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Saturday, Sep 23, 2023

FORECAST–Income Gap Widens Between L.A. and the Bay Area

Sure, Angelenos are getting richer. But they’re not getting rich as quickly as people in the Bay Area. That was one of the conclusions of last week’s quarterly update by the UCLA Anderson Forecast, which painted a generally rosy picture of the state’s expected economic growth this year but said that the personal income gap between L.A. and the Silicon Valley will grow wider in the years ahead. Indeed, the Center for the Continuing Study of the California Economy in Palo Alto reported that the average per-capita income in Los Angeles was $78,163 (adjusted for inflation) in 1990, and $90,867 in San Francisco. In 1999, the average household income was $84,661 in L.A. and $109,647 in San Francisco. So, while the average income in L.A. rose by a modest 8.1 percent over this period, in San Francisco it jumped 20.7 percent. And with huge volumes of venture capital and Wall Street money pouring into the Bay Area, most economists expect this trend to continue for the immediate future. “If we had been talking 10 years ago, we would have seen the reverse situation,” said Michael Dardia, an economist with the Public Policy Institute of California in San Francisco. “Then, it looked as if Los Angeles was outpacing San Francisco, but the next thing was that 100,000 aerospace jobs in the L.A. region disappeared.” While the numbers might seem like bad news for Southern Californians, they actually could point to a dangerous situation for the Bay Area. None of the economists contacted by the Business Journal foresee an imminent collapse of the Bay Area’s high-tech industry, like the one that ripped through L.A.’s defense and aerospace industries in the early ’90s. However, there is concern that the Bay Area’s reliance on one industry exposes the region to the same kind of downturn, whether through a long-term bear market or through global economic upheaval. L.A.’s more-diversified economy, meanwhile, would weather such events with comparative ease. “The collapse of the Asian export market two years ago took the edge off the growth (in the Bay Area) for awhile,” said Tom Lieser, executive director of the UCLA Anderson Forecast. “It showed the vulnerability of the region to that kind of event.” By contrast, Los Angeles experienced little, if any, negative impact from the Asian financial crisis because there are no dominant industries here that rely on exports to Asia. Workforce differences Underlying L.A.’s rather slow increase in personal income, relative to the Bay Area, are important differences in the two areas’ workforces, which in turn create differences in the industries that flourish in the respective areas. For example, U.S. Census data shows that, in 1997, 34 percent of the workers in the San Jose/San Francisco region had bachelor’s degrees, compared with just 22 percent of the workers in L.A. County. In addition, 13 percent of the workers here had less than a high school education, compared with only 7 percent in San Jose/San Francisco. The education gap means that low-wage industries such as apparel and other non-durable goods manufacturing have done well in L.A. because of the area’s big supply of low-skilled workers, many of whom are immigrants from Mexico and Central America. In the Bay Area, on the other hand, the concentration of highly educated workers has been an important magnet for high-tech businesses. Clearly, there is plenty of high-tech action in L.A. (by some accounts just as much as in the Bay Area). But the impact of the industry here is defused by the presence of many more low-paying jobs in low-tech industries. In fact, a recent report by the Los Angeles County Federation of Labor shows that the number of people in L.A. who live in poverty has risen 64.5 percent since 1990. While Los Angeles has become the point of entry for low-skilled immigrants, the Bay Area is home mostly to high-skilled immigrants who are attracted by the labor shortage in the Silicon Valley. Given the almost complete absence of affordable housing in the Bay Area, few poor immigrants in search of a better life have been moving there. “People are poor, but they are not dumb,” said Lieser. “Everybody knows that in San Francisco, the door is pretty much closed.” Growth constraints The extremely tight labor and real estate markets in the Bay Area, however, are expected to work as an impediment to future growth, causing companies that do not absolutely have to be there to look for space elsewhere. Unemployment in parts of the Bay Area is below 2 percent, which many economists once thought would be impossible. The office vacancy rate in San Francisco is only 1.3 percent. “That’s good news for Los Angeles, where there is still some space left and where unemployment is still higher,” said Ted Gibson, chief economist with the California Department of Finance. “It’s a good thing to have a little slack left when there is a tight labor market.” Likewise, the skyrocketing housing market in the Bay Area will make it harder for companies in the area to attract new workers, economists say. “They are way ahead of us in terms of economic recovery,” said Leslie Appleton Young, chief economist with the California Association of Realtors. “In Los Angeles, the median home price is still $25,000 below the previous peak. In Santa Clara, it’s $150,000 above the previous peak, and in San Mateo it’s almost $200,000 (above the peak).” According to Appleton Young, home prices in the Bay Area are driven up by the large number of tech executives who have made a fortune on stock options in Internet companies and who are eager to transfer some of their stock market wealth into more tangible assets. In Los Angeles, the housing market is a lot less feverish. Although prices have been rising steadily, the increase has been slowing in the last few months.

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