City Journal

Wendell Cox
The Long Stall
California’s jobs engine broke down well before the financial crisis.
Autumn 2011

Everybody knows that California’s economy has struggled mightily since the 2008 financial crisis and subsequent recession. The state’s current unemployment rate, 12.1 percent, is a full 3 percentage points above the national rate. Liberal pundits and politicians tend to blame this dismal performance entirely on the Great Recession; as Jerry Brown put it while campaigning (successfully) for governor last year, “I’ve seen recessions. They come, they go. California always comes back.”

But a study commissioned by City Journal using the National Establishment Time Series database, which has tracked job creation and migration from 1992 through 2008 (so far) in a way that government statistics can’t, reveals the disturbing truth. California’s economy during the second half of that period—2000 through 2008—was far less vibrant and diverse than it had been during the first. Well before the crisis struck, then, the Golden State was setting itself up for a big fall.

One of the starkest signs of California’s malaise during the first decade of the twenty-first century was its changing job dynamics. Even before the downturn, California had stopped attracting new business investment, whether from within the state or from without.

Economists usually see business start-ups as the most important long-term source of job growth, and California has long had a reputation for nurturing new companies—most famously, in Silicon Valley. As Chart 1 shows, however, this dynamism utterly vanished in the 2000s. From 1992 to 2000, California saw a net gain of 776,500 jobs from start-ups and closures; that is, the state added that many more jobs from start-ups than it lost to closures. But during the first eight years of the new millennium, California had a net loss of 262,200 jobs from start-ups and closures. The difference between the two periods is an astounding 1 million net jobs.

Between 2000 and 2008, California also suffered net job losses of 79,600 to the migration of businesses among states—worse than the net 73,800 jobs that it lost from 1992 through 2000. The leading destination was Texas, with Oregon and North Carolina running second and third (see Chart 2). California managed to add jobs only through the expansion of existing businesses, and even that was at a considerably lower rate than before.

Graph by Alberto Mena
Graph by Alberto Mena

Another dark sign, largely unnoticed at the time: California’s major cities became invalids in the 2000s. Los Angeles and the San Francisco Bay Area had been the engines of California’s economic growth for at least a century. Since World War II, the L.A. metropolitan area, which includes Orange County, has added more people than all but two states (apart from California): Florida and Texas. The Bay Area, which includes the San Francisco and the San Jose metro areas, has been the core of American job growth in information technology and financial services, with San Jose’s Silicon Valley serving as the world’s incubator of information-age technology. During the 1992–2000 period, the L.A. and San Francisco Bay areas added more than 1.1 million new jobs—about half the entire state total. But between 2000 and 2008, as Chart 3 indicates, California’s two big metro areas produced fewer than 70,000 new jobs—a nearly 95 percent drop and a mere 6 percent of job creation in the state. This was a collapse of historic proportions.

Graph by Alberto Mena

Not only did California in the 2000s suffer anemic job growth; the new jobs paid substantially less than before. Chart 4 reveals the sad reversal. From 2000 to 2008, California had a net job loss of more than 270,000 in industries with an average wage higher than the private-sector state average. That marked a turnaround of nearly 1.2 million net jobs from the 1992–2000 period, when 908,900 net jobs were created in above-average-wage industries. Further, during the earlier period, more than 707,000 net jobs were created in the very highest-wage industries—those paying over 150 percent of the private-sector average.

Chart 5, which indicates job growth or decline in selected industries, again suggests that a lopsided amount of California’s economic growth in the 2000s was in below-average-wage fields. It included nearly 590,000 net jobs in “administration and support”—clerical and janitorial jobs, for example, as well as positions in temporary-help services, travel agencies, telemarketing and telephone call centers, and so on. The largest losses in the state during the 2000s were in manufacturing, which traditionally provided above-average wages. After adding a net 64,900 manufacturing jobs from 1992 to 2000, California hemorrhaged a net 403,800 from 2000 to 2008. But information jobs also went into negative territory, while professional, scientific, and technical-services employment experienced far lower growth than in the previous decade.

The chart also shows that California’s growth in the 2000s, such as it was, took place disproportionately in sectors that rode the housing bubble. In fact, 35 percent of the net new jobs in the state were created in construction and real estate. All those jobs have vaporized since 2008, according to Bureau of Labor Statistics data. They are unlikely to come back any time soon.

These are troubling numbers. Fewer jobs and lower wages do not a robust economy make. A continuation of this trend, even if California’s recession-battered condition improves, would result in a far more unequal economy, shrunken tax revenues, and a likely increase in state public assistance—all at a time when officials are struggling with massive deficits.

Graph by Alberto Mena
Graph by Alberto Mena

A final indicator of California’s growing economic weakness during the 2000–2008 period is that the average size of firms headquartered in the state shrank dramatically. As Chart 6 shows, California had a huge increase over the 1992–2000 period in the number of jobs added by companies employing just a single person or between two and nine people, even as larger firms cut hundreds of thousands of jobs. Many of the single-employee companies may simply be struggling consultancies: if they were doing better, they’d likely have to start hiring at least a few people. While start-ups are indeed crucial to economic growth, small companies are especially vulnerable to economic downturns and often feel the brunt of taxes and regulations more acutely than larger firms do. The awful job numbers for the bigger companies—including a net loss of nearly 450,000 positions for firms with 500 or more employees—suggest the toxicity of California’s business climate. After all, bigger firms have the resources to settle and expand in other locales; in the 2000s, they clearly wanted nothing to do with the Golden State.

Graph by Alberto Mena

What is behind California’s shocking decline—its snuffed-out start-ups, unproductive big cities, poorer jobs, and tinier, weaker, or fleeing companies—during the 2000–2008 period? Steven Malanga’s “Cali to Business: Get Out!” identifies the major villains: suffocating regulations, inflated business taxes and fees, a lawsuit-friendly legal environment, and a political class uninterested in business concerns, if not downright hostile to them. One could add to this list the state’s extraordinarily high cost of living, with housing prices particularly onerous, having skyrocketed in the major metropolitan areas before the downturn—thanks, the research suggests, to overzealous land-use regulation.

One thing is for sure: California will never regain its previous prosperity if it leaves these problems unaddressed. Its profound economic woes aren’t just the result of the Great Recession.

City Journal thanks the Hertog/Simon Fund for Policy Analysis for its generous support of this issue’s California jobs package.

Wendell Cox is the principal of Demographia, a public policy consultancy.

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