L.A. sets trends for new economy

As in most other Super Cities, Los Angeles’ economy is changing. Nothing new here. Things always change and churn — particularly in a multicultural society such as Southern California, where the region’s politics, economics and demography are best described by words like freedom, turbulence, innovation and choice.

There is, unfortunately, a strong tendency for people, including trained observers such as journalists and economists, to look at change and see decline.

As economist Joseph Schumpeter said, “Capitalism is a process of creative destruction.” However, the press and the public tend to focus on the destruction side: jobs lost, hard-hit families and communities, people and firms moving out, relocating.

It is useful, from time to time, to look at both sides, including the creative side. That’s what we did in a report to a group of CEOs assembled in Los Angeles last week to discuss “The Next L.A. Economy.”

If we look at the two years just before the onset of the recession, we see a very vibrant, entrepreneurial economy. California created approximately 326,000 net new jobs — i.e., subtracting out all the job losses and eliminating all jobs created by companies starting up or dying during this period. The breakdown of net new job growth is instructive.

• Three sectors account for nearly two out of three net new jobs statewide and 70% of the new jobs in the Los Angeles basin: services (27%), manufacturing (23%) and wholesale trade (15%).
• The idea that new jobs in the U.S. economy are largely low-wage service jobs, such as flipping hamburgers and changing beds, is not supported by the job creation data. In fact, by a ratio if 6 to 1, the California economy produced high-wage business and professional service jobs (computer programmers, health-care administrators, etc.), not low-wage general service jobs (laundromat operators, car washers, etc.) In the Los Angeles basin, business and professional service jobs also dominated, though at a lower 4 to 1 ratio. The ratio nationwide is 2 to 1.
• Though dominated by high-wage business and professional service jobs, the L.A. economy also produced nearly three out of every four (74%) of the state’s new jobs in the low-wage “general service” category. Because low-wage entry-level service jobs are essential to absorb the influx of new immigrants just beginning their climb up the mobility ladder, this is a healthy situation for the LA. economy.
• In the Los Angeles basin, manufacturing accounted for nearly one out of every five new jobs — and about one of four statewide. All the manufacturing job growth in the Los Angeles basin was by small manufacturers, who created nearly 40,000 new manufacturing jobs — and 28,997 net new jobs.
• High-tech manufacturing accounted for nearly one out of three new manufacturing jobs (32.6%) statewide. However, high-tech dynamics were very turbulent in the Los Angeles basin: large high-tech companies lost 9,880 jobs; small high-tech companies created 9,174 new jobs.
• Small businesses (under 100 employees) created 78% of the jobs statewide and close to 90% of the new jobs in the Los Angeles basin, higher than any other region of the state.
• More than nine out of 10 jobs were created by locally owned establishments.

What we see here is America’s new economy in bold relief: small, locally owned companies producing most of the new jobs in manufacturing, business and professional services and wholesale trade. Our other Super Cities would do well to emulate this picture.