California’s next governor will lead one of the most productive, wealthy, and expensive places to live and do business in the nation. Affordability concerns remain top of mind for Californians: 96% of likely voters say affordability and cost of living are very (61%) or somewhat (35%) important in determining their November votes. High costs are a barrier to the California Dream, contributing to higher poverty, lower homeownership rates, and the loss of households and businesses to other states. For these reasons, our next governor will need to grapple with the economic trends underpinning the state’s affordability challenges and the policy options available to address them.

The Fundamentals

Affordability concerns are driven by a combination of costs and people’s financial resources. Costs include essentials like housing, health care, and food, as well as items like internet access, higher education, and child care that are often central to economic security. Across all consumer expenditures, California ranks as the most expensive state, with prices 11% more than the national level and edging out costs in Hawaii, DC, New Jersey, and New York. California’s top ranking is driven by housing prices, but other factors also shape residents’ daily expenses, like higher gas prices, tax rates, and food costs. How do Californians cope?  Higher middle and top incomes in California than elsewhere help some families pay the California premium, but lower-income families especially struggle to afford the high cost of living. Understanding both the price and income sides of the affordability equation, and the nuances of how Californians experience changes in affordability, is critical to addressing cost-of-living concerns.

Key Issues

Costs rose dramatically in recent years—as did unease about economic security. COVID-era inflation produced a price shock not seen in almost 40 years. Overall prices have risen 28% since 2020 (compared to 13% if inflation had remained at the 2% Federal Reserve target). Costs of key household budget items—rent, utilities, food, and transportation—have also increased significantly and at much higher rates than in the years leading up to the pandemic. Since lower- and middle-income households spend more of their budgets on these basic necessities, rising costs have been particularly challenging for these families. Today, 54% of Californians say that recent price increases have caused financial hardship, and the struggle to make ends meet presents difficult tradeoffs. In recent months, rising energy and gas prices amid the Iran war have cut further into family budgets.

Californians are earning more, but inflation spikes have erased gains. Wages for the state’s average private-sector, non-farm job have grown steadily since before the pandemic, between 1% and 8% annually since 2019. However, bouts of high inflation from 2021 to 2023 ate into wage gains, leading to what felt like a loss in wages. In addition, the recent spike in inflation due to the Iran war has completely erased wage gains made since mid-2024. Over the past year, the average California worker’s inflation-adjusted wage has decreased by 0.2%. This recent trend, while adverse, is slightly better than what’s happening nationally, where the inflation-adjusted wage for the average worker has fallen 0.8%.

Although lower-wage workers experienced larger wage gains than higher-wage workers in the early pandemic recovery, these trends have since reversed. Stalling wage growth in recent years is particularly concerning since low and middle incomes have stagnated over the long run.

Challenges of affording a “middle class” life are longstanding. Homeownership, the main avenue to building wealth in the state, has become increasingly out of reach for younger generations. Less than one-third of Californians ages 30 to 34 own a home, compared to 49% nationally. In California, the share is down from 54% in 1960. The cost of caring for children has also risen, with the median family spending 6–28% of their incomes on child care for infants and preschool-age children, even after the state’s expansions of publicly supported care. One bright spot is that college tuition has become more affordable over the past 15 years when accounting for increases in financial aid (though costs of food and housing for college students have grown). However, health care remains a pain point. Insurance premiums have grown at three times the rate of workers’ earnings over the past quarter century. The recent end of enhanced federal subsidies has further increased premiums for those with private insurance purchased through Covered California.

Affordability issues affect businesses too. California’s high cost of housing drives affordability challenges for households and businesses alike. For employers, higher wages are necessary for recruiting workers, but they also represent a cost pressure. The costs of other inputs, like utilities and transportation, are also higher in California than elsewhere. The state’s large, dynamic markets and skilled workforce are appealing for many businesses, but higher regulatory burdens in California compared to other states present obstacles that may slow business creation and job growth.

Looking Ahead

While affordability has received increased attention in recent years, it has long been a source of pressure on California’s economy. For the next state administration, a broader framework that includes durable policy responses on both the cost and income side will be critical.

On the cost side, the state’s policy options to address short-term price shocks (e.g., removing taxes or fees, expanding direct subsidies, or capping prices in critical markets like rental housing) can be expensive, involve tradeoffs with other policy priorities, and can make affordability worse in the long run. Over the long term, the state should assess the cost drivers stemming from regulation and permitting that slow down housing and business development, though balancing the tradeoffs across other policy goals (such as environmental protection) is complicated.

On the earnings side, investments in programs and institutions that build individuals’ skills and employability can help them command higher wages while also responding to forces changing the world of work, like AI. Earnings potential can also be enhanced through programs that incentivize job growth, including in distressed regions or promising sectors. Finally, reinforcing California’s health and social safety nets amid rising costs, reductions in federal support, and changes in eligibility will be essential for low-income families struggling to afford basic needs.

Today’s affordability concerns are rooted in longstanding obstacles to achieving economic security and upward mobility in California. For the new governor, addressing these intersecting challenges will help improve affordability and boost the economic vitality of families, businesses, and the state overall.