Cluster Buster

For years, Minnesota’s financial services sector has been a star performer. Can the industry keep it up? Events currently playing out suggest that the answer is no—not just locally, but nationally as well. That’s the belief of analysts who did a study recently released by the Minnesota Department of Employment and Economic Development (DEED).

It’s also a conclusion that can be derived from the work of Thomas Philippon, a New York University professor of finance with a shrewd sense of timing. Last year, before the curtain rose in August on the great credit crunch of 2007–08, Philippon was wrapping up a paper reminding us that the U.S. financial sector’s importance has varied considerably over the decades.

“The idea that finance will always be a big, growing part of the economy—that I think is just not true,” Philippon says.

Big Lift For Economy

First off, let’s give Minnesota’s financial services sector proper recognition. Its growth has meant a lot for the state’s economy. DEED’s analysts found that in 2006, this sector had 138,700 jobs, or nearly one of every 12 jobs in the state. Banking accounted for 60,500 of this total, insurance 57,500, and capital markets 20,700. The capital markets sub-sector includes companies in the investment banking, brokerage, and money management businesses. Venture capital businesses, along with mutual funds, hedge funds, and private equity funds could be included as well.

The true size of the state’s financial services sector may be even larger. DEED analyst Dave Senf says that in 2001, the nation reclassified many jobs from financial services to the corporate headquarters category. Senf adds that data crunchers also may be missing financial services employees who work from home.

In 2006, Minnesota’s financial services jobs paid an average weekly wage of $1,375, versus $811 for all industries in the state. Over the decade ended in 2006, jobs in the state’s finance and insurance industries grew 21 percent, versus 17 percent nationally.

The Twin Cities area’s concentration of financial services activity ranks it fourth among major metropolitan areas, trailing only New York City, Boston, and Philadelphia. The analysts’ measure of this intensity is the “location quotient,” which is the ratio of the industry’s share of overall jobs in each of these areas to the industry’s share of national employment.