California has the fourth-largest economy in the world. But as artificial intelligence transforms human labor and affordability remains a pressing issue, how can the state maintain its economic standing?
As Pomona College prepares to host a California gubernatorial debate on April 28, Fernando Lozano, Morris B. and Gladys S. Pendleton Professor of Economics and coordinator of the Public Policy Analysis Program, explains how an economically diverse workforce and robust labor protections can increase worker productivity and support the state’s knowledge economy. This interview has been edited for length and clarity.
What are the most important labor market challenges the next governor will face?
Sustaining an infrastructure that supports a knowledge economy based on human capital. Over the last 100 years, California has fomented creativity, knowledge and innovation to transform its economy. The state must remain an incubator of new industries and ideas. Failing to sustain a knowledge economy risks losing our global economic leadership.
How does California’s knowledge economy increase productivity?
When workers come together around a common set of industries or occupations, they learn from each other and become more productive. This is what we call knowledge spillovers: workers learn from each other, either in formal settings or more informally, such as around the water cooler, in the elevator or when socializing. These formal and informal interactions increase worker productivity, and the spillovers are greatest when workers from mixed economic backgrounds and different life histories interact at work and in our communities.
How does affordability impact California’s ability to sustain a knowledge economy?
Domestic migration matters, across states and within California. The next governor should work with local governments to promote housing affordability and allow an economically mixed group of workers to live close to each other and learn from each other. Lack of affordability is an implicit regressive tax: when workers can’t afford to live close to their places or work, they have longer, more costly commutes; they spend less time with family and loved ones; or they have less access to local amenities.
In addition, it becomes a “tragedy of the commons” [an economic theory where self-interested individuals deplete or degrade a shared resource past the point of usability]. In this case, the lack of affordability increases traffic and pollution.
California has some of the strongest labor protections in the country. How do those policies affect workers and businesses?
When an economy is constantly transforming itself, it creates new winners and, sometimes, new losers. An economy like California’s—one that is constantly transforming itself—should protect its workers and entrepreneurs from economic transformations and allow them to reinvent themselves in this fast-changing environment.
For example, the emergence of artificial intelligence creates an economy that will transform itself faster and more often, which may expose workers to new vulnerabilities. Another example is contract workers: strong labor regulations such as AB5 intends to protect the state’s most vulnerable workers, but that comes at the cost of contract workers, who benefit from the freedom that being an independent contractor gives them.
I believe that if we want workers and entrepreneurs to move to California, or stay in California, we need to offer them a safety net and labor protections that will allow them to reinvent themselves. Yet we must keep in mind that regulations redistribute risk and costs not only across firms and workers, but also across different types of workers or firms, and we should be aware of those tradeoffs.