How California’s economy and housing needs will affect your business in 2019 and beyond
Did you miss our recent webinar with Dr. Robert Eyler, President of Economic Forensics and Analytics, Dean of the School of Extended and International Education and Professor of Economics at Sonoma State University?
In it, we covered:
- What current data suggests about housing’s impact on employers
- The effect of “outmigration” of lower-wage workers on the future of employment in California
- Ways employers can prepare for different economic scenarios in 2020 and beyond
You can still watch the webinar here.
This webinar raised a number of really interesting questions, which Dr. Eyler graciously answered at the end of the presentation. Below is a transcript of the question and answer section.*
I am a hiring manager for an auto dealership located in Burlingame, California. For several years now, to address the high cost of housing and to track automotive technicians, we’ve offered free housing. Did your research reveal any other creative ways for employers to stay competitive and attract and retain employees?
Yes, so, generally speaking, what I’ve seen out there is two things: one is you are seeing some creative ways in subsidizing the cost of housing for employees that employers want to keep and not have to go through turnover, especially if you think that it might take you six or nine months for a position that’s critical.
Two major industries in which you’re seeing this is in health care and in education. Especially on the education side where wages are, in many cases, unionized and, furthermore, relatively low in high-cost-of-living areas, you’re seeing school districts partner with non-profits and other private entities to build housing specific for teachers and to keep them local and not lose them because they have to commute 75 miles every day to come to the job. In health care you’re seeing something that’s similar to that. Kaiser now is starting to roll out (slowly) housing plans, because they’re concerned about not having 24-hour care at their major health facilities because it’s becoming too costly for their employees, vis-a-vis the wages to live locally.
So, you are seeing somewhere there’s partnerships on actually building what is truly defined as “workforce housing.” You’re seeing some pre-tax benefits expand on commuting, but the free housing thing is something you haven’t seen a lot of — or let’s say pure paid subsidized housing where you say, “Well, look we’re just going to pay for your housing, so it’s free to you,” and this is just basically maybe a pre-tax benefit but something that is really a retention toward the end of the day and the employer is willing to bite the cost. Haven’t seen a lot of that. The other ones we’re seeing a little bit more or having housing plans especially on the executive side.
What can be done in the housing market, and what can we expect from the governor’s office in terms of addressing the housing crisis here in California?
You’re hearing a lot of rhetoric out of the governor’s office especially in his first few days about building millions of units now. On the surface that’s great. It does provide a signal that there’s a recognition that housing demand is greater than housing supply and to maybe make housing more “affordable,” we need to build. That’s a good start.
The problem is that’s going to come down to some serious micro-questions, which are what type of housing and where to build it. How many should we really build in each location. How have the fires changed the need for housing in rural California, which politically can be kind of a hot potato because there’s not that many people, but it tends to a wild PR scenario in terms of saying, “We’re going to focus our efforts on major urban areas that have not been affected by fire. You knock yourself out.” The governor has got a real conundrum on his hands about where — if policy is going to jump in and say you must build — where should you build?
But it sounds like what the governor’s office is going to focus on doing is providing incentives to municipalities, especially the urban ones to focus on transportation-oriented development, trying to build multi-family units, apartment buildings, close to transportation hubs to try to do a double whammy. Provide the housing and provide it close to transportation to knock down traffic at the same time. Something to remember: it is very, very difficult to solve the commute, the housing, and the labor problem at the same time, because of this sort of Pilates ball balancing act you have to achieve, which is very difficult to do in practice. But that’s what we’re hearing from the governor’s office, because there’s going to be a big push on providing incentives to build housing as fast as possible, specifically in urban areas that have the most cost of living problems.
With the State of the Union last night, what can we glean from the labor and housing market in California going forward from what was stated?
In the State of the Union, we heard a lot of sort of high level rhetoric, but the reason why it’s important is because, if we’re going to become more protectionist or we’re going to have immigration policy that is going to restrict the flow of labor into California, we’re going to have a rising cost of living effect from the tariffs just from a reduction of trade and potentially a slowdown in other economies that are going to force more costs into the American economy to try to recover those losses. And, as cost of living goes up, there’s going to be more demands for wages to rise and that’s going to put a lot of employers in a pinch in terms of costs.
