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CALIFORNIA ECONOMY : A Recovery That’s Creating High-Wage Jobs

<i> Joel Kotkin, a contributing editor to Opinion, is a public-policy fellow at Pepperdine University and a senior fellow at Pacific Research Institute. He is also business-trends analyst for Fox TV</i>

Despite potentially harmful mergers involving First Interstate Bank and McDonnell Douglas, California’s economy is on track to a dramatic, if unexpected, recovery. Early next year, the roughly 500,000 jobs lost during the recession should be replaced.

Yet, a majority of Californians have had a hard time noticing the recovery; a recent poll indicated that 73% of them still believe the state is in recession. This downcast mood explains, in part, why soft housing prices have only recently begun to harden, though they remain well below their peak levels, particularly in the Los Angeles area and in the Central Valley.

To a large extent, this perception of continuing recession grows out of deep-seated misconceptions about the evolving structure of the California economy. For the first time since the Depression, the economy is resurging without benefit of a major boost in defense spending, a strong housing market or huge growth in new construction. Instead, many of the new jobs are sprouting in sectors linked to California’s enduring strengths in international trade, culture-based industries and technology.

For workers who lost their jobs in the early 1990s, this is not necessarily good news. Many middle managers at large corporations or real-estate speculators are not well-positioned to take advantage of the surfacing job opportunities. But this does not mean that California’s “golden days” as a producer of high-wage jobs are gone.

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Indeed, rather than producing a glut of “hamburger flippers,” the state’s growth industries are creating high-value-added, high-wage jobs at an extraordinary rate. Economist Stephen Levy estimates that, in the year since August, 1994, California has created30,000 new jobs in entertainment, an additional 30,000 in wholesale trade, 30,000 in engineering management and computer services, and another 10,000 in semiconductors.

The number of new entertainment jobs created last year, for example, were double the total number of jobs lost in aerospace during the year. An entertainment job, with mean wages more than 40% above the statewide average, annually pays, on average, about $10,000 more than a comparable aircraft job. In computer services, another high-growth sector, a worker, on average, makes $6,000 more a year than a comparable aircraft employee.

This rapid expansion of high-wage industries helps explain why income in California grew 7.2% in 1995--the first substantial gain in five years.

In part, this spurt simply reflects a continuing shift in the state toward service, technology and culture-based industries, in which California has a competitive edge. In the past decade, employment in high-wage sectors such as engineering and management has nearly doubled, surpassing that in defense and aerospace. Similarly, two decades ago, computer services employed fewer than 20,000 Californians; today, more than 160,000 work in this field.

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As a result of such growth, California now has the highest share of jobs in high-wage growth sectors--including management services, biomedical instruments, entertainment, computers and engineering services--of any state. It ranks slightly ahead of second-place Massachusetts, with its deep pools of educated labor, and well above Utah, Oregon, Texas and New York.

As the economy picks up momentum, even some sectors hard hit by the recession should begin to recover. Economist Levy, for example, estimates that the state’s manufacturing-job losses, largely in aerospace, have all but leveled off, due largely to gains in high-tech electronics, machinery, apparel and plastics. With revived orders for civilian aircraft and the C-17, aerospace employment could start to grow again by the end of the decade.

But if this is a revived economy, it is also one chastened and shaped by the harsh experiences of the 1990s. Companies, industries and workers hoping to succeed in the new environment will have to unlearn many of the assumptions cherished during previous expansions.

Perhaps no one has farther to go on the new learning curve than the real-estate industry. During the ‘80s, it was said that a chimpanzee could make money in California real estate. Today, there’s still money to be made, but not without a strategy. Expansion in high-technology, entertainment and international trade has begun to lower vacancy rates in such real-estate sectors as warehousing, research and development, as well as industrial space. Although prices remain soft, vacancy rates in these categories have been dropping in parts of Los Angeles County, Orange County and the Silicon Valley.

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Last year, California’s biggest job losses occurred not in aerospace, but in the largely white-collar professions of finance, insurance and real estate, which collectively hemorrhaged about 30,000 jobs. It will be these white-collar, supervisorial personnel who may face the hardest time fitting into the new competitive California economy. Increasingly, smart companies in the state, no matter which field, are looking to hire people who can actually produce or sell products or services, as opposed to those whose task has been managing the process inside company bureaucracies.

These new dynamics can be observed at the young, fast-growing small and mid-sized enterprises, which have been adding jobs to the state’s economy since at least the early ‘80s. Typical of these companies is PairGain Technologies Inc. in Orange County, a fast-growing manufacturer of sophisticated telecommunications gear. During the past year, the company has more than doubled its employment, to about 400, with much of that increase in highly paid engineering, technical and sales staff. Even the wages for assembly workers average between $10 and $15 an hour.

The weak real-estate market has been a boon to PairGain, allowing the company to move from cramped facilities in Cerritos to digs in Tustin that are twice as spacious, without a rise in rent. Equally important, the flat housing market has made it far easier for the firm to attract engineers and other workers from other regions of the state and country.

Yet, as PairGain and similar companies expand, realtors should not expect them to gobble up space, particularly office, at anything like ‘80s rates. For one thing, companies like PairGain rely on the latest telecommunications networking technologies, which means a leaner administration and fewer secretaries. PairGain employs only two secretaries and all its sales staff work out of their homes.

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“We don’t need meeting coordinators and facilitators,” says PairGain CEO Charles S. Strauch. “Most of the people we hire are engineers, salespeople or skilled technicians with a manufacturing background.”

The new dynamics of competition, as well as advances in telecommunications technologies, suggest that the PairGain paradigm, while extreme, may become more commonplace in the new California economy. This may continue to drive middle managers, real estate and financial-services workers out of the state, even as in-migration has been increasing. In recent years, the inbound traffic has generally been younger, more affluent, better-educated people seeking jobs in entertainment, high technology and trade-related fields.

What is still missing, and desperately needed, is a greater understanding that California’s emerging recovery will not return us to the “good old days” as measured by the standards of the ‘80s, much less the ‘50s. Real-estate hyperinflation, limitless defense dollars and ever-ascending high-rise offices, which characterized the ‘80s, are history. Companies, developers and politicians waiting for such a recovery might as well wait for Godot.

Instead, Californians must begin to prepare themselves for a future economy that is globally connected, technologically proficient, commercially savvy and economically and socially diverse. And this new economy may well offer opportunities every bit as promising as those in the ‘80s.

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