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Blog Post · March 9, 2022

How Did California’s Economy Recover from COVID—and What Comes Next?

photo - Business Owner Standing Outside with Open Sign on Door

This post is part of a series reflecting on California’s experience of the COVID-19 pandemic.

After two years of COVID, California’s economy is in a remarkably strong position. The economic trajectory has been unlike any in the modern area: a dramatic, historic negative shock followed by a relatively rapid recovery—even if month by month changes have been somewhat uneven. At an aggregate level, the economy is close to pre-pandemic conditions, but it has been reshaped in some respects, and long-standing challenges persist.

The ripple effects of the economic shutdown in March 2020 were severe. California unemployment spiked to 16% and the state’s economy lost 2.5 million jobs. Over the next few months, business slowed dramatically, especially in sectors offering face-to-face services; by the second quarter of 2020, California was home to 61,000 fewer businesses than at the end of 2019, a 5% decline.

However, the economic recovery has been relatively rapid. As of December, unemployment was down to 6.5% in California—about 2 percentage points higher than in February 2020. It took about twice as long to reach this level of recovery after the Great Recession, when unemployment was less severe.

How did this happen? For starters, the cause of the recession was fundamentally not economic but a public health crisis; indeed, COVID afflicted an economy that had been growing for more than a decade, and all along, the trajectory of the virus has shaped the pace of recovery. Also, the federal and state response to the COVID economic shutdown likely prevented a more severe or long-term recession. Direct support to households propped up consumer demand (and reduced poverty in 2020). Federal and state payments to taxpayers—such as stimulus checks, an expanded child tax credit, and California’s Golden State Stimulus—provided the largest infusion of cash, because they were broad-based. Unemployment insurance, which reached a large share of the workforce due to temporary expansions, was the second largest.

These and other safety net expansions may have helped prevent cascading crises in housing and debt, while contributing to upticks in other areas, such as inflation. Evidence to-date suggests these direct to household supports were more equitable and effective than business aid such as the Paycheck Protection Program; the lack of government infrastructure made it difficult to target the businesses most in need.

While macro patterns point to a strong recovery, there are some differences across demographic groups and regions. For instance, although the tightening labor market puts workers in a strong position, rising prices are eating into wage increases, putting more pressure on lower income families.

Furthermore, regional variations have been notable. Los Angeles had the highest spike in unemployment in 2020 and a slower recovery throughout most of 2021—though it has accelerated more recently. As of December, LA’s unemployment rate was 1.5 points higher than in February 2020—a small gap but a bit wider than the rest of the state. Three regions—Northern, Central Valley and Sierra, and Central Coast—are doing better than before COVID, with unemployment rates half a percentage point or more lower than in February 2020.

Unemployment rates are closing in on pre-pandemic levels across racial/ethnic groups. About 4.5% of whites and Asians in California were unemployed between November 2021 and January 2022, 1.5 points higher than before the pandemic. Rates remain higher for Latinos and the “Black, American Indian, multiracial, and others” category (5.6% and 6.5%, respectively) but these groups saw a faster recovery in 2021, and racial/ethnic gaps have narrowed.

While these indicators do not include Californians who have left the labor force, early data suggests that the share of Californians working or looking for work (near 62%) is similar to the pre-pandemic labor force participation rate.

These are strong signs that improvements are accelerating across groups. But two notable economic shifts during COVID could create or widen disparities in economic opportunity. First, the shift in spending from services to goods has been notable (and is contributing to supply chain challenges). The service sector—in particular, leisure and hospitality services and personal services—was hardest hit by the pandemic and—according to 2021 data—is lagging in terms of employment.

As consumers become more comfortable with face-to-face activities, service sector spending may increase, but it’s not yet clear if it will return to pre-pandemic levels. This matters for economic opportunity because the service sector had a large and growing workforce before COVID. While pay has not been universally strong—and some workers seem to be choosing not to return—service sector jobs have long provided an entry point to the workforce for people with a range of educational backgrounds.

Second, COVID shifted a substantial share of work activity to remote settings. Pre-COVID, about 5% of work was done remotely; the best estimates suggest that about 25% of future work will be done remotely. Remote work made it possible for more Californians to relocate during COVID, and it could create economic challenges in business districts like downtown San Francisco and Los Angeles. A large-scale return to office settings this year may smooth out some regional inequities, but given the changes in workplace preferences, the location of workers and businesses are likely to be forever changed. This shift will probably have an uneven impact: for example, remote work is expected to be most common in professions like IT and finance and least common in manufacturing, retail, and health.

The strong recovery lays the groundwork for addressing long-term disparities, but state and local leaders should pay attention to these emerging patterns. As the state continues to roll out investments to support economic recovery and foster economic growth—including the Community Economic Resilience Fund and federal infrastructure funding—it will be important to target communities and sectors with the greatest need, as well as those central to future growth. Targeting investments is no easy feat, as the pandemic showed but California’s accelerating recovery provides a strong foundation for addressing long-term economic challenges and disparities.

Topics

coronavirus COVID-19 Economy employment Health & Safety Net inflation jobs recession recovery Two Years of COVID-19 in California unemployment wages