A Labor Day Update on the California Economy

Labor Day 2016 continues to show improving conditions within California’s economy.  The Legislature has just concluded a session that is being described as one of the most progressive ever for environmental and labor union policies. And Governor Brown is looking at over 700 new laws on his desk. His signature or veto will directly impact the fate of our job growth for years to come.

California Economy Continues Transformation

The revised June job numbers show that since the recovery began in February 2010, our state has regained  2.3 million nonfarm jobs.  Our seasonally adjusted unemployment rate of 5.4% while higher marginally from prior months, put us at levels not seen since before the recession in the summer of 2007.  We see the benefits of this every day. New cars are on the road. New housing and home renovations are underway. The malls and restaurants are busy. It should and does feel good.

But the Governor and policymakers are entrusted with the responsibility to look deeper at the numbers to  prepare for the future. This shows that the pace of the recovery in California remains low by historical patterns, reflecting conditions in the country as a whole. Real GDP has grown at an average annual rate of 2.7% since the recovery began, below the 4% growth seen during 1987-2000 and higher levels experienced in years before.  Nonfarm jobs which had been expanding at an annual rate of 3.0% in 2014 and 2015, have slowed to an annualized rate of 2.2% in the first half of 2016.

To put our low current growth rates into historic perspective, California in February 1975 was also in an economic recovery period, again under Governor Jerry Brown.  In the following 76 months, the state created 2.4 million jobs, representing a 32% increase.  The 2.3 million jobs—virtually the same number—created in the 76 months since February 2010 are at only 16%.

In their latest projections, both Department of Finance and Legislative Analyst expect jobs growth to slow further in the coming years, with Finance showing 1.0% by 2018 and 2019 and LAO around 1.5%.  These differences are small but important.  For the state budget, they translate into a projected deficit by 2019-20 in the case of the Finance numbers, or an $11 billion surplus in the case of LAO’s.

For many Californians, these are more than just mere numbers.  They mean the difference between having the opportunity at a job that will help their household afford the growing cost of living in our state, or continued reliance on state programs for their basic needs.  The types of jobs being created are equally important—whether they offer the paths to upward mobility and whether future generations will continue to experience a California better than those in the past.

Middle Class Wage Jobs Impacted the Most

The key to California’s past promise as a land of upward economic opportunity lay in the diversity of our workforce and our jobs.  No matter their background, the wide range of jobs at differing wage levels gave workers especially Latinos and African-Americans the opportunities to move up in life, gain skills, and compete for jobs producing income sufficient to own a home, educate their children, and save for retirement.  The state budget focused on these aspirations through investments in roads and other infrastructure and in affordable education and skills training regardless of an individual’s educational level. State policies served to promote housing supply rather than escalating housing costs.  Affordable energy was seen as a competitive edge for middle class jobs, not as a public policy priority to be phased out as quickly as possible.

The upward path has narrowed for many as the recovery has restructured the economy to jobs creation primarily in the higher and lower wage industries.  Middle class jobs in manufacturing remain 183,000 below the pre-recession high in 2007; construction jobs are off 140,000.  In contrast, lower-paying Individual & Family Services jobs—primarily state supported, minimum wage In-Home Supportive Services jobs—are up nearly 200,000.

Population Still Growing Faster than Jobs . . . Contributing to Poverty

The good news on our  2.3 million jobs gained since 2010 still mostly serve to rebuild those lost during the recession. Comparing to the pre-recession highs, real growth in the economy shows a net gain of 950,000 nonfarm jobs and 1.1 million additional persons employed.  Population in this period grew much faster—total population by 2.7 million and as the state aged, working age population by 3.4 million.

One of the most immediate consequences of this slower jobs growth has been a steep drop in the labor force participation rate.  While this rate now appears to be stabilizing at around 62% of the working age population, it is doing so near the historic lows previously seen in 1976.  The California rate also remains below the national average, in spite of the state having a relatively younger population and higher pressures to continue working into retirement age due to the state’s significantly higher costs of living.

On a numbers level, California is still short about 1 million jobs and 1 million persons employed to achieve the same population based levels that existed prior to the recession.

On an individual level, this slower jobs growth translates into relatively fewer persons per household being employed than prior to the recession, a factor that directly translates into lower household income, consequent higher poverty levels, and a lower household ability to afford the state’s high housing costs and other high costs of living.

