Image: Job seekers
Justin Sullivan  /  Getty Images file
Job seekers wait in line to enter a job fair in Concord, Calif., last December. Over 1,200 people attended the event, which had been expected to draw closer to 400.
By Allison Linn Senior writer
updated 3/16/2009 7:06:27 AM ET 2009-03-16T11:06:27

California, a state so large that its economy dwarfs most nations, now has another, less cheery, claim to fame: It is one of the states hardest hit by the country’s unemployment woes.

The California jobless rate hit 10.1 percent in January, up from 5.9 percent when the recession began in December 2007. Only Michigan, South Carolina and Rhode Island reported a higher unemployment rate for the first month of the new year, when the national average was 7.6 percent.

While other states with exceptionally high unemployment rates are suffering from severe downturns in specific sectors that power their economies — such as Michigan’s auto industry — in California, the state is dealing with a broad array of problems, more similar to the country as a whole, economists say.

“If you follow the trend of our employment compared to the national employment, it tracks it pretty closely,” said Michael Bernick, former director of the state Employment Development Department and now a labor lawyer. “It’s gone up sharply just as the national rate has, and we’ve continually been higher than the national rate.”

To find one big reason why, you need look no further than the foreclosure signs that line the streets in many of the state’s suburbs and exurbs.

California enjoyed one of the hottest housing markets in the country during the boom, and it was one of the first and hardest-hit by the housing bust. As foreclosures have mounted and homebuilding has dried up, the state has shed construction jobs at an alarming rate. It lost about 130,000 construction jobs from January 2008 through January 2009 alone, according to preliminary calculations from state officials.

But California’s economic woes have spread into other areas as well. The state’s manufacturing sector has shed more than 80,000 jobs over the same period, and its financial sector has cut more than 48,000 jobs, according to the preliminary state data. That’s creating a tough job market for every class of worker, from unskilled laborers to white-collar college graduates.

“It goes across sectors,” said Bernick, adding that it has become common for as many as 40 people to apply for one job opening.

Some argue that the state’s jobless picture may be less bleak than it appears. Howard Roth, chief economist for the state’s Department of Finance, said a change in the way the U.S. Bureau of Labor Statistics calculates the jobless rate has often meant that the state’s monthly numbers initially appear worse than they are, only to be revised later.

Still he acknowledges that California's jobless rate is likely to remain higher than the rest of the country as it continues to feel the recession more profoundly.

In addition to the housing bust, the state’s financial sector has been hit by the banking crisis, and its many businesses are grappling with the effects of the credit crunch that has squeezed access to financing.

Major Market Indices

Other sectors of the economy, including technology and tourism, also are suffering as people pull back on spending. The manufacturing industry downturn could be problematic because California's high cost of land, electricity and other resources make it a less attractive place to locate.

“It’s pretty expensive to manufacture something in California,” Roth said.

The state government also is suffering from a severe budget crunch, which could eventually result in public-sector jobs being cut and further the cycle of economic worries. A 3-year-old drought is hurting the agriculture industry, which Roth said accounts for 5 percent of the state’s economy.

The healthcare and education sector is one of the few bright spots in the state’s bleak jobs picture, and even that sector isn’t faring as well as some would hope.

Stephen Levy, of the Center for Continuing Study of the California Economy, believes one major reason the state’s jobless rate comes in higher than the rest of the nation’s is because of a constant influx of new immigrants. He estimates that about 200,000 new legal immigrants come to the state each year, and in this market he says many of those workers may have immediately joined the ranks of the unemployed. The state data shows that more than 300,000 people were added to the labor force last year.

“The unemployment rate is higher because this is a state that people come to,” Levy said.

On the other hand, Levy believes unskilled immigrants who entered the country illegally are probably returning home because work is drying up.

Levy expects the state’s jobless rate to continue to edge up, and he warns that it could take some time for things to stabilize and eventually turn around.

“We’re no different than the nation — the numbers are going to get worse before they get better,” he said.

Still, he and other economists take solace in the fact that the state rebounded quickly and powerfully from other recessions including the downturn in the 1980s when it was hit especially hard because of steep cuts to its aerospace industry.

This time around, the job cuts are much more widespread, but they also have come at a much faster pace than in previous recessions.

The government stimulus package may help stem job losses, although some don’t expect it to be a major job creator. Bernick says the state should benefit from its diverse economy as well as a history of entrepreneurship.

“We do have high costs, (traffic) congestion (and) higher taxes, but we have such an entrepreneurial ethos and entrepreneurial culture — and part of that’s an immigrant culture — and that’s really what keeps the economy afloat and would be our hope for the future,” Bernick said.

California economists also note that past recessions brought on doomsday talk of permanently high unemployment rates and other long-term woes for the state, none of which came to fruition. This time around, the state is expected to recover more slowly than in recessions past, but most still see better times ahead.

“I’m pretty confident that we’ll come out of it. We’re pretty resourceful people,” said Roth, the state economist. “But for now, it’s a little hard to forecast exactly when that will happen.”

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