama’s 2014 executive action as well.

-Clark Biegler

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Building a strong budget reserve is a no-brainer

A healthy budget reserve is a two-for-one deal for states, according to a new report from the Center for American Progress. When states craft responsible policies that build their budget reserves, they are better able to support their residents during an economic downturn and are able to enact progressive tax policies.

A strong budget reserve helps a state and its residents make ends meet in tough economic times. When state revenues plunged during the Great Recession, many states, including Minnesota, needed to tap into their savings to get by, much like a family would. Even with those savings, states across the U.S. ultimately made cuts in higher education, K-12, services for the elderly and people with disabilities and more. However, the report notes that “rainy day” funds, such as budget reserves, helped states avoid $20 billion in cuts during the recession including cuts to services that people rely on during economic downturns.

A strong budget reserve also enables states to build progressive tax systems. Currently, all U.S. states, including Minnesota, have regressive tax systems, meaning that low-income households pay a higher percentage of their income in taxes than high-income households. This is due in part to states choosing to rely more on certain revenue sources, like property taxes, that are relatively stable no matter the state of the economy. Unfortunately, these taxes also require low-income households to pay more than their fair share in taxes. With strong budget reserves, states can move toward equitable tax systems and absorb some fluctuation in revenue collections. We’ve seen how Minnesota has started in this direction, both in making tax changes that made our state tax system less regressive and in strengthening our budget reserve.


Minnesota Management and Budget (MMB) annually projects how much the state needs in savings to adequately prepare for downturns in the business cycle, based on factors like state revenue volatility. Their latest Budget Reserve Report recommended a target of 4.8 percent of general tax revenues, or $2.0 billion. Currently, the state has $1.6 billion in its reserve, or about three-quarters of the recommended target.

This stronger reserve amount is due to smart policy changes made in the 2014 Legislative Session, requiring that up to one-third of any positive balance in a November forecast go to the budget reserve until it reaches MMB’s recommended amount.

It’s important to continue building the state’s budget reserve to soften the shock of inevitable economic downturns and better meet the needs of Minnesotans during tough times. As Minnesota builds its reserve, policymakers should also continue its progress toward a more equitable tax system.

-Clark Biegler

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What 13 years of decreased funding for affordable child care looks like across Minnesota

When parents have consistent, nurturing care for their children, families are more likely to prosper. Unfortunately, child care is getting more expensive — so expensive that many jobs don’t provide a paycheck big enough to cover both the basic necessities and the amount of child care that families need. But fewer Minnesota families are getting the help they need to afford child care through Basic Sliding Fee Child Care Assistance. Compared to 2002, Basic Sliding Fee now reaches about 2,000 fewer families in Greater Minnesota and about 1,700 fewer families in the seven-county metro area.

Basic Sliding Fee supports working families by bringing down the cost of child care. Households who earn less than 47 percent of the state’s median income ($43,000 for a family of four) are eligible to enroll, and pay a co-pay based on their income. Their child care provider receives a payment through their county.

However, funding shortfalls mean that thousands of eligible families go without Basic Sliding Fee. From 2003 to 2005, policymakers made deep cuts to Basic Sliding Fee. Adjusting for inflation, state funding levels remain 28 percent lower than they were 13 years ago. Those cuts mean fewer families can afford child care, particularly in Greater Minnesota.

I created a map demonstrating the decrease in the number of families served by Basic Sliding Fee since 2002. Of the 30 counties with the biggest percentage drop in the number of families served, 29 are in Greater Minnesota. Overall, 54 percent of the decrease in the number of families covered by Basic Sliding Fee since 2002 occurred in Greater Minnesota.


Because there isn’t nearly enough funding to reach every eligible family, Basic Sliding Fee has a waiting list with about 5,800 families on it. Furthermore, when families can access Basic Sliding Fee, the rates paid to child care providers are so low that providers may choose not to serve Basic Sliding Fee families at all — particularly in today’s market, when the demand for child care outpaces the supply in many areas.

