Los Angeles Area Struggles to Retain Employees and Businesses
Ranked No. 34 of 150 markets in ThinkWhy’s LaborIQ™ Index of Top Performing Metros, the Los Angeles-Long Beach-Anaheim, California metro grapples with a rising cost of living and tough business conditions, resulting in employees and businesses relocating to more affordable areas. Though businesses operating in this metro stand to make more money, the cost of doing business is also much higher than elsewhere.
ThinkWhy It Matters
The Los Angeles-Long Beach-Anaheim employment landscape:
- Challenging regulatory environment for businesses
- Negative domestic migration
- High cost of living
- Increasing average hourly earnings
- Strong blue-collar job growth
According to the International Trade Administration, over 72,000 businesses exported goods from California. Of these, over 95 percent were businesses with fewer than 500 employees and one-third were from the Los Angeles metro. Smaller businesses are driving GDP for the Los Angeles area, now the second-highest in the U.S. Although the area economy is weakening due to rising costs and less migration to the area, the Los Angeles-Long Beach-Anaheim output continues to be a strong economic force.
To overcome a challenging business environment, Los Angeles-area businesses can:
- Consider relocating to a more affordable area, if long-term business strategies aren’t supported by the current regulatory landscape.
- Recruit international workers, which will be the largest available talent pool in the area.
- Monitor operational budgets, as net migration will limit domestic talent supply and increase wage competition.
- Know how the new AB5 law, which will reclassify up to 2 million independent workers as employees in California, will impact budgets and revenue projections.
Average Hourly Earnings Growth (all private employees, December 2019)
Compared to national wage growth of 3.4 percent, at the end of 2019, Los Angeles-area average hourly earnings had increased 5.0 percent to $32.36. Mandated wage increases contributed to this growth. In 2015, the Los Angeles City Council voted to raise the minimum wage to $15.00 by 2020, which came in increments averaging 4.0 to 7.0 percent annually. These mandated wage increases will impact revenues and budgets in 2020, possibly hindering company growth initiatives. The Construction and Leisure and Hospitality Industries, dominated by blue-collar workers, will continue to see some of the top job growth in this metro. Because of this, these two industries may see wages increase in excess of the minimum wage legislation.
Unemployment Rate (December 2019)
The unemployment rate in the Los Angeles metro fell to 3.6 percent in December 2019, a decrease from 4.1 percent in December 2018. Although this is slightly higher than the national average, the Los Angeles metro typically trends higher in unemployment. Even in robust economic times, the area can see unemployment rates from 4.0 to 7.0 percent. As businesses mull over relocation plans given the local regulatory and tax landscapes, the Los Angeles metro could experience rising unemployment.
Job Growth by Industry (December 2019)
With a 1.5 percent rise in job growth in December 2019, the Los Angeles area added 93,200 jobs. Given the size of the metro, the annual job gain could reach over 160,000 jobs. The December jobs number indicates the metro labor market is still stable.
The industries listed below are performing ABOVE the Los Angeles metro’s annual job growth of 1.5 percent. The industries highlighted in green grew faster in December 2019 than the five-year annual average. For investors and business owners who want to grow faster, consider organizations in these industries for merger and acquisition opportunities.
Source: U.S. Bureau of Labor Statistics
The industries listed below are performing BELOW the Los Angeles metro’s annual job growth of 1.5 percent. However, the industries highlighted in green grew faster in December 2019 than the five-year annual average. Companies doing business with slowing industries should consider diversifying their industry mix.
Source: U.S. Bureau of Labor Statistics
Population growth has been a challenge for the past decade in the Los Angeles metro. For the past nine years, domestic migration has averaged -80,000, with over 100,000 residents leaving the area annually since 2017. International migration, though, is the good news. This number has topped 40,000 annually since 2011. Even with recent federal changes to legal immigration reducing the number of H1-B visas the U.S. issues, international migration shows no signs of slowing. As companies seek to recruit talent and expand their business, recruiting from the international talent pool could still be beneficial though slightly more challenging.
Cost of Housing & Business
Housing affordability in the Los Angeles metro is among the worst in the nation, according to the National Association of Realtors’ Affordability Index. Los Angeles and Anaheim residents typically earn just 60 to 70 percent of the income needed to purchase and make payments on a median-priced home. Moreover, Anaheim median home prices increased 3.6 percent to $828,000 in Q4 2019 and Los Angeles home prices increased 7.2 percent to $617,300 in Q4 2019.
Area businesses face increasing sales taxes, and the cost of retail business licenses now exceeds $13,000. According to the Tax Foundation, California's top corporate income tax rate is 8.8 percent, and its overall business tax climate ranks 49th in the nation.
Both businesses and employees are having difficulty affording local commercial and residential real estate, causing employees to live outside the metro and businesses to relocate to more business-friendly states like Texas.
Los Angeles Metro 2020 Outlook
The Los Angeles-area job market has become exceptionally tight over the last few years, as unemployment rates have dropped to record lows. A major port and hub for international migration, the Los Angeles metro continues to be viable but has a potential weakening economy, partially due to impacts of the coronavirus. The Port of Los Angeles is the nation’s busiest seaport, and China accounts for roughly 50 percent of its cargo traffic, according to Bloomberg. At the time this publication went to press, port officials said there had been a 25 percent decline in shipments in February and were predicting total container volume for Q1 2020 could drop 15 percent from a year ago.
Net international migration to the Los Angeles area is expected to remain healthy, with an annual gain of approximately 45,000 people in 2020. However, during the same period, net domestic migration to the metro area is expected to decrease by approximately 118,000 people.
Job growth in 2020 will decrease to 0.6 percent while unemployment will increase to 3.8 percent, compared to national job growth of 1.0 percent and unemployment at 3.1 percent. The Information industry, which includes the publishing, motion picture and broadcasting subsectors, will see the area’s highest job growth of 4.7 percent. Government will see negative job growth of -0.9 percent.
Employers will need to combat continually steep housing costs, which will remain a big hurdle for this market, with attractive compensation and benefits packages. This metro will continue losing businesses and population to smaller metros due to high taxes, regulations and the cost of living. But as a large international hub with diverse industries, the Los Angeles metro is well-positioned for a strong rebound, if companies can overcome the population and business regulatory hurdles.