At the same time that we may see immigration law change or the flow of immigration or the flow of migrants change in such a way that is going to make the supply of labor contract. So, right now what we heard at the State of the Union last night sounds like it’s going to make the cost of doing business in California slightly higher, if all of what we heard last night starts to slowly come to fruition. This is something that we knew when Trump got elected, that California was going to be a more costly place to do business, not necessarily because of California and what it is, but because national policies were going to force change on the California from the outside that would lead to some real puzzles to solve for employers throughout the state.
So, those are the two big things from last night that one needs to watch very closely: if we actually see some kind of a barrier built on our southern border, will that restrict the supply of labor in a way that actually forces costs onto me as an employer that are rising directly? Because I employ people that move fluidly over the border, which happens throughout the state? Don’t be fooled: there’s a very large market for workers that if they go away, costs are going to rise across the board, because that loss of labor is a major shock to the economy in California. And the second is how will that ultimately transmit up in housing prices and how they feed off of each other wage demands? Those things are coming. It’s just a matter of speed.
With the baby boomers exiting the labor market, what is the outlook of labor force growth, and with generally underperforming millennials, what do you think the impact will be on the U.S. labor market? And how much will need to be supplemented by imported talent?
That’s a great question. It’s also multifaceted, so let me try to break it down a little bit: What we don’t know about baby boomers is how fast they’re actually going to start to exit our economy. It’s been sort of a rhetorical looming question for decades, and now we’re starting to actually see the fruit of it. It could be that we see a lot of baby boomers transition into another work chapter in their life. What economists really are not very good at doing yet is measuring non-payroll employment. We just don’t know how many gig workers there are. There’ve been a lot of wild, varying data on this, and how many of those so-called gig workers are actually baby boomers transitioning from one career to the next?
The supposition is that as baby boomers have longer lives and they maybe need income over a longer span of time, they will naturally come back toward the labor market, rather than classically retire. And what that does, going to the other part of the question, is two things: one, if we find out the millennials are maybe less productive than we expected, will an employer choose a more senior worker with a lot of experience and a long productive history over a younger worker that may have more potential to be productive but has not maybe shown its face yet. And as older workers who don’t want to leave the workforce remain in the workforce, it slowly chokes off entry points for new workers to come into the labor market, which is something that, as an educator, I’m concerned about. Because when I tell people that you get an education, and you go out in the workforce, if those opportunities are now not as fluid because older workers are staying in their jobs longer, we as educators are really doing a disservice by not telling our students that when they’re choosing career paths in majors.
It’s a very tricky environment and it’s fascinating, as an economist to think about, but it’s a very tricky one as a practitioner to think about: Who should I hire? These new entrants in the labor force — can I really trust their productivity versus an older worker? Where, with the older worker, I have they have the same questions because they’re at the sort of later stages of their work life. It’s very intriguing. There is no great answer to that, but the two things I can say for sure is, one, I think the court still out a little bit on whether or not millennials as a group are going to be less or more productive than the previous cohort. And even the baby boomers on top of that. And second is that we should expect baby boomers to not “retire” in the same way that maybe our grandparents retired or that the the cohort before them retired simply because the nature of work changed. You went from a more goods-producing workforce to a knowledge-based services-producing workforce where the toll on the body was not the same. So, work lives can be a lot longer, as well as the natural lives can be a lot longer, and the need for income might be 10 or 15 years longer than in the previous generation.
How are you determining, if there is going to be recession in 2020 or 21, that it’s going to be mild? Are you concerned for us to go into another Great Recession and why? And, also, if you could comment on the Dodd-Frank and Glass-Steagall Act.
So, let me start with the first or the last one which is the Dodd-Frank and the Glass-Steagall Act. Those two acts are or acts about the banking industry and the Glass-Steagall Act is much wider than just banking, by the way. The Glass-Steagall Act had an enormous number of things in it when it was passed. But in general, when you think about how banks hold liquidity, the way in which we regulate banks, those two acts are two historic stops in terms of the way we think about lending in our lives.
There’s going to be some continued pressure while Trump is in the White House to unwind the American economy from some of the parts of the Dodd-Frank Act even though that’s kind of gone on the third burner, especially around immigration and trade. That was kind of the third thing on his list, and since he hasn’t got through the first two completely yet, whether he gets to the third or not is still an open question. So, the way that the Dodd-Frank Act really changed things, if you go back to the graph I showed you earlier about the so-called excess reserves, the amount of cash that was sitting on the sidelines in the American economy waiting to be lent, that spike was a function of the Dodd-Frank Act. The reason I don’t think we’re going to go into a Great Recession Two is that we don’t have the real economy labor and the financial part of the economy lending in the stock market all looking like they’re going to descend simultaneously. If recession comes, it’s probably going to look a little bit more like the 2001 recession or the so-called “dot bomb” recession when we saw some overinflated values in Silicon Valley and in the Bay Area pop, and you saw a contraction in the Bay Area and in employment as a result and that sort of rippled out for six or nine months into the American economy and then we slowly turned the corner and then really accelerated because of lending toward housing in the last decade.