The basic necessities are the same in St. Peter and St. Paul — parents and children everywhere need affordable child care. This map clearly tells a story about the statewide impact of Minnesota’s under-investment. If that story doesn’t change, the next chapters will only be worse for working families.

-Ben Horowitz

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Census data: More work to do to address racial disparities

According to the latest Census data, Minnesota families brought home bigger paychecks in 2015 than they did in 2014. Minnesota’s $63,488 median household income is considerably higher than the $61,558 reported in 2014, and has returned to pre-recession levels more quickly than the nation as a whole. The big racial disparities in income that have characterized our Census data in the past remain – strong evidence that there’s still a lot of work to do.

The income data demonstrate how far the economy has come since the floor dropped out during the Great Recession that began in 2007. The gains in 2015 mean that Minnesota’s inflation-adjusted median household income is now back to roughly where it was when the recession began, and represents a big improvement from 2011, when it had dipped to $60,016. Our progress exceeds a larger, national trend. The median household income in America increased from $53,723 to $55,755 — an impressive jump, but one that falls well short of the $58,003 reported in 2007.

The Census data also show that fewer Minnesota families are struggling to meet their basic needs when compared to 2014, although more did so in 2015 than in 2007. In 2015, the poverty rate in Minnesota fell from 11.5 percent to 10.2 percent. That’s the third lowest poverty rate in the nation. But more families are still struggling compared to 2007, when Minnesota’s poverty rate was 9.5 percent. For a family of four, the poverty line was set at about $24,000 in 2015. America saw its poverty rate fall from 15.5 percent to 14.7 percent.

The numbers on income and poverty look very different in Minnesota’s communities of color. While the estimated median incomes of Asian, black, Native American and Hispanic or Latino households in Minnesota all rose, the increases were not statistically significant. In other words, while the Census estimated that these median household incomes were higher, the methodology used could not say with certainty that any real change occurred.

Statistical issues aside, the data prove that many communities are still excluded from the state’s overall economic success. For example, while Asian Minnesotans’ median household income is about $5,000 higher than the median household income of white Minnesotans, the poverty rate for Asian Minnesotans is more than twice as high as that of white Minnesotans. And the median household income for black Minnesotans remains less than half that of their white neighbors. The median household incomes for most racial and ethnic categories in Minnesota included in the Census are now statistically indistinguishable from where they were in 2007 although black Minnesotans’ inflation-adjusted median household income remains lower than it was in 2007 by about $4,000.

 2015 Median Household IncomeIncrease from 2014Poverty RateChange from 2014
All Minnesotans$63,488$1,93010.2%-1.3%
White (Non-Hispanic) Minnesotans$66,979$2,0747.3%-1.0%
Black Minnesotans$30,306*32.4%-5.2%
Asian Minnesotans$72,344*16.4%*
American Indian Minnesotans$36,863*25.1%-7.1%
Hispanic or Latino Minnesotans$43,380*20.8%*
* indicates a change that is not statistically significant.
Source: American Community Survey.

The data make it clear that policymakers can and must do more to ensure that all Minnesotans can share in the state’s prosperity. Poverty rates may be low for some groups, but about 550,000 Minnesotans overall — roughly 360,000 of them white or Asian — still struggle to pay for child care, cover their health insurance premiums, write their rent checks and keep food on the table. Despite working hard, many families’ paychecks simply don’t stretch far enough to make ends meet, and there are not enough jobs that provide important benefits like paid sick leave.

Additionally, the clear racial disparities in the data — and the long-term, systemic reasons they exist — cry out for a continued spotlight on racial equity during Minnesota’s legislative process. Policymakers took a first step last year by discussing and enacting policies that moved toward addressing our racial disparities; this is an important conversation that must continue.

We know that policy can make a difference because history and research show that the safety net works. When states and the federal government invest in policies that boost the incomes of working families, make affordable child care available, broaden access to health insurance and support workers on the job, families do better as a result. That’s why one alternative measure of how many households struggle to meet their basic needs — the national Supplemental Poverty Measure — has decreased from an estimated 26 percent in 1967 to 16 percent in 2014. The Supplemental Poverty Measure considers the impact of important policies on family income, like the federal Earned Income Tax Credit or Minnesota’s own Working Family Credit.

