The Center for Jobs and the Economy has released our initial analysis of the November Employment Report from the California Employment Development Department. For additional information and data about the California economy visit www.centerforjobs.org/ca.

The November data in general shows a slowing in the recovery trend for wage and salary jobs.  Employment experienced a significant decrease in the state, although this result may be more a statistical event related to the out-of-trend high estimate from the October survey data rather than a full reflection of conditions in the economy.

In particular for California, the November numbers also portray a situation that was likely overcome by subsequent closure actions by the state.  During the week the November jobs and employment surveys were done, only 12 counties were under the most restrictive Tier 1 provisions.  In the week following the surveys, Tier 1 expanded to 41 counties, and currently comprises 55 counties in addition to yet another layer of state restrictions embodied in the new regional, stay-at-home designations.  The effects of these state actions will likely begin to be reflected in the December numbers to be published in January.

Substantial progress among the lower wage workers experiencing the overwhelming bulk of the unemployment and income effects coming from the state’s actions is unlikely in the near term.  Essentially all of the November unemployed lived in a county now covered by the Tier 1 restrictions.  More critically, the blanket expansion of these restrictions is coming during the fourth quarter that normally produces the highest share of sales and cash flow for restaurants, retail stores, and other small businesses essential to their continued operation in the coming year.  Many, particularly small businesses are now unable to operate at a sufficient level during their most important cash flow period.  The effects are likely to be seen in lower employment and job numbers in the upcoming months, but also higher business closures than normal in January and February.

Many of those that are able to survive this period will then be faced by the scheduled minimum wage increase in January, and businesses especially small businesses with this type of worker will be faced with yet another challenge to their operating viability, both directly for minimum wage workers and more broadly through wage compaction as the minimum wage continues to grow to levels paid to higher skilled workers.  Where this wage rise is handled through price increases, the current unemployed will be faced with two economic hits—yet another spike in the cost of living at a time of limited income opportunity.  Additional challenges to recovery for this tier of the economy will continue to arise as the state agencies increase the regulatory cost burden, including measures such as the recent Cal-OSHA rules and actions by the Air Resources Board to further increase the state’s high energy costs.  Large companies such as most recently Hewlett-Packard and Oracle have more flexibility to relocate and avoid these additional cost burdens—particularly when combined with a more flexible work force made possible through telecommuting.  The population-serving and tourism services businesses that have sustained the greatest impacts in the current crisis have fewer such options.

The higher wage tier of the state’s economy in contrast evidences more sustained activity near normal if not growing conditions, including recent IPO activity coming in close to the Dot.Com period levels.  

This sharp division of the state’s economy is reflected in the continuing performance of the state budget.  Including the year-end surplus for FY 2020, the latest budget cash flow report from Department of Finance shows General Fund revenues through the end of November are $14.9 billion above the Budget Bill projections, or 24.6% higher than expected under the high deficit assumptions that guided the current year budget.

The individual components of the budget revenues in particular illustrate the sharp divide in economic conditions being faced by the state’s population.  The charts below illustrate general fund cash flow over the prior four months.  July is not included due to the effects coming from the delay of the 2019 payments to July 15.

Personal Income Tax—comprising about 70% of general fund revenues—is heavily dependent on the higher income taxpayers who largely have retained their jobs and incomes including through a rapid shift to teleworking.  In the four months shown, the total is 35.8% above the enacted budget cash flow forecast, 12.4% above the actual 2019 revenues, and even 3.7% above the levels expected prior to the pandemic in the January Proposed Budget.

Sales & Use Tax is more sensitive to overall economic levels, but shows similar if somewhat lower results due to the resilient incomes of higher wage workers and the level to date of enhanced unemployment and other emergency assistance payments.  The combined months shown are 32.3% above the enacted budget projections, 9.1% above the 2019 actual revenues, and 2.7% above the pre-pandemic January forecasts.

Corporation Income Tax similarly reflects the ability of large companies to continue operations if not expand through telecommuting.  Combined, the actual revenues in 2020 at 48.7% above the enacted budget projections, 41.1% above the 2019 actual revenues, and 45.8% above the pre-pandemic January projections.

Combining the above three sources along with all other minor revenues, total General Fund revenues in the four months are 32.7% above the enacted budget projections, 12.6% above the 2019 actual revenues, and even 5.6% above the rosier projections behind the various spending expansions proposed in January.