Smart Economic Development is Inclusive Economic Development

Launched in 2018 and informed by a partnership with the Brookings Institution,  EDC’s Inclusive Growth Initiative  serves to inform San Diego County’s economic priorities and make the business case for economic inclusion. From EDC’s baseline reports on  Equipping Small Businesses to Compete ,  Building San Diego’s Skilled Talent Pipeline , and  Addressing San Diego’s Affordability Crisis , EDC together with a steering committee established three  Inclusive Growth  goals for San Diego to achieve by 2030:

• 50,000 new quality jobs in small businesses
• 20,000 skilled workers per year
• 75,000 newly thriving households

In this report, EDC provides a data update on the region’s progress against the 2030 Inclusive Growth Goals.

San Diego rebounded from the Great Recession of 2008 more prosperous than many of its peer regions due to its strength in innovation. Globally recognized as a life sciences and tech hub, San Diego leads in everything from medical device manufacturing and genomics to cybersecurity and wireless communications. As a result, local firms have seen record inflows of venture capital in sciences and technology. The industries that produce these life-changing and life-saving products and services, collectively known as San Diego’s “innovation cluster,” account for 10 percent of all jobs and are an important driver of economic growth.

While the innovation cluster has made the region more prosperous, it also perpetuates economic disparities in ways that threaten San Diego’s competitiveness and resilience. San Diego's economy has more than doubled in size over the last two decades, meanwhile the typical household has seen its income increase at roughly half that rate. Even before the COVID-19 pandemic, most households did not earn enough to meet region’s expected cost of living.

To address the competitiveness challenge caused by rising inequality, San Diego must focus on the building blocks of a strong economy: quality jobs, skilled workers, and thriving households.

Addressing the challenges confronting San Diego will require effort from both the public and private sectors. Policymakers and business leaders must do their part to ensure that San Diego is cultivating and retaining the talent that the region needs to compete on a global stage. Inclusive Growth means supporting San Diego’s small and diverse businesses through strategic procurement practices so that they have the resources to provide quality jobs for their employees. Inclusive Growth means evaluating hiring practices and the necessity of bachelor’s degree requirements, opening pathways to quality jobs for students from diverse backgrounds. Inclusive Growth means tackling San Diego’s affordability crisis head-on, ensuring that the region’s cost of living does not deter or drive away the talent that fuels the region’s innovation economy. The region’s future growth and competitiveness depends on inclusion; smart economic development is indeed inclusive economic development.

Although San Diego is the birthplace of many successful large, multinational companies including Qualcomm, Illumina, and BD, small businesses—those with fewer than 100 employees—are the backbone of the regional economy. These small businesses employ more than 60 percent of the workforce in San Diego County, nearly double the national average. However, jobs with these companies pay 34 percent lower wages than large businesses, on average. As depicted in the chart on the left, this compensation disparity has only increased during the last four years, exacerbated by the pandemic.

The top challenge faced by any employer, regardless of size, is attracting qualified talent. Small businesses struggle to offer compensation that is competitive with their larger peers and commensurate with the ever-increasing cost of living in the region. On top of this, employer-sponsored health benefits are not as prevalent in small businesses as in large businesses. To compete for talent, small businesses must provide 50,000 new quality jobs by 2030. A quality job is one that provides economic security—paying an annual salary of $43,264 in 2020 and providing health insurance.

Over the past four years, the wage gap between small and large businesses in the region has increased. Simultaneously, the proportion of employees in small firms that are offered employer-sponsored health insurance has declined. In 2017, approximately 57 percent of San Diego’s small business employees were offered a health insurance plan through their employer. In 2020, that number dropped to 55 percent. While two percent might not seem like much, this translates to 13,636 fewer employees in small businesses being offered employer-sponsored health benefits.

In the region, only 26 percent of jobs in small businesses qualify as quality jobs. Furthermore, access to quality jobs is unequal across race and ethnicity. Looking at occupation-level data across all firms, the chart below shows that occupations with higher proportions of quality jobs are disproportionally held by white San Diegans. In fact, a Black person is 27 percent less likely to hold a quality job compared to a white person, and a Hispanic person is 42 percent less likely.

EDC’s baseline study on  Equipping Small Businesses to Compete , released in 2019, found that the region needed to add 50,000 quality jobs in small businesses by 2030 to close the gap with the broader economy. More than 3,000 quality jobs in small businesses have been added since, putting the region on track to achieve the goal of adding 50,000 quality jobs in small businesses by 2030. However, the pandemic widened the gap between small and large firms in terms of the proportion of quality jobs available. The jobs losses of 2020 depicted in the chart below were principally concentrated in jobs that are not considered quality; meanwhile larger firms added quality jobs at a much faster clip. To have small businesses compete with their larger peers in terms of the proportion of quality jobs offered, small businesses now need to create more than 100,000 new quality jobs—double the goal established in 2019.

Although suppliers outside of the region may be able to provide goods and services at a lower cost, the supply chain disruptions resulting from the pandemic showed the value of having a diverse set of local suppliers. Across all industries, San Diego companies experienced  increasing difficulties with managing suppliers and vendors throughout 2021 . Upstream labor shortages have reduced production, port and travel delays led to late or canceled shipments, and the unavailability of microchips and plastics prevented companies from delivering finished goods and even services. Meanwhile, institutions that rely on local suppliers report greater customer service, supply chain resiliency, and stronger brand equity in the communities they serve.

