Kimbell, Larry J

Richardson, Mary

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UCLACalifornia Policy OptionsTitleThe California Economy: On The ReboundPermalinkhttps://escholarship.org/uc/item/5xm5307gAuthorsKimbell, Larry JRichardson, MaryPublication Date1998eScholarship.org Powered by the California Digital LibraryUniversity of CaliforniaTHE CALIFORNIA ECONOMY: ON THE REBOUNDLarry J. Kimbell and Mary RichardsonThis chapter outlines the geographic and economic distribution of growth inCalifornia following the recession which ended in 1993, drawing on research conductedfor the UCLA Anderson Forecast and elsewhere. We examine regional growth patterns,the prospect of renewed positive inmigration, the role of the national macroeconomicenvironment, as well as the distribution of earnings. Growth in California has returned tothe relatively higher rates, vis a vis the U.S., which have historically characterized theCalifornia economy. The dramatic expansion of the electronics industry and relatedbusiness services in Santa Clara County and San Francisco is leading the recovery ofCalifornia's regions. The recovery has occurred within a national macroeconomicenvironment which has been remarkably stable.Long term prospects for stable growth will eventually be challenged byincreasing earnings inequality, wage stagnation, and the impending increase in thedependency ratio of elderly to working age population. That ratio will begin to risearound 2010 when older babyboomers start to retire. Young immigrants offer a solutionto the dependency problem. But the integration of less educated immigrants into aneconomy already plagued by increasing earnings inequality will challenge theimagination of policymakers. The wider distribution of on the job training, upgrading oflow wage jobs, and English language acquisition will be important components of anagenda to incorporate immigrants into the California economy.A Return to Faster GrowthCalifornia and the U.S. are currently reversing the trend toward slowdown in therate of real GDP growth that we have seen in the past three decades. Furthermore,growth rates in California have returned to their relatively faster growth rate with respectto the U.S (Figure 1). Growth rates in California have exceeded growth rates of the U.S.in nearly every year except for 1990-1995 (Lieser, September 1997), when the recessionhit California particularly hard. California returned to this faster growth path in 1996 andis expected to maintain that position for the first two decades of the next century. Due tofaster growth tates, wages in California have exceeded those in the U.S. for many years.California has weathered the loss of aerospace jobs and the influx of low wageimmigrants without a noticeable decline in the California-U.S. wage ratio (Figure 2)(Richardson and Mitchell, 1997). However, the dispersion of wages for California'smale workers has widened relative to the U.S.California is making impressive employment gains. However, the new jobs tendto be concentrated in certain industries and regions, with net pay levels and skill levels1-r~!that are slightly below average (Jacoby and Goldschmidt, .1997).. Between March 1996and March 1997 California added more than 425,000 jobs, a gain of 3..4% (Lieser, June1997.. This is the highest nllnlber of jobs created in California since 1988.. The majorityof jobs added were in the service sect!:>r.. Four industries comprising less than half ofservice sector employment accounted for 83% of the new service jobs during this period..These four industries included business services, motion pictures and television,engineering and management services and amusement and recreation services.. Thestrongest gains in manufacturing employment were found in high technology industriesand apparel..Growth fu California is generated by distinctive regional competencies. Theexpansion of the electronics industry and related business services in Santa Clara Countyand San Francisco has produced a striking change in the geographic distribution of thestate's growth. Although through much of the post World War II era, the state's economywas dominated by the greater Los Angeles five-county region, the balance of growth inrecent years has shifted northward. Employment Development Department data from thefIrst seven months of 1997 indicate that the San Jose metropolitan area is the fastestgrowing region in California, with an employment growth rate of 4.2% (Figure 3)(Lieser, September 1997). Unofficial surveys of large and small technology companies inthe San Francisco metro area showed average employment growth rates exceeding 10%in 1996 (Lieser, June 1997).IiI:IIHowever, the sustainability of northern California's fast-paced growth isquestionable. With employment growth rates of 10% and vacancies of 5%, the SiliconValley is becoming too crowded, too expensive, and too hemmed in by land userestrictions for the current expansion to endure. The congestion of northern Californiaraises questions about where the technology boom overflow will locate. SouthernCalifornia has a plentiful supply of office and industrial space, but it is perceived bynorthern California hi-tech entrepreneurs as being too far from the network of SiliconValley suppliers and distributors. There will be a price at which high tech producers willopt to pursue lower cost locations. Given the slack growth in southern California and thebenefit to the state of keeping the technology boom in California, policies should beconsidered to increase the attractiveness of locating in southern California.Slow Growth in Southern CaliforniaSouthern California is adding jobs, but