California Unemployment Rate Rises to 12.2%; State Must Improve Business Climate to Combat Unemployment, Budget Problems

California’s unemployment rate rose three-tenths of a percentage point to set a modern record of 12.2% in the month of August, according to the most recent data released by the state’s Employment Development Department (EDD). The numbers reveal a troubling trend of the continued widening of the gap between the state’s unemployment rate and the national jobless rate, which now stands at 9.7% (see the chart below from an Associated Press article derived from EDD data).

Source: California Employment Development Department

California’s unemployment rate is the fourth-highest in the nation, trailing only Michigan, Nevada, and Rhode Island. Gov. Arnold Schwarzenegger noted that the jobless rate underscores the importance of addressing the state’s economic problems, stating, “While I am pleased to see fewer jobs lost, my administration will not rest until job growth resumes and employment returns to normal.”

If the governor is serious about his statement, California must improve its poor business climate in order to foster job creation and economic growth. As George Will reported in a recent column, California’s job growth rate since 2000 is nearly 20% below the national average. California has ranked at or near the bottom in numerous business climate and economic freedom indexes. The American Legislative Exchange Council’s 2009 Rich States, Poor States study, which reports the results of the ALEC-Laffer State Economic Competitiveness Index, ranked California 43rd in terms of its economic outlook. The state suffered from low rankings in categories such as Recently Legislated Tax Changes (data is for 2007 and 2008 so it does not even include the $12 billion in new taxes passed in February 2009) — 40th, State Liability System (tort litigation treatment, judicial impartiality, etc.) — 44th, State Minimum Wage ($8.00/hour) — 48th, Top Marginal Personal Income Tax Rate (10.3%) — 49th, and Personal Income Tax Progressivity — 50th. The Freedom in the 50 States index of personal and economic freedom, published earlier this year by the Mercatus Center at George Mason University, ranked California 47th. The state scored 44th in the Fiscal Policy subcategory, 46th in Regulatory Policy, and 48th in Economic Freedom. Finally, California was voted the worst state in the nation for jobs and business growth for the fourth year in a row in Chief Executive magazine’s 2009 “Best & Worst States” survey of hundreds of CEOs.

If the Golden State is to regain its lustre, it must dramatically reduce the tax and regulatory burden that is driving businesses and jobs to states with fewer impediments and more economic opportunities. Moreover, it will not solve its persistent budget problems without encouraging economic growth. For years, the public sector has been consuming more than its share of resources and cannibalizing the private sector that is responsible for economic growth. It is far past time for the pendulum to swing the other way towards smaller government and a freer, more productive private sector. In addition to reducing taxes and eliminating red tape, the state should get rid of policies such as occupational licensing requirements and the minimum wage, which only serve as a barrier to work, raising unemployment and resulting in higher prices to consumers in the process.