California is Producing More Output with Fewer Workers

As with the national economy, many aspects of California’s economy have recovered to pre-pandemic levels and in some cases have returned to pre-pandemic trends. After falling by about 10 percent from the fourth quarter 2019 to the second quarter 2020, first quarter 2021 economic output in the state had recovered to within 1 percent of pre-pandemic levels, according to a report by Beacon Economics.

And in second quarter 2021 as the economy grew by 6.5 percent, it’s safe to assume that California’s economy is now producing as much output as it did prior to the pandemic.

One of the most intriguing features of the pandemic economy is the extent to which the recovery of the labor market has lagged the recovery in output. There are still 1.2 million fewer people employed in the state compared to pre-pandemic levels or around 8 percent fewer jobs.

Supply-side factors have been a major feature of the labor market’s slower recovery. There are around a half-million fewer workers in the state’s labor force today than there were prior to the pandemic. School closures, leading some parents to drop out of the labor force, fears of contracting COVID-19 and enhanced unemployment benefits have taken a toll on labor force participation in the state.

It is also worth underscoring that California is now producing pre-pandemic levels of output with 1.2 million fewer workers. In addition to supply-side dynamics, productivity gains have clearly replaced many thousands of jobs in the state.

In fourth quarter 2019, each worker in the state produced $162,000 of real output compared to $176,000 in first quarter 2021. While in the short term, productivity gains can replace jobs, productivity growth is the lifeblood of economic expansion in the long run.