Western Alliance Bank’s SoCal Economic Forum: California’s Economic Strength Hindered by Worker Shortages, Housing Shortfalls

California’s strong economy is being undermined by insufficient housing development and sluggish job growth resulting from a worker shortage. That’s the latest assessment from economist Christopher Thornberg, founding partner of Beacon Economics, who spoke to an audience at Western Alliance Bank and San Diego State University’s recent Economic Forum.

The downsides may not be obvious as California’s gross domestic product (GDP) growth continues to outpace the nation. Over the last year, the state’s output increased 3.7%, compared to 3.1% for the rest of the country, and in the past five years, it rose 13.6%, compared to 11.7% nationally.

Still, the state’s job growth rates are among the lowest in the country.

“The problem is a lack of people,” Thornberg said. “We don’t have enough workers in our state.”

Part of the reason is that many older people in the state’s coastal communities retired during the pandemic, leaving those regions starved for labor. Now, a lack of housing is keeping working-age people from moving into those communities.

“California doesn’t build enough housing, so it’s hard to grow our labor force and economy,” Thornberg said. “The exception is San Diego. San Diego is a breath of fresh air when it comes to housing.”

Thornberg said headlines suggest that people are fleeing California, but in reality, more people live in separate households. Fewer residents per household translates into less available housing. For example, while Los Angeles has seen its population decline by 4% in four years, the number of households is up by 5.1%. If there were an exodus of people from the state, we would see higher housing vacancy rates.

“Instead, California vacancy rates are at about record-low levels,” Thornberg said. “That’s because the number of households is going up, and we don’t have enough housing units.”

Balancing housing policies and the labor market with economic growth is complex. Despite California’s robust economy, the state faces significant challenges resulting from sluggish job growth and insufficient housing development. Wages aren’t doing the state any favors, Thornberg noted.

“Minimum wage policy is having a negative impact on the youth of today,” he said. While the poverty rate in California is at a near-record low, the unemployment rate for 16- to 19-year-olds is 18%. California’s minimum wage hikes likely will force businesses to steer away from hiring younger workers who have not yet developed job skills.

However, Thornberg also pointed out that the share of the Southern California population with a subprime credit score is near an all-time low. “People are doing well. Simple as that,” he concluded.