Rewriting the script: LA’s opportunity for inclusive economic growth

| Report

Los Angeles County has the largest economy in the United States—one of the largest in the world, in fact—and over the past three decades demonstrated strong productivity growth relative to the rest of the country (Exhibit 1).1 It is home to diverse, talented Angelenos, fast-growing industries with strong specialization, and imagination and creativity that fuels innovation across its economy. With this combination of “uniquely LA” assets, the county has an abundance of opportunities to showcase its potential for accelerateed, inclusive economic growth.

Yet, despite these strengths, LA has not matched its peer counties, nor the United States as a whole, in other growth areas—GDP growth, employment growth, and population growth (Exhibit 1). To put the magnitude of slower economic growth into perspective, zooming in on employment growth: our analysis shows that if LA County had matched its peers’ average employment growth rate in the decade following the Great Recession, 325,000 more Angelenos would be employed today.2

Los Angeles County has matched its peers in productivity–but growth has been slower in other key economic measures.

While LA is a multicultural hub—at least 130 countries of origin are represented in LA County’s population3—LA residents experience different economic outcomes and quality of life across demographic groups. For instance, Latino and Black Angelenos have an average household income of $65,000 and $54,000, respectively, compared to $97,000 for White Angelenos and $89,000 for Asian Angelenos.4 Black and Latino Angelenos also experience higher poverty rates, lower levels of educational attainment, and a higher percentage of their population unable to earn a living wage than their Asian and White peers.5 Without equitable access to opportunity and well-paying jobs, these gaps may persist into the future and dilute LA’s economic potential.6The case for inclusive growth, McKinsey, April 28, 2021.

A new report by McKinsey, Rewriting the script: LA’s opportunity to build a faster-growing, more inclusive economy, addresses opportunities and challenges across seven key economic opportunities spanning three key areas: the business environment, talent, and infrastructure. Each of these areas could be critical to assuring sustainable, inclusive growth, and each can have material opportunity for LA. The report aims to inspire LA’s stakeholders across public, private, and social spheres to transform LA’s economy into one that works better for everyone.

The business environment—industry shifts and the difficulty of doing business in LA

The report Rewriting the script finds that two areas may introduce challenges to LA's economic growth. First, LA has seen a growing concentration of jobs in a narrower set of industries (Exhibit 2). However, this job consolidation has not led to stronger employment growth: if each of LA’s top six sectors in 1990 had grown at the same rate as the rest of the United States, these sectors combined would have employed 10 percent more people in 2022.7

Los Angeles County has seen a growing concentration of jobs in a narrower set of industries.

Based on current industry size, historic employment share, projected national growth rates, and level of specialization, seven sectors stand out as potential growth areas for LA: the creative economy; healthcare; transportation and warehousing; professional services; logistics; bioscience; and aerospace.8

Second, LA’s current business landscape is characterized by high land, labor, regulatory, and utility costs, and both the cost and ease of doing business in LA remain high compared to peers.9 In this business environment, some small companies may struggle to scale up and some larger businesses may lose motivation to stay. For instance, companies with more than 500 employees comprise just 1.4 percent of LA businesses, compared to the peer average of 4.3 percent.10 To ensure that companies of all sizes can thrive, there may be opportunity to create tailored support at every scale.

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Talent supply gaps and evolving skills needs

As the most populous county in the United States, LA is well primed to attract and develop a strong workforce to drive economic growth.11 However, the county’s recent slowed population growth and low labor participation may pose a barrier to realizing this potential.12 LA County has experienced negative population growth since 2018, and the California State Department of Finance estimates that LA County’s population could decrease by approximately 1.7 million people by 2060.13

Furthermore, while LA’s current labor force participation rate, at 64 percent, is higher than the United States average of 63 percent, it is lower than the peer average of 67 percent (Exhibit 3). These gaps in labor participation, coupled with slowing population growth, indicate possible challenges in labor supply. However, the gaps also reveal an opportunity to bring previously untapped talent into the labor market to drive greater economic growth.

Los Angeles has an opportunity to address labor supply gaps by matching peer workforce participation rates.

Emerging trends indicate that LA’s labor challenges may be more complex than supply and demand issues. For instance, LA exhibits a higher unemployment rate—4.9 percent—than the peer average of 4.3 percent (Exhibit 4). Yet demand for workers persists, as evidenced by the average of 365,000 quarterly, unique job postings in LA in 2022.14 This may be explained by an ongoing skills mismatch between talent supply and job demand. In McKinsey’s 2022 American Opportunity Survey, workers cited a lack of skills as their biggest barrier to finding a job in LA.15

Los Angeles has a higher unemployment rate than its peers, despite a high demand for workers.

