Robust local economy helps keep state afloat

By: EDMOND JACOBY - Staff Writer | Saturday, January 22, 2005 7:50 PM PST ∞

One out of every nine jobs in America is held by a Californian. So when the Employment Development Department released statistics Jan. 14 showing a marked downturn in jobs, people took notice. The state, EDD said, lost 25,000 jobs in December.

The scenario such data suggest is that California's economy is in trouble, that a steady drop in unemployment has now turned around and that prosperity may be around the last corner, not the next one.

If that is a harbinger for the nation at large, it's worrisome.

But economists seem to think the statistics don't paint the whole picture. Those jobs weren't lost everywhere across the state, and ongoing economic growth in places such as San Diego County is reassuring. Indeed, while the number of jobs declined in California last month, the unemployment rate ---- the percentage of people who could work and who wanted to work but who could not find jobs ---- remained unchanged from the month before at 5.8 percent.

"The San Diego region has been showing very good employment for years, and the recession of 2001 barely even caused a ripple," said Ross Starr, a professor of economics at UC San Diego.

"I wouldn't put too much faith in those December figures, because they're seasonally unadjusted," he said.

Seasonal adjustments are alterations of statistical data meant to even out fluctuations that occur at the same time every year, such as retail hiring at the beginning of the Christmas season. By taking away the effect of seasonal changes, statisticians can more easily spot and interpret nonseasonal changes.

Jack Kyser, chief economist of the Los Angeles County Economic Development Corp., agrees.

"Certainly, I don't think they're a harbinger. I think it's just noise," he said.

In fact, he said, a recent report by the federal Bureau of Labor Statistics singled out five Southern California counties as among the 10 counties nationwide with the best track record for employment growth for the year ended June 30: Orange, Los Angeles, Riverside, San Bernardino and San Diego.

If anything, Kyser said, Southern California faces the prospect of not enough workers to fill high-skill jobs in the future. Retiring metal workers and others whose jobs require training in manual and machine skills will be difficult to replace as time goes by, he said.

"Schools don't offer industrial arts anymore. Jobs like that aren't appealing in the high-tech era, and we have this notion that everybody has to go to college," he said, adding that the decision not to train people to replace those workers will lead to unfilled jobs.

The difficulty finding trained employees has another consequence. If employers must train workers after they are hired, the cost of hiring skyrockets, reducing the employer's ability to compete in the world market. In the end, an untrained work force pushes many companies toward the decision to transfer the jobs overseas, where the skills are still available and may be found at a cheaper price.

Unemployment in San Diego County is so low ---- 3.2 percent in December, down from 3.5 percent in November ---- that the region is essentially at full employment, according to Robert Brown, chairman of the department of economics at Cal State San Marcos.

"Southern California, in the last few years, has been carrying the state," he said.

"Southern California is doing really well, so presumably somebody in California is not doing well; that would be Northern California, I guess," he said.

"Depending on who you talk to, we are at, near or even under full employment," he said. The term 'full employment' means that everyone who wants to work and has skills that are in demand is able to find a job.

"There always are people who are unemployed because they're moving between jobs, or because there's a mismatch between the skills workers have and the skills employers need," Brown said.

In San Diego, that is the source of the 3.2 percent of the work force that can't find work.

When an economy is at full employment, the demand for labor must be met by increasing the supply of workers, or by increasing the productivity of workers. If neither happens, the labor market is in disequilibrium ---- the demand for labor is greater than the supply of labor ---- and the price of labor ---- wages ---- will rise until equilibrium is achieved.

Although productivity ---- the amount of product created by an hour of labor ---- is increasing in the American economy, the rate of productivity increase has declined sharply in the past year, according to government figures.

"We would expect wages to increase unless the supply of labor is increasing," Brown said.

According to Ryan Singer, chief economist for the San Diego Regional Chamber of Commerce, that is exactly what's happening.

"Economic theory tells us that the productivity gains we've seen in the last few years can't continue," Singer said.

"Something will happen: The capital-to-labor ratio will eventually equal out," he said. The San Diego region experiences net population gains of roughly 50,000 every year, mostly through natural increase (births). But about 40 percent of the increase, or 20,000 people, are young adults supplying the labor pool.

"So while it appears that the low unemployment leaves us nowhere to go, these people moving in represent growth potential," he said.

Continued productivity growth also strengthens the economy, but it's not a factor that can be counted on.

"Nobody knows where productivity growth comes from," UCSD's Starr said.

"The best guess is that it comes from a successful application of information technology, but there isn't a policy-maker anywhere who actually has a handle on that. It's progress that comes, and we are overjoyed by it," he said.

Explaining the decline in productivity, CSUSM's Brown suggested that when an employer hires, he selects the best worker he can find. If he needs to hire another worker, he does the same thing, but this time he is selecting the best of the workers who are still looking for a job, and his choice presumably is someone with skills that are not as good as the first person's. Each time the process is repeated, the skill level of the best among those still in the pool of available workers is slightly lower.

In the end, Brown said, when nearly all of the workers have been hired, it is only the least skilled who are left, and as the average skill level of the hired employees declines with the addition of new hires, their productivity falls, as well.

San Diego's full-employment economy makes it a happy place, in some ways. That same full employment, which gives the region its economic robustness, however, contributes to some of its greatest woes. Housing prices here are sky-high, in part, because everyone is employed. Transportation gridlock is a byproduct of economic growth that outpaced planners' imaginations. And the new technology companies that are born here, spinoffs from university research projects in many cases, too often find it necessary to move on when the local labor pool is tapped out.

The good news is, with full employment already achieved, all of these problems can be solved.

Contact staff writer Edmond Jacoby at (760) 739-6675 or ejacoby@nctimes.com.

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