Minnesota should continue building on the track record of successful state and federal policies until the opportunity to find shared prosperity is available in every corner of the state.

-Ben Horowitz

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New Census data highlight Minnesota’s health care gains

According to Census data released today, Minnesota retained our status as a national leader when it comes to the share of our residents with health insurance. Thanks to our investments in policies that help people who can’t afford private health insurance, fewer people are forced into a choice between paying for either the health care they need or their other basic necessities.

In 2015, only 4.5 percent of Minnesotans went without health insurance, compared to 5.9 percent in 2014 and 8.2 percent in 2013. These decreases mean that 44 percent fewer Minnesotans lacked health insurance last year compared to 2013; it also means that Minnesota ranks fifth in health care coverage rates among the states and Washington, DC. Nationwide, 9.4 percent of Americans lack health insurance, down from 11.7 percent in 2014 and 14.5 percent in 2013.

Medical Assistance and MinnesotaCare are important parts of Minnesota’s health insurance success story. When people are struggling to make ends meet, these publicly-financed options ensure that affordable health care remains within their reach. More Minnesotans qualified for Medical Assistance beginning in 2014 thanks to the Affordable Care Act.

By expanding Medical Assistance, Minnesota took advantage of a federal policy allowing states to save money while providing health insurance and improving the health of more of their residents. The federal government is covering the entire cost of the expansion through 2016. In the future, federal funding will pay for at least 90 percent of the expansion’s price. In states that expanded Medicaid, hospitals are treating fewer uninsured patients — and they are receiving a higher federal reimbursement rate for the treatments provided. Efforts like Medical Assistance that provide a cost-effective health care option pay off in other ways, too. Medicaid has been linked to improved overall health for enrollees and better performance in school for kids.

If Minnesota is going to continue to move closer to being a state where health insurance is within reach for everyone, the state will need to address the persistent racial disparities in coverage rates. From 2013 to 2014, these racial disparities shrank; we’ll know more about their current status when the Census releases additional data on Thursday.

To build on Minnesota’s momentum towards ever-higher rates of health care coverage, policymakers should:

  • Restore eligibility for MinnesotaCare. Other data show that Minnesotans earning 200-275 percent of the federal poverty guidelines ($24,000-$33,000 for a single person) — particularly Minnesotans of color — are much more likely to lack health insurance than those earning more. Prior to 2014, many in this income range would have been eligible for MinnesotaCare; the state could restore that eligibility and may even save money in the process.
  • Address the lack of affordable health care options for undocumented Minnesotans.
  • Protect existing publicly-financed health care options by preserving the provider tax. The provider tax finances MinnesotaCare and a portion of Medical Assistance, but legislation passed in 2011 means the tax is scheduled to disappear in 2020. That would put affordable health care at risk for more than 100,000 Minnesotans.

Today’s news affirms that Minnesota and the nation have made great strides in making health insurance coverage available to more people. With stronger evidence every year that policy choices make a real difference in people’s ability to find health care coverage, Minnesota’s policymakers have good reason to push for even more progress in 2017.

-Ben Horowitz

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Income inequality rising in Minnesota and U.S.

Income inequality between Minnesota’s richest and poorest households continues to widen and is bad for the economy, according to a report from the Economic Policy Institute.

Income inequality has gotten worse in every state since the 1970s, and the highest-income households today hold a much higher share of overall income. Growing income inequality contradicts some of our country’s most deeply held values. Americans believe that hard work should pay off, that people who work full time should be able to support their families, and that everyone should have the opportunity to succeed. Income inequality can also be bad for the economy. When low- and middle-income households have a smaller share of the economic prosperity they help produce, it can dampen consumer spending, which is an important driver of economic growth.

