By Jed Kolko, associate director and research fellow, Public Policy Institute of California
This opinion article appeared in the
San Francisco Chronicle on May 8, 2009
Layoffs, foreclosures and budget cuts are grim realities for Californians, but they shouldn't blind us to the fundamental truths about our state's economy. Despite frequent booms and busts, historical patterns are the best guide to our economic future. Economies tend to return to growth rates and unemployment levels established over the long term. California's economy generally keeps pace with the U.S. economy and is likely to do so in the future. Employment growth - the broadest measure of economic performance - in California and the nation has averaged 1.5 percent annually over the past 30 years. In 2008, the California economy shrank, but the nation's economy shrank more: California had a 1.7 percent job-loss rate compared to 2.0 percent for the United States. While California may emerge from recession on a slightly different timetable, its long-term growth rate is likely to closely track the nation's.
At the same time, California's unemployment rate consistently exceeds the U.S. rate, even when California's employment growth surpasses U.S. growth, as it did in the late 1990s. Why the paradox? California's labor force grows faster, in part because people want to live here. California's economy generates jobs at a rate similar to the nation, but California's population growth outpaces its job growth. Our unemployment rate, thus, is likely to remain higher than the nation's even after the recession is over.
A recurring complaint about California - and one revived again recently - is that states with lower taxes and fewer regulations are luring businesses, and the jobs they generate, out of state. But the reality is that California loses very few jobs to other states. Business relocations are highly visible when they happen but are a misleading guide to the state's economic performance. Businesses rarely move out of or into California, and on balance, the state loses just 11,000 jobs a year. That's just .06 percent of the state's 18 million jobs. Far more jobs are gained or lost because businesses launch, expand, contract and close.
In fact, debates about California's business climate frequently understate the state's strengths. For instance, California consistently scores poorly on national business climate rankings. But these rankings suffer from a definition of "business climate" that's far too limited, focusing primarily on tax and regulatory costs. The skill level of the workforce, availability of capital, support for new business and overall quality of life are important aspects of the state's business climate as well. Focusing on the cost side of the equation fails to explain why California's growth tends to keep up with - or surpass - that of the nation.
It is true that California is a high-cost state for business. And California workers earn, on average, 12 percent more than other U.S. workers, even when adjusting for differences in workers' education, occupation, industry and other personal characteristics. But that's only half the picture: California's workers also have higher productivity. Output per worker is 13 percent higher than the national average, more than offsetting the higher wages.
To be sure, California faces long-term economic challenges that will outlive the recession. Housing is still expensive relative to the rest of the nation and is likely to remain so. The high cost of real estate makes it harder for some businesses to locate and attract workers here.
California also has to deal with uneven economic growth. Regional economic differences in the state are dramatic - and persistent. Unemployment tends to be higher in the Central Valley than in the urban, coastal parts of the state, due to a different mix of industries and a faster-growing workforce in inland areas. For California, the bad news and the good news is that long-term economic trends are likely to continue.