San Francisco Business Times

California is a productivity leader but there are serious gaps: Closing them is $1.4 trillion opportunity

California cannot just glory in the buzz of tech; it needs to raise its game more broadly, write Alexis Krivkovich and Olivia White in San Francisco Business Times.

Productivity is the key to staying competitive and improving living standards. So, it’s good news that in the United States, California is near the head of the pack, ranking fifth in overall productivity and third (after Washington and North Dakota) in productivity growth.

Our strong position in tech is a factor, of course, and even given tech’s current difficulties, that is a good place to be. What may matter even more is the existence of what we call “city-level agglomeration effects”— clusters of firms in related fields. These companies compete fiercely, but they also share an ecosystem, in the form of talent, suppliers and customers, that encourages innovation and thus productivity growth. Silicon Valley is an obvious example.

But before we pat ourselves on the back, hold on. California’s position is akin to being a tall poppy in a field of short grass, rather than true excellence. U.S. productivity has faltered, growing just 1.4 percent from 2005-19, compared to 2.2 percent since 1948. In California, productivity is growing 2.1 percent a year, less than the postwar average. In effect, the state looks good because others have done much worse.

Moreover, the headline figure of 2.1 percent hides some unhappy truths. One is the existence of striking inequalities between the state’s regions and even within them. San Francisco and San Jose are the two most productive metropolitan areas in the country. Los Angeles and San Diego are in the top 10. But go to, say, San Bernardino, and things don’t look so great. That hints at another issue. California’s eight most-productive sectors account for only 28 percent of employment, meaning that most jobs are in in sectors of low or middling productivity, and thus less likely to be well paid or to see substantial wage growth. Tech can help these sectors too, of course, but the fact remains that the benefits of rising productivity are uneven.

To put it plainly, California cannot just glory in the buzz of tech; it needs to raise its game more broadly. Government has a role to play here, in the form of providing a positive economic environment. While we understand that rankings are flawed, it cannot be good news that California does so poorly in many of them when it comes to the cost of doing business.

The biggest improvements, though, will be the result of the choices that business leaders make. Two things matter most: people and technology.

One of the striking after-effects of the pandemic has been a noticeable decline in labor force participation, which is now just 62.3 percent — five percentage points less than in the late 1990s. And yet businesses complain, constantly, of the difficulty of finding good help: there are 10.8 million U.S. jobs open at the moment, 2.3 million more than before the pandemic.

One way to widen the pipeline is to reduce the focus on credentials in hiring and instead focus on skills and experience: not every barista or local government official needs a degree to do a good job. And then, it is critical to invest in on-the-job training. Yes, there are costs associated with this — but the greater cost is of not doing so. Employees benefit from structured learning programs and coaching; so do companies, in the form of greater productivity and loyalty.

In terms of technology, there is a strong correlation between sectors’ productivity growth and their level of digitization. Moreover, the data is clear: firms that invest in intangible assets, such as research, technology, and software, grow faster. Firms that have done this well have several things in common: They support their digital strategy with time, attention and money, both on the front lines and at the managerial level. They focus on continuous development. They set priorities. They make bold bets.

If the U.S. could up its productivity growth back to postwar norms, that would add $10 trillion to GDP by 2030; California’s share would be $1.4 trillion. But this won’t just happen, it will require sustained and thoughtful action. After all, there are places all over the country that used to be productivity winners and now... are not.

And here is one more cautionary note. While productivity is necessary to build prosperity and improve quality of life, it is not sufficient. After all, Los Angeles and San Francisco are among the country’s most productive cities — and yet they have serious problems in the form of homelessness, cost of living and education performance.

We can and must do better.

This article originally appeared in San Francisco Business Times.

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