EPI 2016 report graphic

Some of the most distressing findings:

  • As of 2013, the top 1 percent of earners in the United States hold 20.1 percent of the nation’s income. In Minnesota, a similar story prevails where the top earners hold 16.3 percent of income.
  • The income gap is now so wide that the richest 1 percent of earners in Minnesota make almost 20 times more than the bottom 99 percent.
  • In Minnesota, income inequality is worst in Roseau County, where the top earners have incomes 33 times higher than the bottom 99 percent.

Fortunately, Minnesota can take actions to decrease income inequality and to push back on its negative impact on living standards. These include:

  • Increasing the number of good jobs by increasing wage and job quality standards, such as boosting the minimum wage and expanding access to earned sick time;
  • Ensuring our tax system doesn’t make income inequality worse, but instead is fair to Minnesotans of all income levels, through policies like expanding the Working Family Credit; and
  • Supporting lower-wage workers in their efforts to move into the middle class, by making child care more affordable, improving access to affordable health care, and making sure all Minnesotans can get the education and skills training they need.

By investing the right resources in the right places, Minnesota can work to mitigate rising income inequality so that everyone has a chance to succeed.

-Clark Biegler

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Lack of earned leave hurts Minnesota families

Looking back on my childhood, I see that I was blessed. Whenever I was sick, my mom was able to take a sick day and care for me. But what about my peers whose parents did not have earned sick leave?

For many children across Minnesota, this worry is a reality. When they get sick, their parents are not able to stay home with them because they work in jobs that don’t offer earned sick leave. Often, the families least likely to afford time off without earned leave are also the least likely to have it.

We’ve talked about the importance of the ability to earn paid sick time and how it’s good for the economy, and a report from the Minnesota Department of Health takes an in-depth look at who has access to various forms of earned leave, with particular emphasis on sick leave. It finds that when Minnesota employees have access to earned paid leave, there is a positive impact on their earnings, health, productivity and economic security.

Currently over one million – or 4 out of 10 – Minnesota workers lack earned sick leave, and low-income workers who can least afford to take time off work are also the most likely to not have paid time off. Nationally, less than 40 percent of low-income workers have access to earned sick leave, and only 5 percent of private-sector low-income workers have access to paid family leave, according to the report.

Access to and participation in various forms of earned leave also vary greatly by race. For example, while 60 percent of white Minnesota workers have access to sick leave, only 50 percent of Black and 40 percent of Hispanic Minnesota workers have this benefit. This disparity likely reflects the fact that people of color are more likely to be working in low-paying jobs that lack any paid leave. Taking maternity leave, which is generally unpaid, is also correlated with race. While almost 75 percent of white working mothers in the U.S. took maternity leave after their last childbirth, mothers of color are much more unlikely to take time off with a new child. Only a little over 60 percent of Black and Hispanic working mothers took time off after having their last child.

Access to paid leave also varies by industry and employer. Only about 35 percent of service workers in Minnesota have access to earned sick leave. This contrasts with workers in the state and local government sector, 89 percent of whom have earned sick leave, or employees at private companies, at 61 percent.

Workers without earned sick time or family leave have tough choices to make. Do they go to work sick? Will they be able to stay home to care for a newborn? Those who do not have earned leave can potentially lose their jobs if they take time off work to care for a sick child, take an elderly parent to the doctor, or because they are ill themselves.

The effects of lack of access to earned sick leave are clear. There have been just under 3,000 reported foodborne illnesses in Minnesota over the course of nearly a decade. Many of these illnesses could have been minimized had these workers had some form of earned leave to recover quickly, instead of “toughing it out” at work so that they did not lose wages. With earned leave in place, workplaces would be healthier.

The Department of Health’s report also shows that employers benefit from providing earned sick leave. Earned leave can improve employee morale and retention, and helps recruit more skilled laborers. In addition, it reduces the costs due to lost labor and widespread company illness when employees work while sick.

The health and business benefits of earned leave are being increasingly acknowledged by policymakers. Minneapolis recently passed a sick leave requirement. They join five states, one county, 26 cities, as well as the District of Colombia that have laws so more workers can earn sick leave. As the Department of Health report shows, earned leave is both good for workers and good for business.

-Zack Eichten

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