the rate of growth is less than the rest ofCalifornia. As of July 1997, employment growth rates in the greater Los Angeles regionwere the lowest of all metropolitan areas in California except for Fresno. While theaverage rate of employment growth for California as a whole was 3%, in the greater LosAngeles region it was only 2%. Job growth has been consistently stronger in the rest of2California than in the greater Los Angeles region in every year since 1990 (Schniepp,1996). Because the difference between annual employment growth rates since therecovery began has been roughly constant, southern California is not about to catch up tothe rest of the state.The type of jobs being created in southern California tend to be low wage.Higher paying industries, such as transportation equipment manufacturing,communications, public utilities, finance and insurance, petroleum refining and state andlocal government, with the exception of education, are downsizing. Although LosAngeles is the largest manufacturing center in the nation (Wolff, 1997), in 1996 only 36%of California's new job formation in manufacturing was located in the greater LosAngeles region. The average salary for the net job created in Los Angeles County during1996 was $24,730 (Schniepp, 1996).The Return of Positive Net MigrationDeclines in outmigration from California are prompting expectations of the returnof positive net migration. Prior to the 1990s, more people migrated to California fromabroad and from other U.S. states than departed the state for other destinations. Duringthe 1980s average net inflows of 337,000 were recorded (Lieser, September 1997). U.S.Bureau of the Census estimates show a large exodus from California during the first halfof the 1990s. Statistics from the U.S. Internal Revenue Service suggest that the netoutflow from California peaked at about 425,000 persons in 1993-94. The slowing of netdomestic outmigration in 1995-96 returned the overall domestic and internationalmigration count to near zero (Gabriel, 1997).Low unemployment rates in the destination state relative to the origin state, tendto prompt strong migration between those areas (Gabriel, 1997). This tendency isparticularly true if the states are near each other. The sharp increase in net domesticoutmigration from California during the early 1990s coincided with the sharper decline inemployment opportunities in California relative to that of other states, attendant to thegreater severity of the recession in California. Recent declines in California'sunemployment rate are projected to reverse the direction of net migration flows (Figure4)Net inmigration is expected to become a substantial factor in California'seconomy by the turn of the century, with major implications for housing and labormarkets. This expectation is based on the projected convergence of California andV.S.jobless rates over the 20 years beyond the turn of the century. According to Lieser, thefaster rate of growth in California during this period will eventually close the California-V.S. differential in unemployment rates. Hi~torically, the convergence of California andV.S. unemployment rates is a rare occurrence and has typically been accompanied bylarge numbers of immigrants from other states (Lieser, September 1997).3In addition to boosting the demand for housing and consumer goods, increaseddomestic migration to California will expand the workforce while raising its educationallevel. Unlike flows of foreign immigrants, domestic migrants to California aredominated by persons with a college education (Figure 5). From 1985 to 1990 Californiahad a net gain of college educated workers because domestic inmigration was very high.It is unlikely that the return of positive domestic migration will be sufficient to overcome.the trend toward declining education levels in California's workforce, but domesticinmigration will partially offset the decJine (Bolton, 1997).As recently as 1980, California had the highest percent of college educatedworkers of the ten largest states. However, by 1995 California had fallen to fourth placein this ranking (Bolton 1997). During 1983-1993 managerial/professional employmentincreased by 1% in California, compared to 4% in the U.S (Figure 6) (Richardson andMitchell, 1997). Whereas prior to 1983 the share of managerial/professional occupationsin California clearly exceeded that of the U.S., by 1993 they were roughly equal. Jacobyand Goldschmidt's study of California's fastest growing occupations indicates that 45%of these jobs will require skills consistent with less than a high school education (Jacobyand Goldschmidt, 1997).Maintaining a Stable Macroeconomic Environment for GrowthThe national macroeconomic environment since the last recession has beenremarkably stable. Real GDP growth, GDP deflator inflation, and the unemployment rateseemed fixed at desirable levels. Faster growth during the recovery would have riskedtoo much inflation. High rates of resource utilization have drawn the attention of FederalReserve Chairman Alan Greenspan (Kimbell and Dhawan, 1997). Fearing that wagegrowth pressures could be building given the current tightness of labor markets,Greenspan warns that the threat of rising inflation may require a slowdown in growth.Waiting too long to raise the interest rates could provoke a recession while slowinginflation. Greenspan may act to slow the national economy by mid 1998, and thisslowdown will affect California as well.'Ul.,The ability to maintain the strict monetary discipline which has been achieved inthe past fifteen years will become more problematic in the future, especially after 2010when the aging babyboomers