California’s Economy Lags Behind Other States, Here’s Why it’s so Sluggish

California’s unemployment rate, 5.2% of its labor force in July, is no longer the nation’s highest after months of having that dubious distinction.

While California’s July rate was unchanged from June, Nevada’s creeped ahead — or behind — with a 5.4% rate, so California is now tied with Illinois for second place among the states.

The jobless rate translates into slightly over 1 million of California’s 19.4 million-person labor force being unemployed. The labor force is defined as adults of working age who either hold jobs or are seeking work.

As high as it may be in relative terms, California’s unemployment rate is merely one piece of an economic puzzle. Other pieces include a population that has been declining due largely to out-migration to other states, a chronic shortage of housing that pushes housing costs upward and pushes people out of the state, increased numbers of workers who have retired and a decline in the labor force due to all of those factors and more.

Overall, California’ economic recovery from the brief but sharp recession during the COVID-19 pandemic has been slower than the nation as a whole, or as a new analysis from Beacon Economics puts it, “There is little doubt that California is not doing as well as it has in the past. The only substantial argument is over why the state is faring so poorly, and the depth of the rot.

“California’s biggest problems are not a function of an economy that suddenly stumbled upon hard times,” Beacon continues, “they are the unintended consequences of policy choices made over the past decade. While the state continues to show real strength, and there is no recession in sight, these policies have limited the economy’s capacity to expand.”

While “the state’s economy is growing, just at a slower-than-typical rate (and) California’s problems relate to a number of unforced policy and fiscal errors, which have created a drag on the state’s ability to grow. A change in approach would serve California well, but this can only occur if we align the narrative about the state’s economy with the reality,” the strongly worded analysis declares.

Chief among those unforced errors cited by Beacon is California’s inability to jump-start housing construction despite the passage of numerous legislative measures aimed at reducing impediments, such as restrictive local zoning and design rules.

Beacon says, “California’s economy is being held back by the state’s housing shortage, not by housing affordability,” adding, “As the lack of housing supply drives up home prices, higher income families who enjoy lower price sensitivity are moving in, pushing housing prices up even further, and pushing lower income families, who face greater price sensitivity, out of the state.”

Beacon sees a geographic aspect to the state’s slow recovery, with jobs in inland areas growing markedly faster than those in coastal communities — and once again ties it to housing.

“The regions that have added significant payroll jobs over the last two years, such as the Inland Empire, Sacramento, Fresno, and Stockton, are all located in less expensive inland parts of the state and are able to grow because of their expanding labor force,” Beacon notes. “In contrast, the more expensive coastal markets have seen much less labor force growth, and hence less payroll job growth. The differential impact on California’s coastal communities is a function of slower growth in their housing supply combined with a greater share of their labor market entering retirement.”

Aligning the narrative of the economy with reality, rather than ideology, is sound advice that Capitol politicians should heed as they draft nostrums purporting to improve the lives of their constituents but rarely succeed.

CalMatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.