By Dr. Lynn Reaser, Ph.D., CBE
A year ago, California’s economy was racing forward, with year-over-year job growth equal to 3.1%, a pace double the national average. Today, the state’s year-over-year gain has decelerated to half that clip at 1.5%, slightly behind the U.S. 1.6% pace. The year-over-year change in the number of jobs added is also notable. In May of 2016, California posted a hiring surge of nearly 500,000 additional jobs. While still sizable, the current gain is slightly less than 250,000.
All of California’s major metropolitan areas have experienced this slowing, including Silicon Valley, the Bay Area, Los Angeles, Orange County, San Diego, Sacramento, and the Inland Empire. (See Figure 1.) The deceleration has also been registered across all of the state’s major industry clusters.
This speed bump could be temporary, but it is important to determine if there are fundamental forces at work that might cause the slowdown to continue or if it could deteriorate into an actual loss of jobs and incomes.
A Myriad of Forces
An analysis of all dimensions of the issue indicates that no one single causal factor exists. A number of forces from both the supply and demand sides appear to explain the slowing in job gains. Some are reason for greater concern than others.
Closing in on full employment
As California’s jobless rate has continued to fall, with the rate falling to a 16-year low of 4.7% in May, finding qualified workers has become increasingly difficult. The number of unfilled job openings nationwide in now at a record high. Among small business firms, 33% of them outside the state report skilled and/or unskilled positions they cannot fill. In California, that number is even higher at 40%. (See Figure 2.) The tightening of the labor market is reflected in the pickup in wage gains as firms compete for workers. This supply side impact is also reflected in the geographic pattern of the slowdown over the past year. It has been concentrated more in the major metropolitan areas rather than in rural areas that typically have higher unemployment rates and more excess capacity.
Return to the norm
Over time, California’s job growth has closely tracked the national average. (See Figure 3.) Its earlier significant outperformance likely reflects the sharper rebound from the effects of the housing downturn as well as more slack in the job market. Companies earlier on were probably aggressively hiring to offset the severe cutbacks they had implemented during the recession. California could now be returning to its historical pattern of following the national average.
Almost all of California’s major industries have contributed to the braking in overall job gains. (See Figure 4.) Some of the reasons for the slowdown are structural or long-term in nature, whereas others can be traced to policy or cyclical factors.
Job growth in the information services industry has exhibited the greatest contribution to the state’s overall deceleration in job growth. In May 2016, the industry had added 50,000 jobs over the prior year. In May 2017, the gain was a mere 200. This industry includes a diverse group, spanning newspaper publishers, broadcasters, telecommunications firms, data processing companies, and motion picture producers. The latter group has driven the slowdown, swinging from a job gain of 34,000 in 2016 to a job loss of 15,000 in 2017. Some of this change may reflect the volatility of the industry, but efforts to cut costs have also likely been at work. Of greater concern, producers of motion picture, video, and audio content continued to be attracted to other areas in and outside the U.S. due to lower costs. The impact has been especially hard on Los Angeles.
Job Placement Firms
A similar swing in hiring among employment services, involving a change from job gains to job reductions, has been the largest factor behind the change in the Administrative & Support group. This may reflect a lesser use of temporary workers by firms as they have added to their permanent staffs over the past two years. Hiring by job placement and temporary help firms can also be volatile, but its slowdown has also typically come in the front of major economic slowdowns. Notably, the rest of the country has seen an acceleration of hiring in this segment.
Health care employment has slowed significantly over the past year, with the deceleration spanning most segments, ranging from medical offices to hospitals. This change likely reflects growing cost pressures on the industry as well as uncertainty regarding how policies will be altered with the expected repeal and replacement of the Affordable Care Act.
Transportation, Warehousing, and Utilities
All major types of transportation have slowed down their rates of new hiring while employment growth in warehouses has also lost speed. The latter trend is surprising, given the increased demand for warehouse space with the explosion of e-commerce. Utilities have shifted from adding to their workforces to cutting them in the past year. All of these changes may reflect the attainment of more sustainable staffing levels, problems finding qualified workers (as in the case of trucking), or efforts to reduce costs.