begin to retire. This mass retirement will put upwardpressure on government spending, while placing downward pressure on savings rates.Other policy dilemmas which will be aggravated by the retirement of the babyboomersinclude: 1) the projected deficit in Social Security, 2) the smaller size of the futureworkforce which will be supporting the retirees, and 3) current trends of slow growingproductivity, wage stagnation and increasing earnings inequality. In last year's4I~California Policy Options.. we suggested that California could welcome an influx ofyoung immigrants as part of the solution to the projected 75% increase in the ratio ofelderly to working age population. We offered this proposal cautiously, with recognitionof the near term labor market tensions it would create.The integration of young, less educated immigrants is and will be a daunting task,but the other policy options are no less so. Due to a faster drop at the bottom of theearnings distribution, earnings inequality among men in California is already increasingfaster than in the U.S. (Figure 7) (Richardson and Mitchell, 1997). If a smallerworkforce, composed of predominantly low wage workers, is going to support thebabyboomers, the question of how to raise their productivity is inescapable. Risingproductivity would lighten the tax burden as well as raise wages. The continued growthof low-skill, low-pay jobs may be due to the unwillingness of employers to upgrade theskill content of jobs. To the extent that the low wage economy is due to employers'reluctance to upgrade jobs, policies could be designed to assist employer-providedtraining (Jacoby and Goldschmidt, 1997, Wolff, 1997).Instead of trying to create high-skill, high-wage industries, that we upgrade low-skill, low-wage ones instead. The most effective means of raising the earnings of lowwage workers is to develop comprehensive industrial upgrading strategies in lightmanufactUring which facilitate changes in marketing, production and human resourcepractices. While heavy industry and high tech manufactUring have been declining in theLos Angeles region, light manufactUring industries have been growing (Wolff, 1997).By implementing a high-skil1/high wage competitive strategy. Lightmanufacturing industries can reposition themselves in product markets that require bettertechnology, reorganized workplaces and better trained workers. This strategy allowsindustries to compete on the basis of quality, customized products and fast response,rather than just low prices. Furthermore, the high-skil1/high wage path has the tripleadvantage of raising the wages of low wage natives as well as immigrants, while raisingprofits for employers by increasing the competitiveness of their firms.ConclusionsCalifornia has rebounded to its customary faster growth path. Southern Californiahas not recovered as much as northern California and it does not appear that it will regainits former dominant position in terms of faster growth. The California economy isgenerating.jobs that pay lower wages than average, however, the California-U.S. wageratio has remained stable, implying that the trend toward lower paying employment isnational rather than local. Declining unemployment rates have prompted expectations ofa return to positive net domestic migration, which should partially offset the declining5educational level of the workforce and stimulate consumer demand. Although therecovery has taken place in a remarkably stable macroeconomic environment, prospectsfor future stability will be challenged by faster growth rates, increasing earningsinequality, wage stagnation and the impending increase in the dependency ratio of elderlyto working age persons. Policies to facilitate the integration of~ young immigrants willpose controversial solutions to the future crisis of dependency.ReferencesBolton, Nancy, "The Education of The Workforce", The UCLA AndersonForecast, September 1997.Gabriel, Stuart, "Leaving Los Angeles", The UCLA Anderson Forecast, March1997).Jacoby, Sanford and Goldschmidt, Pete, "Education, Skill and Wage Inequality",California Policy Options, Volume 2, 1997.iI!Ii I, Ii ,ii;II !,:IiiKimbell, Larry J. and Dhawan, Rajeev, "Long Ternl Projections: A 20/20 Viewof 2020", The UCLA Anderson Forecast, September 1997.Lieser, Tom, "The California Long-Term Outlook: The Moving Vans AreHeaded West Again", The UCLA Anderson Forecast, September 1997.Lieser, Tom, "The California Outlook: Making Room for The Boom", The UCLAAnderson Forecast, June 1997.'IjII Richardson, Mary and Mitchell, Daniel J.B., "The California-to-U.S. WageRatio", The UCLA Anderson Forecast, September 1997.Schniepp, Mark, "The Greater Los Angeles Regional Economies", The UCLAAnderson Forecast, September 1996.Wolff, Goetz, "Low Wage ManufactUring: A Neglected Policy Arena inCalifornia", California Policy Options, Volume 2, 1997.60.070.06 I',0.05III0.04III0.030.02~C8Iif]1 u.s.10.010.00E 86 87 88 s-0.01-0.021.201.181.161.141.121.10'HourlyPay-WeeklyPay---Annual~~L- .-1.081.061.041.021.000.9883 84 85 86 87 88 89 90 91 92 937Figure 3. Rates of Nonfarm Employment Growth: Santa Clara and Los AngelesCounties8California Domestic MigrationManagerial/Professional Employment ,As Share of Total Employment:California and U.S. 198~~-1993Figure 6.0.30.280.26r::'-:::-Califl~.:._.:.:..~:~J0.240.220.292 9387 88 89 90 9183 84 85 869Figure 7. California/U.S. Ratio of Wage Dispersion As Nleasured by Male Earnings at75th/25th Percentiles1.201.151.101.051.000.95 ! I I I I I I I I I I I I I79 80 81 82 83 84 85 86 87 88 89 90 91 92 9310

The California Economy: On The Rebound

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