California’s high cost of employment will stifle recovery; here are 6 issues the state needs to deal with

The now ended long economic boom from 2010-2020 made Californians complacent. Workers were in demand everywhere in America, so employers put up with California’s high minimum wage, stunning housing costs and often absurd regulations. 

No more. The coronavirus depression has thrown record numbers of Americans into unemployment lines. The jobless rate skyrocketed in two months from under 4% to 31% as of mid-April in Southern California, higher than during the Great Depression of the 1930s. It will get worse.

People are begging for work. Employers have the pick of whom to hire – and where to find them across the 50 states.

If you were a corporate manager looking to build or lease a plant and hire workers, where would you look first? California, with a $13 minimum wage rising to $15 in 2022? Or Texas, with a $7.25 minimum wage – less than half the 2022 number?

Then there’s the state income tax. During times of plenty, maybe it’s worthwhile to put up with California’s 13.3% top state personal income tax rate, compared to Texas’ 0.0%. The weather is so much better, there are a lot fewer hurricanes and bugs. The humidity is way lower.

But during tough times? And what if there’s a personal income tax increase? That happened in 2009 during the last recession and prolonged the hard times.

If you needed that 13.3 percent to re-invest in your company, instead of going to a poorly run state government, where would you go?

Then there’s California’s high unemployment rate shown in a January 2015 report by the Legislative Analyst, “CA Unemployment, While Improving, Still Among Highest in U.S.”

As the Great Recession dug in, California unemployment was stuck from 2 to 2.5 percentage points higher than the national average. Then it took longer to recover.

Obviously that’s going to happen again. It’s what economists call “price elasticity,” meaning that, as the price of something rises, people want less of it, and this applied to California workers in April 2010, as well as April 2020. 

When the opposite happens, there’s “price inelasticity,” meaning the price can go up a lot, but demand still is there – like the need for California workers in February 2020.

The first thing that will happen is the further spread of the underground economy. If work needs to be done, and people are willing to do it outside the official channels and regulations, then it will get done one way or another.

As I recently warned, “Underground Economy Will Stifle Recovery.” Employers in the underground economy don’t pay unemployment taxes and workers compensation. They probably don’t pay income and other taxes necessary to fund government services at this critical time. They don’t follow worker safety regulations, meaning injuries end up in emergency rooms and will be paid for by everyone.

Companies that play by the rules, paying all the taxes and observing every labor regulation, will be at a disadvantage to those firms operating in the shadows. The cost structure will just be too high. So many of these honest firms will go out of business, join the underground economy or move to Texas.

Here’s the question now: Does this state have the chutzpah to pass needed legislation to open the doors wide to recovery? That would include, at a minimum: 

1. Suspending the minimum wage increase. 

2. Repealing Assembly Bill 5, which bans many types of freelance labor.

3. Passing new workers compensation reform, needed as the 2004 reforms have deteriorated.

4. Cutting taxes, not increasing them.

5. Repealing the recent rent control edicts, as rents will be falling anyway.

6. And last, but most important, really reforming all state and local pensions, switching from the defined-benefit plans to shared-risk plans, a bipartisan reform working well in Wisconsin since 1982.

California enjoyed a decade of prosperity, but it covered up myriad expensive policy mistakes. Now the covers have been pulled off, revealing the rot underneath.

Every state needs a healthy economy in order to survive. It must strike the careful balance needed to have a strong tax base, while not overreaching and over-burdening its entrepreneurial sector. Imbalance becomes an abuse. 

And unless the business and jobs climate in this state are improved, even more of California’s tax base will move to other states. 

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John M.W. Moorlach is a Republican from Costa Mesa who represents Senate District 37, Senator.Moorlach@sen.ca.gov. He wrote this commentary for CalMatters. Moorlach has also written about open government, the motor-voter disaster and hard fiscal realities facing California.