Blue Green Line in Header

Is California’s Economy Really All About the Bay Area?


This era of regular and ongoing political “whoppers” coming out of Washington DC, seems to have ushered in an increased willingness outside the beltway to declare pretty much anything, regardless of having evidence to support said claim, or even worse, saying it in the face of contrary evidence. Deeply misleading comments about the economy can be particularly dangerous in my view. In the fashion world, the adage that saying things enough times makes them true may hold, but it certainly does not for the economy. These false narratives have the pernicious effect of focusing policymaker attention on things that don’t matter while allowing them to ignore things that do.

Recently, one of the most oft-repeated false narratives involves ‘conventional wisdom’ about the patterns of growth in California—or more specifically, where growth is occurring within the state. For all the doom and gloom pronouncements about California’s economy given its high taxes, high housing costs, and stiff regulatory environment, the state has vexed its critics by continuing to be one of the fastest growing economies in the United States. Job growth has been among the fastest in the nation, and the state recently became the world’s 5th largest economy, surpassing the United Kingdom in terms of output.

The standard explanation for this contradiction is the tech industry in the San Francisco Bay Area. Joel Kotkin, Professor of Urban Studies at Chapman University, author of multiple books, and a regular commentator in the media, explained it this way on Southern California Public Radio's "Take Two" program on May 18, 2018 (California Baby Bust): "Almost all the income growth and high-end job growth took place in Silicon Valley.”

No one doubts the strength of Silicon Valley. The older tech companies that have traditionally driven the South Bay economy have been supplemented by a new surge of social media companies up the peninsula. Average payroll income across the area is now well over $115,000 per year, twice the national average. Until recently, these economies also had some of the fastest job growth in the state. And the latest slowing has been driven only by a lack of labor supply. Unemployment in the region is currently below 3%.

As for the rest of the state, the claim is that things are not so good. A recent study out of Harvard suggested that despite its hot tech economy, California has one of the lowest ‘quality of life’ rankings in the nation, something driven partly by high rental costs. High taxes and stifling regulations are typically cited as causing a mass outflow of business and higher income families from the state. Sounds grim.

Is the Bay Area truly the only source of California’s overall economic growth? Absolutely not. In fact, data completely contradict this interpretation of the distribution of economic prosperity within the state. Instead, the data reveal a picture in which economic prosperity is fairly wide spread.

Take, for example, personal income in the state, collected by the U.S. Bureau of Economic Analysis on an annual basis. The core 6-county Bay Area region generates not all or even a majority of state income. In 2016 the Bay Area generated slightly over 25% of California’s total income. Over the last 5 years the region has accounted for about one-third of all income growth in the state. 

The region clearly punches above its weight given that it comprises less than 20% of the state population. But the idea that most or even a majority of new income growth in California is within this one region is completely false. Indeed, the region’s relative contribution to growth in the late 1990s was greater than it is today—although so was its contribution to the losses in state income that occurred during the bust of 2001.

Moreover, into the future, these numbers will almost assuredly show the Bay Area’s contribution to growth slowing, given how its most recent pace of job growth has sharply declined relative to other parts of the state. Today, the fastest growing regional economies in California from a jobs basis are Stockton, Fresno, and the Inland Empire.

It is important to note that these personal income numbers are based on aggregate income, which can be biased by received government benefits. So what about the quality of the jobs in question? Again, we don’t have to guess; the data is easily obtainable from the annual American Community Survey from the U.S. Census. This data shows residence-based earnings for full time workers. I divided the state into 3 areas: the 6-county core Bay Area, the three big coastal Southern California counties (Los Angeles, Orange, San Diego), and everything else. The Bay Area accounts for about 20% of state employment, while the other two regions account for roughly 40% each.

Between 2013 and 2016, California added over 1.1 million full time workers — a 10% growth rate. Were they good jobs? Well, 43% of these workers earned over $100,000 per year, 75% were paid over $50,000 per year. The number of full time workers being paid less than $25,000 per year (often referred to as the working poor) actually fell.

Were all these new high paid jobs located in the Bay Area? No. The number of new jobs paying over $100,000 per year in the state (484,300) was greater than the total number of new jobs added in the Bay Area. Mind you, the Bay Area accounted for 40% of these high-end jobs – it’s a dynamic region with many highly skilled, highly paid professionals – but 60% were located in the rest of the state.

The claim that all high-end jobs in California are in the Bay Area is simply wrong. And believing otherwise distorts public policy. For example, much of the focus within economic development agencies these days is wrapped around the idea of growing a tech sector. These data actually show us the opposite—that economies can succeed and workers can do well without needing a large tech cluster.

The data also illustrate another issue. Too often we hear that people are fleeing the state because of high housing costs. But housing costs are so high because the number of high-income earners across the state is growing faster than the supply of homes. Lack of supply is the critical issue. And this is important because the solutions to increasing supply are substantially different than those that deal strictly with affordability. Indeed, too much of the policy focus has been on affordability and this is exactly why we have accomplished so little in terms of increasing the growth in new home supply in California.

The age of false narratives may be upon us, but to truly service the economy and the people, policymakers and other public-sector leaders must take care to vet these ideas against real and credible data, allowing them to make evidence-based decisions about where to invest time, money, and other resources.


Previous article  |  Next article