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Economic Policy

Brief # 103

Income Inequality in California Points to Economic Shifts Nationwide

By Linda F. Hersey

December 29, 2020

As California goes, so goes the nation.

Whether it is culture, policy or innovation, the nation’s most populous state has long been a frontier for change and a reliable predictor of trends for the rest of the U.S. and around the globe.

That is among the reasons why the widening income gap between the state’s wealthiest and poorest citizens, coupled with an outmigration of the middle and working class, increasingly concerns economists and policy makers.

California may command the nation’s largest economy – indeed, among the largest in the world — but it also has among the highest poverty rates in the U.S. California’s poverty rate is 19 percent while the poverty rate for the nation is 14 percent.

Economists warn there is no easy fix. Income inequality in California, they argue, points to significant changes well under way across the economy, as high-tech automation deletes the need for human labor in manufacturing and other traditional jobs.

For Californians, these are the best of times and the worst of times, economically.  The San Francisco Bay area, for example, enjoys a net worth of close to a half-million dollars per resident.  Yet San Francisco’s historic Tenderloin neighborhood reports a poverty rate that hovers at just over 50 percent.

Fundamental Structural Shifts in the Economy

Richard Florida, who directs the Martin Prosperity Institute at the University of Toronto, argues that California is experiencing fundamental structural changes in its economy that are likely to occur in other states.

Florida told the New York Times that income inequality seen dramatically in California is a “symptom of the bifurcation of the labor market into a small share of knowledge jobs and a much larger share of low-wage service jobs.”

California, the leading incubator state for knowledge jobs, ranks among the top 10 states in economic growth, outpacing the nation as a whole.

California also is experiencing a population decline – with a net outmigration of residents to nearby western states that include Texas, Arizona and Oregon, as people who are struggling move elsewhere.

People most likely to leave California are high-school educated, low- and middle-income adults with families, while college-educated high-income earners are more likely to move to the Golden State, according to a 2018 report by the California Legislative Analyst’s Office.

The Public Policy Institute of California reports that the biggest determining factor for economic prosperity for Californians is education.

The job market in the knowledge economy rewards people with a four-year college degree or higher, while median income has dropped for adults without college degrees.

There also are racial disparities in income levels that need solutions. The Public Policy Institute of California found that only about 10 percent of the state’s top wage earners – those with incomes above the 90th percentile — are Latino and African American, though they make up more than 40 percent of the state population.

Renewed Focus on Education, Economic Development

California is a bellwether for economic transformation in the U.S. and other advanced nations around the globe. While less dramatic, income inequality is up in other states, including Alabama, Nebraska, New Hampshire, Virginia and New Mexico.

The California experience, and the lessons learned, need to be recognized and applied in economies moving rapidly into the new Knowledge Age, which favors the well-educated and technological elite.

Closing the income gap will require a combination of policy changes to reduce disparities, including more tax and safety net programs, along with a renewed focus on improving opportunities for education, economic development, housing and transportation.

Engagement Resources

Public Policy Institute of California is a nonpartisan think tank dedicated to improving and advancing the state’s public policies through independent research.

Legislative Analyst’s Office of California is a nonpartisan fiscal and public policy adviser to the state Legislature.

U.S. Census Bureau follows a directive to measure poverty in the United States. Here is a primer on how the Bureau defines and measures poverty.

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