We take a look at where California’s economy has been, where it might be headed, and how we can better insulate Californians against future upheavals.

Employment has recovered from the shock of the pandemic, unemployment is near historic lows, and inflation is coming back down to Earth. Yet despite many signs of strength, Californians are deeply concerned about the state’s economic future. Nearly two in three Californians expect bad economic times in the coming year. Seven in ten believe the state’s children will be worse off financially than their parents. Californians have weathered a lot these last few years, and many are still trying to make sense of the economic times we are living in and the challenges and opportunities ahead.

Although inflation is now stabilizing, two years of rapidly rising costs for food, housing, gas, and other goods and services cut into Californians’ budgets. Wage increases provided a partial buffer for many, but in most sectors wages did not keep pace with inflation. Since the beginning of 2020, wages have increased 16 percent for all private-sector workers, but after adjusting for inflation, they are down 2.3 percent. Only three of the largest sectors have shown growth in inflation-adjusted wages: leisure and hospitality (up 6%) as well as information and trade, transportation, and utilities (up 1–3%; not shown in chart).

Talk of a “soft landing” has increased as inflation has fallen without a recession and with a minimal rise in unemployment. However, the Federal Reserve could keep interest rates high to tame inflation. High interest rates affect investment decisions and may lead to lower business investment and expansion, which in turn brings repercussions for tax revenue and the state budget. State leaders should continue to monitor changes across all dimensions of California’s labor market to help guide policy decisions in this time of economic uncertainty.

From the Great Resignation to the Great Reshuffling to the “Big Stay,” the labor market has experienced major changes in recent years. As employers and workers renegotiated their arrangements and recovered from the pandemic, California saw more job openings than job seekers for the first time in decades. As a result, wages and flexibility increased, though not equally across sectors. However, this pattern abated somewhat in 2023; recently, California has had close to one job seeker per opening, similar to pre-pandemic levels.

We may be settling into a new normal when it comes to remote work. Pre-pandemic, about 5 percent of working days were spent at home—this shot up to 60 percent when COVID hit. For the past 12 months, 29 percent of working days were spent at home nationwide (about 1.5 days per week). In some sectors, especially those that skew toward well-educated workers in higher-paying jobs and industries such as information and finance, remote work is common. In lower-wage sectors such as food services, transportation, and retail, it is rare.

Remote work could trigger shifts in economic inequality within and between regions. Today, the share of work-from-home days is 40 percent in Los Angeles and 46 percent in the Bay Area. Nationwide, remote work is more prevalent in large metro areas than smaller cities and towns. As higher-wage workers move away from places with higher costs of living, these changing migration patterns are reshaping regions. Urban areas must figure out new ways to sustain healthy downtown economies; elsewhere, population surges are providing a boost to local economies but also placing new demands on physical infrastructure, housing, schools, colleges, and health services.

Some economic disparities have narrowed in recent years. Notably, the unemployment rate among Latino Californians is now lower than it was before the pandemic (4.7% vs. 5.7%) and similar to that of whites and Asians. Regional gaps have also shrunk. Inland areas with historically higher unemployment—including the Central Valley, Central Coast, and far north—are the only regions faring better than before the pandemic.

This promising pattern is driven partly by sectors of work. For example, many Latinos work in construction and agriculture, sectors that have recovered quite well. However, Black unemployment is slightly higher than pre-pandemic levels (7.4%) and remains higher than that of other racial/ethnic groups. In addition, unemployment among whites and Asians is above pre-pandemic levels. Notably, employment is only one measure of economic well-being. It will take longer to determine if people are seeing changes in earnings, hours worked, benefits, and other measures that more fully capture economic prosperity.

Even as some wage and unemployment disparities have narrowed, persistent and growing income inequality remains a long-standing obstacle for California. Driven by increased global trade, technological advancements that have favored more educated workers, and other factors, top incomes have grown 63 percent over the last 40 years (reaching $291,000 for families at the 90th percentile). Meanwhile, bottom incomes have suffered several large downward swings, only increasing about 7 percent ($26,000 at the 10th percentile).

Pandemic aid temporarily reduced income inequality, and wages increased the most in low-wage sectors, but reversing the long-term trend in growing income inequality is a challenge. Paired with high levels of poverty, high income inequality dampens the chances of upward mobility. It can take time and money to invest in the skills and experiences needed to move up the economic ladder, but for many these resources are lacking. As a result, most children born in low-income families in California earn low incomes as adults.

High income inequality in California coincides with high levels of poverty and stagnant upward mobility. About 5 million Californians cannot meet their basic needs and it has gotten harder to climb the economic ladder over time. Sky-high housing costs have left many—especially younger, lower-income, and nonwhite residents—without the meaningful opportunity to own a home, a vital path to wealth creation for earlier generations. And in our increasingly knowledge-based economy, a college degree is key to economic mobility, but college affordability and debt are limiting the viability of this pathway for those who might benefit the most.

A smaller workforce is another long-term challenge for California. Workforce participation has been gradually declining for decades, from 67 percent in 2001 to 62 percent as of November 2023, almost entirely due to the aging of the population. If California’s age and gender demographics had remained at 2001 levels, participation would have only fallen slightly, to about 66 percent in 2023. In other words, roughly 1.2 million more Californians would be working today.

Policies that boost employment among groups with low workforce participation rates will be critical to meeting the state’s labor needs. For example, while about 91 percent of white, Latino, and Asian men ages 25–54 participate in the labor force, only 83 percent of Black men do. Similarly, 69 percent of Latina mothers in this age group are in the workforce, compared with 79 percent, 76 percent, and 75 percent of Black, white, and Asian mothers, respectively. Helping those without a college education attain the skills needed for jobs that offer good wages and career prospects—and addressing barriers like stable housing, disability, immigration status, and criminal history—could help encourage more Californians to join the workforce.

COVID shined a stark light on women’s vulnerability in the workplace. During the height of the crisis, unemployment among women rose much higher than it did for men, and women were more likely to leave the labor force. Today, overall labor force participation rates for women—including women with children—are actually above pre-pandemic levels, perhaps due to increased flexibility in some workplaces. But gaps between men and women are still large, especially for women with children in the household; notable disparities also exist between women with and without college degrees.

If current trends in women’s employment persist, levels will likely fall short of what the labor market needs over the long term. Supporting families’ child care and elder care needs—including addressing low wages in this sector—would help relieve this barrier to women’s employment.

Even as California confronts long-term challenges like high income inequality, stagnant mobility, and a shrinking labor force, other changes to the state’s economy are on the horizon, driven by factors like climate adaptation and technological advancements in automation and AI. Preparing California’s workers and businesses for these transitions will require strengthening the ecosystem that enables businesses to create jobs—and that helps Californians prepare for and access jobs.

Key features of this ecosystem include worker and business supports that are tailored to the state’s diverse local needs, policies that enable work among more people and that assist businesses in hiring as the workforce shrinks, a safety net that helps participants work and achieve upward mobility, and stronger career pathways that allow more Californians to access a brighter future.

Focusing on these priorities would help bolster the state’s economic foundations and address barriers to economic opportunity, ensuring that more people can participate in and benefit from the state’s economic prosperity.