LA County’s skills mismatch could continue to evolve with the aforementioned industry shifts. For example, as automation increases, skills demand may shift too; nationally, an estimated 12 million occupational transitions could happen by 2030.16The economic potential of generative AI: The next productivity frontier,” McKinsey, June 14, 2023. Automation is likely to be most pronounced in office support, food service, business and legal professions, and production work. More than 700,000 positions in LA County could be automated by 2030, with new roles emerging within each industry.17 These changes will likely require a concentrated focus on reskilling and upskilling in new capabilities, so that as the automation landscape evolves, Angelenos can have ample opportunity to participate in the workforce in secure, well-paying roles.

Talent gaps could hamper economic growth, making it difficult for Angelenos to secure high-quality jobs and businesses to find the talent they need to grow. Though part of the skills mismatch can be addressed through reskilling and upskilling efforts, some occupations with large talent supply-demand gaps are in sectors that may require a tertiary qualification, for instance, in the fields of healthcare and engineering.18 Realigning LA’s skills mismatch would likely require interventions that facilitate equitable access to higher education.

Access to affordable housing, convenient transportation, and high-speed broadband

High-quality infrastructure is necessary to drive economic growth.19Reimagining infrastructure in the United States: How to build better,” McKinsey, July 6, 2020. However, affordability concerns in areas such as housing, transportation infrastructure, and access to the internet continue to affect Angelenos’ ability to live, work, and play (Exhibit 5). For example, some 47 percent of Angelenos are rent-burdened, meaning they spend more than 30 percent of their income on rent.20

The relatively high cost of housing, congestion, and broadband connectivity may affect Angelenos’ ability to live, work, and play.

Data also suggests that these concerns fall unevenly on LA’s population—for example, compared to similar cohorts in peer counties, Black and low-income LA residents experience longer commute times and their ratio of housing expenses to household income is higher.21 And while nearly 70 percent of all US jobs require at-home internet access, more than one in ten LA households do not have access to the internet.22

Developing interventions that serve all Angelenos—while also working to provide targeted support to Angelenos at risk of and experiencing homelessness—may be critical to retaining talent and providing the stability and certainty that fosters a culture of innovation, a key enabler for inclusive economic growth.23Resilience for sustainable, inclusive growth,” McKinsey, June 7, 2022.

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LA’s blockbuster sequel: A new era of economic growth

To develop solutions for LA’s three barriers to growth, stakeholders can reframe the challenges as opportunities by asking seven questions that focus on LA’s unique mix of sectors, talent, and infrastructure. The McKinsey report offers CEOs and decision makers a number of thought starters against these critical questions:

  1. How can LA create a business environment that supports the growth and retention of both small and large businesses?
    • Ensure businesses have access to the talent they need to grow and stay in LA. For instance, stakeholders can create career pathways for in-demand roles or establish curricular offerings that serve current and future workforce needs.
    • Maximize the value of services while addressing the growing cost of doing business in LA.
    • Expand digital support for commonly used essential business services, especially those that may not meet customer satisfaction standards.
    • Provide at-scale “back-office” support for growing small and medium businesses.
  2. How can LA invest in the growth of its sectors?
    • Build dedicated facilities that position LA as an entrepreneurial and innovative place for business. Facilities could focus on creating spaces to house LA’s key growth sectors.
    • Invest in next-generation tech talent development around industry themes.
  3. How can employers better match skills to develop the talent needed in LA?
    • Offer reskilling to fill critical skills gaps for individuals already in skilled positions. Building and scaling up certification and reskilling programs could help workers seeking new careers and fill critical skills gaps.
    • Develop upskilling programs to advance employees within their current company.
  4. How can employers better facilitate access to the labor market and jobs?
    • Implement skills-based hiring for select job categories that emphasizes role-specific competencies rather than credentials. New skills-assessment methods and tools, aptitude tests, and evaluation rubrics, for instance, could widen employers’ search for talent while ensuring candidates are well qualified.
    • Cultivate flexible work arrangements where appropriate, such as work-from-home and flexible schedules.
    • Support childcare and expanded leave offerings to address childcare barriers.
  5. How can LA broaden the talent pool through access to educational opportunities?
  6. How can Angelenos work together to make LA more accessible and affordable?
  7. What strategies can LA implement to enhance connectivity?
  • Provide additional support to connect Angelenos who cannot afford broadband subscriptions, even with existing discounts.
  • Increase the number of internet access points and device loan points in Community Anchor Institutions (CAIs).
  • Make devices more affordable through strategic partnerships. A combination of approaches could be used to increase device affordability, including bulk purchasing, internet service provider (ISP) partnerships to offer more affordable devices, and refurbished equipment programs.

A call to action

Without any of the interventions mentioned above, LA’s annual economic growth rate will likely remain below that of peer counties and the United States.27 But what if LA’s leaders in the public, private, and social sectors all worked together toward greater aspirations? What could be achieved through cooperating on the central issues of talent, innovation, business growth, and infrastructure development? LA might have the opportunity to accelerate its economic growth inclusively and sustainably—while changing the lives of everyday people meaningfully, for the better. Simply put, the results could be transformative.

For LA’s sequel, focused on accelerated, inclusive economic growth, there is a plethora of inspiration from which to draw, and everyone can write their own role into the script.

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