State Ranked Sixth in Productivity in 2000, Report Shows

California has been maligned as one of the most high-cost, heavily regulated, business-unfriendly places in the U.S. So how does it keep on generating wealth that’s the envy of much of the rest of the nation? One answer is productivity.

That’s the finding of research released Monday by the Federal Reserve Bank of San Francisco, which has determined that California ranked sixth in the nation in the productivity of its workers in 2000. They produced just over $79,000 in goods and services per worker, trailing only Alaska, New Jersey, Connecticut, New York and Washington, D.C. (The figure represents inflation-adjusted 1996 dollars, which the Fed used as a baseline for a historical comparison.)

Labor productivity, which measures the real output of goods and services per hour of work, is the primary determinant of a region’s long-run standard of living. It’s the main factor that drives wage growth. It also helps businesses cut costs and boost profitability.

California’s productivity performance is remarkable, according to Federal Reserve economist Daniel Wilson, because of the state’s sheer size and because its productivity advantage has persisted over a number of years.

Alaska led all states in labor productivity in 2000, with nearly $90,000 worth of output per worker, largely because it has huge oil and natural gas industries that generate a lot of product with a relatively small number of workers. California, by contrast, displayed higher productivity than the national average across a wide variety of industries. And it has been doing so since at least the mid-1980s.

So why is California’s productivity so high?

Wilson points to various factors, starting with the high amount of capital per worker. Land and other costs are so high in California that companies tend to concentrate value-added activities and labor-saving technology here to get the most bang for their buck.

“If you put a warehouse in California, you’re going to give it better equipment than you would elsewhere to make the most of that acre of land,” Wilson said.

Workplace practices and organizational structure have likewise allowed California businesses to gain efficiencies, he said. Silicon Valley, for instance, has fostered a highly mobile work force that has led to the rapid spread of innovation and knowledge to other firms as employees move around.

California’s ability to attract a highly skilled labor force also has boosted its productivity. In 2000, compensation per worker was about $52,000 in California, compared with an average of about $44,000 for the rest of the U.S., reflecting in part the higher productivity of its work force, according to Wilson.

He said California’s productivity advantage going forward would hinge largely on its ability to keep attracting the brightest workers from other states or abroad, as well as on educating the state’s low-skill immigrants and their children.