California’s growth explained

Lets take a look at the details of California’s economic resurgence since the election of Governor Jerry Brown and adoption of a significant tax increase. (Using data compiled by Don Grimes covering the period from June 2011 to June 2014. Governor Brown took office in January 2011 and the tax increase was approved by voters in November 2012).

Over those three years, California’s job growth has exceed the U.S. average by a substantial amount. California employment growth in the past three years: 2.5%, 2.9% and 2.3%; U.S. growth during same periods: 1.6%, 1.7%, and 1.9%.

What might be even more interesting and important for Michigan is the breakdown of the job growth by sector. California achieved this faster than the nation job growth even though its manufacturing sector was substantially lagging the growth in the U.S. and was actually losing jobs the past two years: California manufacturing employment growth for the three years: 0.5%, -0.3%, -0.3%; compared to U.S. manufacturing growth of 1.9%, 0.4%, 1.1%.

California’s recent out performance can be traced to a stronger rebound in construction, but mostly to much stronger job growth in professional and technical services, corporate headquarters and health care services. In the two big job-growth, knowledge-based sectors California increased professional and technical service employment by 5.8%, 3.7%, 3.6% ; compared to 2.7%, 3.0%, 2.9% for the nation. In private health service California employment grew 3.5%, 7.2%, 4.1%; compared to 2.1%, 2.4%, 1.9% for the U.S.

The strong job gains in these highly paid, highly educated sectors seem to also support stronger job growth in retail trade and restaurants and bars than in the U.S. overall.

This is consistent with the trends we have been reporting on in our annual reports and detailed in our recent The New Path to Prosperity report. Growth is occurring in knowledge-based services which tend to be higher wage which drives employment increases in retail and hospitality which are low wage. The lesson is clear, if states and region are going to grow and be prosperous, unless they have major oil and gas deposits, this is what it will look like. Manufacturing isn’t a sustainable growth option and the rest of the goods producing sector on a structural basis is not going to grow much either.

Two lessons from California seem important for Michigan to learn:

  1. You don’t need job growth in manufacturing to thrive.
  2.  It’s not all about taxes. You can be a prosperous state even if you have relatively high taxes, or more generally business costs, if you can grow the knowledge economy. If Michigan can grow its knowledge economy, as we have been advocating, then it doesn’t matter if manufacturing and other cost sensitive sectors move to lower cost states – Michigan will still thrive



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