Op-Ed: California’s keenest competition for innovation sector jobs? Other bluish Western states

For a generation, California has seen more of its residents and companies head elsewhere, but has found a way to respond, at least in terms of wealth creation, by constant innovation. But today, the Golden State’s hold on the elite reaches of the economy is slipping in ways that could threaten the state’s long-term prosperity.

Innovation is California’s best driver of high wages and upward mobility. Bureau of Labor Statistics data show that in the innovation industry — software, computer and semiconductor manufacturing, technology services and nine other sectors — the median wage was $208,000 in California last year. That’s almost three times the $76,000 median wage for all jobs in California.

But now, prime competition for innovation-based jobs comes not only from low-tax, low-cost states like Texas but also from bluish states such as Colorado and Washington. We found that Washington and Utah have actually created more innovation sector jobs per capita than California over the past decade, while Arizona, Colorado and Idaho have had higher per capita growth rates for such jobs.

Many of these states, noted Christopher Lloyd, chair of the Site Selection Guild, which follows investment flows, are duplicating “many of the great things about California.” This includes building elite university systems in places like Washington, Texas, Colorado and Utah. “The development model has turned on its head,” Lloyd suggests. “These states have learned from California. There seems to be a failure there to recognize things have changed and tech people are much more mobile.”

Keeping tech in California is all the more critical with the state suffering the nation’s highest unemployment rate and Los Angeles the highest of any large metro area. We have already experienced a troubling shift in business and professional service jobs such as accountants, lawyers and management consultants, the largest source of higher-wage jobs. Over the last three decades, Texas saw more than double the level of California’s growth in that sector, but Washington, Oregon and Colorado also outperformed California by a wide margin.

Now tech seems also under assault. Some tech linchpins have already moved their headquarters to Texas, including Hewlett Packard Enterprise, Oracle and, perhaps most crucial, Tesla. Many other firms, like Apple, Airbnb, Amgen, Uber and SpaceX, are expanding largely outside of this state. These trends are accelerating, notes a recent Hoover Institution study.

Of course, big companies often move production and jobs to cheaper locales. But growth in the number of innovation businesses is also slowing. Since 2005, the number of these businesses grew far faster on a per capita basis in Arizona, Utah, Colorado, Florida, Georgia and Oregon. This is not only a reflection of high taxes and regulation; many of our keenest competitors, such as Washington, Oregon and Colorado, are hardly governed by conservative, anti-regulatory politicians.

Another warning sign comes from venture capital firms. The Bay Area’s proportion of the venture capital deal count in 2021 is expected to fall below 20% for the first time in history. In a study of 90 venture-capital-funded companies compiled by Initialized Capital, a San Francisco firm, those that said the Bay Area would be their first choice to headquarter a company dropped from 41% in 2020 to 28% in 2021.

Tech’s own evolution poses additional challenges. As digital advertising has grown 10 times in revenue in a decade, now accounting for more than half of all advertising spending, huge fortunes have been made at a handful of firms, but for an ever more narrow employment base. Michael Malone, who has chronicled Silicon Valley over the last quarter-century, suggests the abandonment of production narrows the scope of employment. For example, shortages related to supply chain problems have made producing chips — a California invention — a priority, yet virtually all the new planned semiconductor facilities, employing thousands of workers, are not being built here but in Texas, Arizona and Oregon.

Malone also suggests the once hyper-competitive valley has become enamored with picking “the sure thing” backed by massive capital. If there is a potential competitor, simply buy it. As a place for new, independent ventures, California’s appeal is in danger of wearing off, Jack Dorsey, former chief executive of Twitter, suggests.

In the face of these trends, how can California revitalize and expand its tech imprint, with more widely spread opportunities?

Here, our competitors may be our guide. Increasingly, states like Utah, Colorado and Arizona focus not on corporate incentives and other traditional blandishments but on providing for a higher quality of life for people, particularly the young and not yet rich. “The No. 1 issue is to attract talent,” says Joe Snell, who spearheaded economic development efforts in Denver and now in Tucson. “California has had such a plethora of talent, everyone wanted to be there. But people have started to look elsewhere for lifestyle reasons.”

Historically, California appealed to people because, frankly, it was more attractive, with better weather, a stronger education system and a uniquely innovative spirit. Now California has the worst attraction rate in the country, which is driving the demographic decline. Over the last 20 years, notes EMSI, an economic forecasting firm, Los Angeles’ population of young people has dropped by 750,000.

California need not respond to this by throwing millions at companies, drastically reducing taxes or even scrapping its regulatory regime, although reform is needed. State leaders’ priority should be to restore the state’s allure as a place offering a better way of life. This means confronting issues like high housing and energy prices, a poorly functioning basic education system, staggering traffic congestion and homelessness.

Many workers want to stay in California but have been forced to find more affordable regions in the state. Fortunately, working remotely during the COVID pandemic has made this easier. Between March and November 2020 more than 80,000 people moved out of San Francisco, but more than two-thirds relocated to somewhere within the region, notably the exurbs and rural locations such as the Mother Lode country. Yet such moves fly in the face of state policy that favors development in dense urban counties, which have extremely high housing costs.

All the elements California needs to maintain and expand its tech economy — capital, talent, attractive locations, a first-rate higher education system — remain. But it needs to address basic issues that drive workers and companies to seek their fortunes elsewhere. We can still write new chapters, but only if we change the current course.

Joel Kotkin is the presidential fellow in urban futures at Chapman University and executive director of the Urban Reform Institute. He is the author of “The Coming of Neo-Feudalism.” @joelkotkin
Marshall Toplansky is a clinical assistant professor of management science at the Argyros School of Business and Economics at Chapman University.