California's Economic Recovery That Wasn't

Last week, California's Employment Development Department announced that the state added 44,200 jobs in August. This news was trumpeted by Sacramento as further evidence of California's comeback.

Yet, when judging a comeback, one always has to ask, compared to what? According to the recent UCLA Anderson economic forecast, even though California has regained all the jobs it lost during the recession, the Golden State is still about 1 million jobs shy of where it ought to be. And California still has roughly 321,000 more unemployed than at the start of the recession.

But if we are trying to glean lessons learned, we need to compare recoveries of two recessions that have both similarities and differences. To do that, let's take the recent recession (which began in December 2007) and compare it to the one that started in July 1990. And to dig deeper than what the unemployment rate will allow, let's examine labor force and employment growth, along with changes in the labor force participation rate and employment-to-population ratio, all relative to the beginning of each recession.

Labor Force: Labor force growth following both recessions is best described as stagnant. 79 months after the start of the July 1990 recession, California's labor force was 2.6% larger relative to the start of the recession. 79 months from the start of the current recession, California's labor force is just 2.9% above December 2007, almost identical to the July 1990 recession.

Employment: Both recoveries took a little over 70 months to regain the absolute number of jobs lost during the recession. 79 months after the 1990 recession began, California's employment had grown 1.4%. What about growth following the December 2007 recession? An equally anemic 1.1%.

On these two metrics, the current recovery is performing in line with the 1990-era recovery. However, if we examine these metrics relative to the growth in the eligible working-age population (i.e. the civilian non-institutionalized population), we see a stark deviation.

Labor Force Participation Rate: California, much like the nation as a whole, has seen a declining labor force participation rate - the ratio of those employed or looking for work to the eligible working-age population. This is partly because of changing demographics, but also, based on a pre-recession Bureau of Labor Statistics forecast, because of sub-standard growth during the recovery. 79 months following the July 1990 recession, the labor force participation rate was about 1.5 points below what prevailed at the start. More recently, California's labor force participation rate is 4 points below the December 2007 rate.

Employment-to-Population Ratio: While 79 months after the start of the July 1990 recession, California's employment-to-population ratio was 2.1 points below what it was at the beginning of the recession, California's current measure is almost 5 points below the start of the December 2007 recession. As we see with the labor force participation rate and the employment-to-population ratio, California's labor market is much less healthy than it was at a similar point following the July 1990 recession despite similar labor force and employment growth during these two recoveries.

This deviation between labor market growth and the ratio changes implies that the current recovery is not sufficient to account for California's eligible working-age population growth, while previous recoveries have kept up. California was able to rebound from the July 1990 recession recovery despite the fact that the Golden State was undergoing a systemic reshaping of its economy. Indeed, the end of the Cold War made California's massive aero-defense industry largely irrelevant.

In the period from 1990 to 1996, California's real gross domestic product grew by 8 percent, while between 2008 and 2013, its economy has only grown by 3 percent. Notable here is that in the 79 months after the July 1990 recession, California's civilian non-institutionalized population grew by 5 percent, compared to 9 percent in the 79 months after the most recent recession. This combination of weak economic performance and stronger eligible working-age population growth means previously acceptable labor market growth isn't adequate. A recovery that doesn't provide enough jobs for the working population isn't a true recovery. And that is where Sacramento's comeback story falls apart.

Unless pro-growth actions are taken, this will be the legacy of California's anti-business climate: a state with millions who can work, but can't find it.