Generally speaking, recessions are mild if the previous growth phase that created them is a mild growth phase. And we certainly had a mild post-recession economy. So, there’s no reason to think that we’re going to have a hard fall. And so some of the data I showed you suggest exactly that: that we’re starting to slow down, and we don’t expect a hard contraction over the next couple of years like we saw in the Great Recession. But I’ll say it with one caveat and that is that you know a lot of the assumptions behind my take that it’s going to be a mild recession and we may have another 18 to 24 months before we see any real downturn is not taking into account any weird events.
So, if something strange geopolitically happens that we can’t see and it happens at a time where there’s already some other uncertainties in the economy, the sum of the two parts can lead to a lot of business nervousness and investor nervousness simultaneously that can easily contract employment quickly. So, that’s what we really saw in 2007 and 8: we saw some things we did not predict, and once those things started to show their face completely a lot of parts of the economy seized up simultaneously. So, we’re not seeing that yet, but keep in mind that events and their timing could easily change that outlook. The data that come out next week might show that some economists are really seeing less productive 2020 and 21 even three months before simply because things have changed a little bit. But fundamentally speaking the American economy looks pretty good for the next couple of years, which means if we do go into recession in 2020 or 2021, it’s probably going to be relatively mild.
What about company movement from the Bay Area? There’s a major employer who is headquartered in San Francisco but have recently moved their headquarters to Texas.
So, the pressure is going to stay on. California as a place to do business is going is going to continue to be a relatively high cost of doing business due to the cost of living. So, we should expect one or more major employers to really scratch their heads and go, “Why am I continuing to have ten or twelve thousand people in California, when I can have those ten or twelve thousand people in a place that’s half the cost for them and for me?” It’s something that will continue.
The number one thing that I hear is that as long as the talent and the ideas are separate in California major employers especially on the technology side of the economy are going to continue to stay in California. They don’t want to be that far away from the talent. What’s blown my mind is that the technology allows you to really find the lowest cost of living place but still do business technologically on a regular basis but the face to face piece in the networking piece in the culture piece is still so important that being close to where it the epicenter of ideas and very very creative people seems to have sort of in a sense usurp any ideas about, let’s say, the financial cost of doing business, because there’s this sort of real cost of leaving. And as long as the real cost of leaving exceeds the financial cost of leaving, you’re going to see California businesses pretty much stay here.
Even if there’s no guarantee that we will end up in a recession, are there ways to recession proof a company or at least slow the effects of a potential recession on employment and the business?
There’s really no way to one hundred percent recession-proof a company, but you can do two things that I think help. One is plan. You should plan and be conservative on the revenue side and less conservative on the cost side. If you expect slower growth in the economy and you predict that in your planning, it’ll force you to make decisions that then make the bottom hit more softly. So planning along side of where you predict the economy is going will help you make better decisions.
Two: try to reduce the amount of leverage the company is taking and also slow down the amount of hiring you’re doing until you can see exactly how the economy is going to play out, because what a lot of companies do is they end up exposing themselves to more costs and then going into recession is a more costly unwind to try to reduce your costs, especially if you have workers and you’re having expansion plans that are dependent on labor. One of the ways you may see companies really considering that is whether or not they start converting to capital and remove the sort of indirect costs of hiring less out of their planning and make it more machine driven. But not every organization obviously has that choice. So, those first two pieces are the way I would think about it.
How can you stay competitive and raise wages if you have a cap on market billing rates under a government contract? Often, we are allowed a 2.5 margin and a 10 percent cap on indirect costs.
It’s not easy in what you’re doing. You have some loss-leader projects probably against other things to have to make up the gap if you still want to take on public projects. So, it’s something that the state of California and other municipalities are going to have to address sooner than later, given the costs of wages rising, and I think they’re still in this mode where they’re lagging because of the nature of the contracts. For a lot of employers, it’s a real, real tough situation going on, in terms of facing basically an automatic pinch on profits if not basically breaking even. Which does not attract a lot of bidders.
*Lightly edited for clarity