California's economic crisis - businesses are leaving the state - includes related articles - Cover Story

Nation's Business, July, 1993 by John S. DeMott

"The system is out of control," .says Michael Hoy, Kemper's Western Division president, based in Folsom, Calif. He says some sectors of the medical, legal, and vocational-rehabilitation fields view workers' compensation as "a big money machine." The California Workers' Compensation Institute, an independent research organization, says that litigation costs take up 20 percent of expenditures under the compensation program.

Hoy points out that California law requires that only 10 percent of a claim of disability attributed to stress be job-related. He says the compensation benefits are simply "too easy to access."

Another example of the regulatory problems faced by employers is the recent $1 million damage award to a man who had alleged sexual harassment by a female supervisor. An award of that magnitude was possible because unlike the federal government and most other states, has no ceiling on potential awards in such cases.

Business defections stemming from excessive regulation--or any other reason--are the last thing California needs right now. From a dynamo creating an average of 300,000 jobs a year in the 1980s, a total of 3 million for the decade, California now is losing them at a furious pace--estimates range to 1 million over the past three years alone. Unemployment in Los Angeles County hovers at 10.2 percent, more than three points above the U.S. average. And the California economy would have to create 250,000 jobs annually just to absorb the immigrants--57 percent of the U.S. total--from Mexico, Japan, Korea, and China arriving in California.

The costs and other problems of dealing with a fast-expanding population are going to grow substantially. The state finance office estimates that California will have 63.3 million people by 2040, more than double the present number.

Some economists and most California politicians initially rejected the prospect that the state--long recognized as an engine of permanent growth--had encountered basic difficulties. Their state's $780 billion economy, they pointed out, is the seventh-largest in the world and subject to the same cycles that affect nations. But the reality is that the state faces "a significant restructuring of the economic base," says Jack Kyser, chief economist for the Los Angeles County economic-development corporation.

Another factor is the sharp decline in defense spending in a state where defense contracts and military bases have been major economic factors. Aerospace and high-tech jobs in Los Angeles County have dropped from 301,000 in 1985 to 185,000, with further cuts expected. Seventeen California military bases, with 140,000 civilian jobs and a combined annual payroll of $4.2 billion, are slated for dosing, and 10 more installations were added to the list this year.

The defense cutbacks are not the result of any state policies, of course, but the extent to which those policies have reduced the number of nondefense jobs contributes to the problem.

Even companies born and bred in Silicon Valley are reacting similarly to California's business climate. Cypress Semiconductor of San Jose, a supplier of chips to the workstation and supercomputer markets, went offshore in 1992, opening a low-tech assembly plant in Thailand that will save $17 million in costs this year, says CEO T.J. Rodgers. For one thing, wages will drop from $10 to 50 cents an hour. More to the regulatory point, Rodgers says he got the Bangkok plant up and running in less time than it takes to obtain local government approval to install an awning in San Jose.