Our Economic Growth Engine is the Bay Area

Economic growth within California remains highly focused within the Bay Area.  With just under 20% of the state’s population, the Bay Area alone contains:

• 45% of net nonfarm job gains since the pre-recession high
• 52% of net job gains since the pre-recession high in Professional & Business Services, the primary growth industry for higher wage jobs
• 45% of net employment gains since the pre-recession high
• 27% of total personal income, and 32% of the net increase in total personal income 2007-2014
• 40% of state personal income tax paid, and 52% of the net increase in tax paid 2007-2014 

  The staggering job growth occurring in the Bay Area appears to statistically overshadow the deteriorating business climate that is seen in the rest of the state’s economy as a result of unrelenting expansion of regulation, fees, and taxes since 2000.  

   

A California economy without the Bay Area would look considerably different:

• Instead of 2.3 million, created only 1.6 million nonfarm jobs since February 2010, or less than the 1.8 million jobs created in this period by Texas — a state with a population 13% smaller than California outside the Bay Area.
• Instead of 5.9%, a June unemployment rate of 6.3% (seasonally unadjusted) — tied for the 6th highest rate in the nation.
• Instead of 16.4%, a 2014 poverty rate of 17.9% vs. the US average of 15.5% — California outside the Bay Area is home to 91% of the net increase in persons living in poverty 2007-2014.
• Instead of $49,985, a 2014 per capita income of $45,292 — below the US average of $46,030.

Even within the portions of California outside the Bay Area, significant differences exist between the interior and coastal regions.  Among the nation’s 387 top metropolitan areas (MSAs), 8 California MSAs ranked in the areas with 10 highest unemployment rates in June.  Ten California MSAs were in the highest 20.

Challenge for Labor Day 2017:  Broaden Economic Growth for All Californians

The Governor, the Legislature and all Californians are rightfully proud of our return to being the 6th largest economy in the world as measured by GDP.  This is a testament to the economic resilience of Californians and the enormous ingenuity, determination and drive coming from California employers large, medium and small.

Distribution of this growth remains heavily uneven as the state continues to splinter into a two-tier economy and risks evolving into a two-tier society.  The economic divide growing between the Bay Area and the rest of the state should be no surprise.  The Bay Area industries leading this growth are the least regulated in the state, and challenges to their continued growth comes less from market forces and technological barriers, and more from governments and competitors that want to rein them in with the same 19th Century regulatory models applied to the rest of the economy.

The remainder of the state’s economy, instead, has been subjected to an unrelenting expansion of regulation, fees, and taxes since 2000.  The low level of jobs growth is in large part a reflection of the increasing costs of doing business in this state and the increasing costs and restrictions associated with providing jobs.  As businesses have had to shift spending and investments to regulatory compliance rather than efficiency and capacity, the jobs creation rate along with the business creation rate itself have declined.

California has never depended on a single industry to meet the economic aspirations of its people.  We cannot.  We are too diverse.  We have some of the highest rates of educational attainment in the country, but also the nation’s highest percentage—17.9%–of adults with less than a high school education.  The hollowing out of middle class wage jobs—in particular middle class wage jobs that have been the hardest hit by the state’s growing regulations—limits the upward mobility options for much of our population.  The high cost of housing and the increased barriers to commuting caused by the condition of our roads has also reduced the mobility of labor and restricted the ability of many to access jobs even where they are being created.

The 2016 legislative session just completed with major new laws focused on the transformation of our energy sector and our whole economy through new climate change policies. The foundation of these policies is based on the argument that  “green jobs” creation will replace and surpass the hundreds and hundreds of thousands of good paying middle class jobs that will be phased out in our energy and manufacturing sectors. Currently, after 4 decades of compounding regulations, green jobs in California still comprise at most 2% of our jobs under the most generous of estimates.  It is now up to the oversight of the Legislature to determine how much and how fast we are willing to impact the other 98% on which our workers and our households depend.

These are the challenges that are now in front of our state policymakers. Will we see policies that accept the current growth trends and simply attempt to make the current failures more tolerable? Will we see policies that instead of reforming housing policies to reduce the costs for all, will at best alleviate costs for a very few? Will we see policies that assume unemployment and underemployment are now a permanent feature of our state rather than reforms to create growth engines in other parts of the state?

We hope 2017 will bring a broader discussion on the economy we can offer to future generations.

About the Author: Rob Lapsley is president of the California Business Roundtable, a nonpartisan organization comprised of the senior executive leadership of the state’s major companies employing over half a million Californians. Before he was named president in 2011, he was vice president and state political director for CalChamber. He served in the US State Department as special assistant to the US ambassador to Spain during the Iraq War. He was chief of staff to California secretary of state Bill Jones and served as undersecretary of state from 1995 to 2001. He has served on the PPIC Statewide Survey Advisory Committee since 2011.