Explaining Southern California's economy

Massive hurricane: We're on it! Massive unemployment…um, we'll get back to you on that

Arianna Huffington is ticked off that politicians can leap into action when a hurricane is bearing down on the East Coast but stall, stall, stall when it comes to attacking the dull, grinding crisis that is U.S. unemployment. A taste:

With the toll that the job crisis is taking on the lives of millions of people in this country -- from college graduates who can't get jobs to middle class families being thrown out of their homes -- this is a Category 5 disaster. In extreme cases, financial desperation has even been a reported cause in suicides. "We have noticed many more people mentioning the economy," said Eve Meyer, executive director of the nonprofit San Francisco Suicide Prevention, which has seen an increase in suicides on the Golden Gate Bridge. "We constantly hear, 'I'm going to be homeless; I would rather be dead than be homeless.'"

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New Case-Shiller data shows that the Southern California housing market may be stabilizing

The June Case-Shiller numbers are out, and while prices in Los Angeles and San Diego are only up 0.3% and 0.2% from May, respectively, there are other parts of the nation where prices have cratered far worse, year-over-year. LA is down 3.4% from last June, while San Diego is down 5.3%. But Chicago is down 7.4% and Minneapolis, 10.8%. Phoenix and Portland are both down more than 9%. 

So it's looking like SoCal is beginning to put the brakes on the slide.

The big question is whether the very modest SoCal uptick will persist. At this point, teensy price increases over a few months could indicate that we're finally seeing the housing market stabilize. And the S&P/Case-Shiller analysis indicates that SoCal may be mounting a recovery that's not going to be dragged down by other hard-hit markets:

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U.S. GDP growth: bad, badder, and worse

The Commerce Department busted down its previous estimate of GDP growth in the second quarter from 1.3 percent to 1.0 percent. 

This is a major problem for California, where the unemployment rate of 12 percent is almost three percentage points higher than the national rate of 9.2 percent. In Southern California, it's even worse. L.A. County is at 12.4 percent. Other counties are even higher 

A lot of economists now think that GDP growth –which, in a "normal" recovery should be running at something like 5 percent – will muddle along for years, slowly improving, but grinding down the rolls of the unemployed more like a guy with sandpaper than a guy with a belt sander. 

In Southern California we have another problem. A significant chunk of the unemployment we're dealing with is related to the housing industry, which may take much longer to recover than the economy as a whole. There are some macro-economic trends, related to household formation, that bode well long-term. But by that, we mean LONG TERM – as in workers not going back to building new houses until the middle of the decade.

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Will California ever choose right-to-work?

UPDATE: AirTalk did a great segment on this general topic today. UCLA Economics professor Lee Ohanian outlined a "new union" strategy that I've actually explored in the context of the auto industry and its negotiations with the United Auto Workers. The idea is basically for the unions, both public and private sector, to become partners and "solution providers" for employers -- labor consultants, if you will. Could be a way for unions to re-invent themselves, amid greatly increased global competition.

California is not a right-to-work state (and neither are any of the other, un-highlighted states in the chart above). What that means is that if you belong to a union in California, you can be required by the union to pay dues. Critics of unions argue that this excludes some people from certain workplaces -- the old “closed shop” distinction. If states want to opt for right-to-work instead, they need to enact a law that enables it. The last time this happened was in

Oklahoma 10 years ago. But much of the U.S. South is right-to-work. In practice, this has meant that manufacturers ranging from Boeing to Toyota have set up factories in states like South Carolina and Alabama.

 

These states haven’t escaped the national unemployment disaster, but they’re all doing better than California, which at 12 percent is second only to the living hell of American joblessness, Nevada (12.9 percent). LA County is in between, at about 12.5 percent. Other SoCal counties are far worse.

This has stoked a debate about whether California should pass a right-to-work law. Unions don’t like it (obviously) and one of the state’s Congressmen, Brad Sherman (a Democrat who represents the San Fernando Valley), introduced a bill last year that would repeal right-to-work nationwide. The whole thing is highly politically charged: The right considers unions a Democratic bastion and an obstacle to business; the left believes that allowing a swath of non-unionized operations to take hold means that workers will move to those states and drift away from the Democratic party. 

At a less pragmatic level, many Democrats also believe that businesses will exploit workers in right-to-work states, reducing the wages and benefits that collective bargaining has brought to unionized workforces. 

There is some evidence that RTW laws do attract workers and lead to an overall uptick in earnings. The conservative/libertarian economist Richard Vedder published his findings last year in the Cato Journal. You would expect his research to cut in the RTW direction (although libertarians are tormented on the issue), but the data make a case. An example:

Without exception, in all the estimations, a statistically significant positive relationship (usually at the 1 percent level) was observed between the presence of right-to-work laws and net migration. To be sure, the results indicate that right-to work was only one of several factors explaining migration—for example, there was strong out-migration from manufacturing-intensive states, and Americans as well moved into low tax states, while the climatic variables were relatively weak and not statistically significant. Nonetheless, the findings reinforce the view that people vote with their feet to move to freer labor market environments.

We’ve already had a preview of what the political debate over this economic issue might look like: collective bargaining rollbacks for public employees were a significant part of the 2011 protests in Wisconsin. In that context, labor economist Laura Dresser presented the anti-right-to-work case for NPR:

Dresser says most businesses look at more than just labor costs.

"The broadest and strongest evidence suggests that employers are looking for good workers — that takes good schools. They're looking for good infrastructure — that takes money for roads and rails. They're looking for cities where they can have suppliers and relationships with other businesses, and all of those things tend to happen in non-right-to-work states."

In addition, the most significant job growth over the past decade has been in states with high immigration. Dresser says that includes both right-to-work states and strong union states, such as New York and California.

So this one is just getting started. With no respite for California unemployment on the horizon, we could be spending more time debating it in the months to come.

Chart: Wikimedia Commons

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