Leisure and Hospitality
While leisure and hospitality created 44,000 new jobs for Californians in the past year, this contrasts with the 71,000 positions generated in 2016. Food services has dominated the deceleration. Some of the slowing may reflect the impact of the increase of the state’s minimum wage from $10.00 an hour to $10.50 in January of this year for firms employing 26 or more workers. In San Diego, where the minimum wage was boosted to $11.50 an hour at the beginning of this year, restaurant employment has actually fallen below its year-earlier levels.
Retailing has swung dramatically from a job gain of over 23,000 jobs just a year ago to a payroll loss of 200 positions as of this May. The decline in brick-and-mortar stores mirrors the trend experienced nationally. On a percentage basis, California has seen virtually the same pattern as recorded in the rest of the country over the past two years. While some job offsets have occurred in such areas as transportation and warehousing, the overall impact of e-commerce has been to reduce the total number of payroll jobs.
Professional and Technical Services
The slowing in California’s job growth in technology services to about one-third its gain of a year ago is disturbing given the state’s reputation as a global leader in innovation. Slowing in the fields of computer design and technical consulting has been particularly significant. In contrast, the rest of the country has retained its strength in this field.
A year ago, California had added nearly 9,000 jobs in manufacturing. These jobs have been lost over the past year. The high cost of living and doing business in the state appear to have prevented a sustained improvement, which has occurred on a modest scale in the rest of the country.
Job growth in banking, insurance, and real estate is only about one-third its pace of a year ago. This counters the trend of the rest of the country, which has experienced steady, albeit moderate, growth. California’s financial sector’s slowing may be a response to the lessening in demand from the many industries swept up in the state’s deceleration.
Except for the Department of Defense, government sector jobs have continued to grow over the past year at the federal, state, and local levels. The rate of hiring has slowed down as staffing levels may have been restored to more normal levels and budget pressures remain.
With home prices continuing to rise, the demand for new housing remains high. Construction hiring is not quite as strong as a year ago, but much of the problem may be due to the problem in finding qualified workers. Three-fifths of small California construction firms cannot fill key positions. Wages this year are rising about 6% from a year ago in this sector, as businesses compete for workers.
1. California’s slowdown in job growth over the past year could be temporary, but it is likely to be more prolonged. Some of its dimensions should not raise undue concerns, whereas others are more worrisome.
2. The state’s tendency to converge to a growth rate similar to that of the nation is a historical trend that may be difficult to overcome unless the state can continue to spawn new waves of technology, innovation, and job creators. If the nation does not pick up speed, this moderation could have adverse implications for the state’s overall economic growth as well as its budget.
3. A tightening of the job market could be an important constraint on business, although a pickup in wage gains could help household incomes and cushion the impact on California’s total personal income growth and its revenues.
4. The apparent slowing in job demand is of particular concern regarding several key California industries: manufacturing, professional and technical services, business services, motion pictures and information companies, health care, and leisure and hospitality.
5. California’s policy leaders may want to consider several steps they could take to reverse or stem the recent slowdown:
· Lobby for reforms in immigration law that will facilitate the flow of critical skilled and unskilled workers for the state’s firms.
· Support the development of vocational training and apprenticeship programs to provide the supply of workers needed in construction, manufacturing, tourism, and other businesses.
· In addition to affordable housing that qualifies for special regulatory treatment or subsidies, focus on ways to encourage more market-based housing for middle-income households, such as ways to streamline project approval processes.
· If national tax changes are implemented, examine how California’s tax policies might be changed to either maximize benefits or limit any harm.
· When Congress ultimately approves a successor to the Affordable Care Act, determine as quickly as possible the future of Medi-Cal in terms of size and future growth to enable health care companies to plan.
· As national regulatory policies are modified, evaluate parallel California rules to ensure that best practices are followed and that benefits justify costs.
· Analyze carefully the possible downside risk on jobs of any future actions, such as minimum wage floors, that significantly raise the costs for businesses in the state.
· Lobby for federal funding for California’s vital scientific and medical research.
On balance, California is unlikely to return to the pace of job growth enjoyed a year ago. None of the individual polices suggested above is likely to restore that performance, but some or a combination of them could allow the state to at least keep pace with the nation. Given California’s technology drivers, we also have the potential and capability to lead and outperform the U.S.