California’s next governor will take the helm at a challenging time for the state’s economy—confronting stagnation in the job market, concerns about affordability, and uncertainties around the impact of federal policy and global conflict. Our next governor will lead one of the largest economies in the world, home to renowned companies, marquee sectors, and a highly skilled workforce. However, the state faces challenges competing for talent—highly skilled workers and innovative businesses—amid slowing population growth and heightened costs. The choices made by the next governor will affect the state’s competitiveness as a whole and shape economic opportunities for residents in a decade of transformation.

The fundamentals

California’s $4 trillion economy is the envy of many worldwide; it comprises a diverse range of sectors from agriculture to manufacturing to hospitality and is home to globally known industries like Hollywood and Silicon Valley. Nearly 2 million private-sector businesses and 19 million workers power the state’s economy. Driven by tech and manufacturing, California’s GDP has grown faster on a per capita basis than the US and other large states over the past decades. While this growth has generated large gains in wealth and productivity, these have not translated to all parts of California; inland and far northern parts of the state lag behind, poverty rates remain high (17%), and low-to-middle-income families have seen a fraction of the gains of high earners.

Key issues

California’s labor market has stagnated. Uncertainty and pessimism about economic conditions have dampened economic activity since at least mid-2022. Job growth has fizzled out, with businesses hesitant to hire and workers hesitant to change their job situation. Job gains have been limited to a few key sectors like health care and local government, while stock market gains have been driven by AI. Unemployment has not increased much in the past two years, though it remains higher than in 2022 and above almost all other states.

Affordability remains a pressing challenge. Ninety-six percent of likely voters say affordability and the cost of living are somewhat or very important for their votes in November. After the pandemic, the spike in prices and then a slowing labor market brought affordability issues to the fore. Yet affordability is not a new concern in California, where the cost of living and doing business has exceeded that of most other parts of the country for decades. For now, prices have stabilized (except for already higher gas prices facing further volatility due to the Iran war) and most households are seeing meaningful income growth. In the long run, addressing pressures that increase costs unnecessarily or tamp down earnings potential—such as housing prices, regulatory burden, and employment barriers—can help keep living and business costs in check.

Population changes will lead to a shrinking workforce. California’s population growth is slowing, and its people are aging. The ratio of working-age people to older and younger residents is lower than it’s been since the 1970s (comparing those age 18-64 to those younger or older). One major challenge for the next governor will be providing expensive services like health care to a growing older adult population while the share of workers shrinks. Meeting workforce needs more generally will require addressing barriers that currently prevent some people from working as much as they’d like. Moreover, planning for future labor needs must also adapt to major changes in technology, climate, and federal immigration policy, as well as the retirement of experienced workers and business owners.

Productivity needs to be leveraged for broad economic growth. Leaps forward in productivity have powered economic growth and improved standards of living for generations, and California’s economy is poised to undergo the next leap with AI. The computer and information age brought about improvements across the board—but large firms and highly educated workers saw much greater gains, leading to greater economic inequality. Facilitating the transition to AI could help ensure that greater productivity translates into broader economic gains across the state’s diverse sectors and communities.

Jobs, the economy, and prices are especially salient issues for voters, as recent experience has shown. While federal policies are more powerful for short-term price and monetary controls, state leaders also have tools to address economic concerns, especially long-term ones. In this era of transformation, policies in two issue areas will be critical:

• Supporting the growth of key sectors and businesses across California’s diverse regions through the state’s economic development plans and by examining the regulatory climate.
• Educating, training, retraining, and supporting workers through education, workforce, and safety net systems.

The impact of the state’s economic strategy also depends on the broader policy context in areas like housing, child and dependent care, transportation, taxation, and health care—all of which crucially shape the choices of businesses and workers in the state.

For the next governor, the message is clear. Major changes are afoot, unlike those we’ve faced in the past: slowing population growth, a new era of technology, and increasing climate volatility. Each of these shifts creates economic opportunities and risks, which may require Californians to adapt in new ways. The next state administration will need to confront these transformations and harness the power of California’s large, diverse economy to remain competitive nationally and internationally while broadening opportunities for residents.