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Minnesota lost 5,200 jobs in December, ending a streak of job growth that lasted more than a year.

Meanwhile, the state unemployment rate ticked up from 2.3% to 2.5%, according to data released Thursday by the Minnesota Department of Employment and Economic Development (DEED).

The jobless rate has been steadily rising over the last several months since hitting a record low for any state of 1.8% over the summer. But it remains at a historically low level and is still one of the lowest in the nation. The U.S. unemployment rate is 3.5%.

A big factor in last month's job decline was government, which lost 6,100 jobs, all of it coming from local government. State officials were scratching their heads trying to better understand reasons for it — if perhaps end-of-year grants had shifted or if there was an issue with the seasonal adjustment of the data.

DEED Commissioner Steve Grove said he was surprised by the decline. He thought local government would have added jobs in December with all the snow the state got that month, likely leading to a flurry of hiring of snow plow drivers.

At the same time, Minnesota's private sector added 900 jobs last month.

"It was kind of a weird month with that job dip overall, but the private sector did grow," he said. "We haven't seen massive reports of layoffs. There were a few kind of near the end of November and early December that were on our radar. but there weren't a slew of them over the last month and a half."

Grove added, "Obviously as we begin the new year, like every state, we are monitoring economic conditions very closely."

The loss in jobs and the uptick in unemployment comes as the Federal Reserve has been hiking interest rates to try to curb high inflation. As it does so, Fed officials have acknowledged that unemployment may rise and job gains will moderate.

Wage growth in Minnesota slowed last month to 3.7% over the year, after jumping 5.7% in November. While the state had been surpassing the U.S. in pay increases, that changed in December when average hourly earnings nationwide rose at a higher 4.6%.

That also means that wage growth in Minnesota is now falling further behind inflation even as the latter has also been slowing. The consumer price index increased by 6.5% in December, after rising 7.1% in November.

On the good-news front, the jobs report showed more improvement in narrowing of racial disparities. Based on 12-month moving averages, the jobless rate for Black Minnesotans declined by four-tenths of a point to 3.9% in December, a considerable decline from 7.4% in June 2022 when it was triple the white unemployment rate.

"It has gone down every month for the last six months," said Grove. "That is a streak we certainly want to see continue."

The jobless rate for Latino Minnesotans inched down to 3.8% while it slightly increased for white Minnesotans to 2.3%. Racial gaps in unemployment have now decreased to being less than double.

Up until last month, Minnesota had been adding jobs for 14 consecutive months. The U.S., however, is in the midst of an even longer streak that has not yet been broken in 24 months of job gains.

Minnesota's job losses in December contrasted with the U.S., which added 223,000 jobs last month. And it was a reversal from November when the state added 6,500 jobs, a number that was revised downward by 300 jobs.

In 2022, Minnesota outpaced the nation in job growth — 3.2% compared with 2.9%. But it has only regained 90% of jobs lost in the first months of the pandemic while the U.S. has made a full recovery.

One of Minnesota's biggest obstacles is its labor shortage. It still has about 90,000 fewer workers in its labor force than it did before the pandemic.

After continuing to see more workers exit the labor force in recent months, the state finally saw a small uptick of about 3,400 who came off the sidelines in December. That wasn't enough though to change the state's labor force participation rate which remained steady last month at 67.9%.

It's still much higher than the U.S. rate of 62.3%, but is down from 70.8% in February 2020.

"This remains the central thing that is holding our economy back — that challenge of finding enough workers for those jobs," said Grove. "We're still are at one person searching for every three or four jobs that out there."

On Thursday, Gov. Tim Walz unveiled his economic budget proposal for the state, a $4.1 billion package that includes investing in a workforce fund to increase employment in critical occupations as well as a paid family and medical leave program that he said will help parents stay in the labor force.