Supporting the region’s small and diverse businesses is more important than ever, and a consistent challenge that small businesses report is identifying their next customer. One opportunity to support small businesses is to  connect them to large institutional buyers  in the region. Strategic procurement centered around local sourcing of vendors not only increases the viability of small businesses but also increases the resiliency of these large institutions. With more than 113,000 local, small firms specializing in every industry from agriculture to aerospace, developing relationships with these suppliers now is the best insurance policy against unexpected shocks in the future.

The innovation economy is a main driver of growth across San Diego. Not only are jobs in the cluster high-paying, but each job in innovation-related industries supports two jobs elsewhere in the economy. With such growth comes increased demand for talent with the skills and educational training necessary to perform complex tasks such as research and development. In fact, all of the job growth from the last five years was in positions that required some form of degree or credential acquired through post-secondary education (PSE), as shown in the chart below. Looking forward, it is projected that 84 percent of new jobs created between now and 2030 will require PSE.

As many know, hiring for these skills is becoming increasingly difficult for businesses, both regionally and across the globe. While the current situation for attracting and retaining talent has been exacerbated by the pandemic and the ‘ Great Reshuffling ,’ the supply of local talent was already lagging demand in the region. In many cases, employers have quickly raised advertised salaries, sourced talent outside of San Diego, or worse, expanded their business to another region.

While this issue is multifaceted, one of the most glaring problems is the unequal access to high-paying jobs among San Diego residents. Hispanics represent one-third of the population but occupy only one-sixth of innovation economy jobs. Most of these innovation jobs require some form of PSE. Meanwhile, the demographics of San Diego’s talent pipeline are changing rapidly. Just 15 percent of current degree holders in the region are Hispanic, but nearly half of all seventh graders are Hispanic. Hispanic students have consistently been shown to be the least prepared to enter or complete a degree or credential. This means the workforce of the future will look different than today’s—and San Diego needs to do something about it.

Skills developed in K-12 education are precursors to outcomes later in life. The chart below shows how Black and Hispanic students are not only graduating high school at a lower rate, but are also less prepared to do well in college. If Black and Hispanic students were succeeding at the same rate as their white peers, San Diego would not have a talent shortage, but instead, employers in the region would enjoy a talent surplus. That is the size of the challenge, that is the scale of the opportunity.

For San Diego businesses to continue to grow and compete on a global scale, San Diego must focus on developing local talent to meet the demands of the region’s innovation cluster by doubling the number of PSE completions by 2030 so that 20,000 new skilled workers enter the labor force each year.

It is clear that there is much work left to do since EDC’s baseline study on  Building San Diego's Talent Pipeline . As it stands, only about one in three San Diego students will end up completing PSE within six years after graduating from high school. To ensure that San Diego builds a robust talent pipeline, greater investment is needed in students who are struggling to graduate or complete a certificate.

The pace of talent production must be accelerated if businesses in the region are to have the talent they need in the years ahead. Ensuring that San Diego’s Hispanic population is prepared to enter a PSE program is just a start. Four-year colleges and universities are often out of reach for many high school graduates due to cost of tuition, lack of access to reliable and affordable transportation and housing, or many other factors.

The fastest way to increase the pool of skilled workers is to expand the definition of what it means to be a skilled worker. Despite many individuals possessing the skills required to succeed in entry-level positions, many simply do not have the resources to obtain the four-year degree that is stated as a requirement in job postings. San Diego employers can do their part by eliminating inflated educational requirements for many entry-level positions, offering education support, and hiring from San Diego’s robust Community College system–which is inclusive by charter.

Ensuring that San Diegans have an affordable place to live is key to economic development. It is no secret that the region is an expensive place to live. In fact, San Diego is 47 percent more expensive than the average U.S. metro. Compared to the 25 most populous metros in the country, San Diego has the second highest median home price of $845,000, only behind San Francisco.

With a median household income of $79,673, a majority of households in the region are not thriving, meaning their incomes are insufficient to enjoy the full quality of life that San Diego has to offer. Specifically, an owner-occupied household must earn at least $122,412, and a renter-occupied household must earn at least $79,608. Addressing this issue means adopting an Inclusive Growth agenda in earnest. To ensure San Diego businesses have the talent that they need to compete on a global scale, the region must work toward increasing the proportion of thriving households from 47 percent to 55 percent so that more than half of San Diegans can afford to live and thrive here. While this would barely get the region into a majority thriving status, it still requires cultivating 75,000 more thriving households by 2030.

Compared to other metros in the U.S., cities in San Diego County often have a higher concentration of households that are housing-cost burdened, meaning they pay more than 30 percent of their income toward housing and related costs. In fact, 43 percent of the households in San Diego County are housing-cost burdened. The region’s affordability crisis poses a grave threat to firms’ ability to fill open roles, especially in recruiting from outside the region.

The high cost of living in the region has many causes, but the lack of affordable options for housing, transportation, and childcare are among the top drivers of San Diego’s affordability crisis. Rising housing costs are pushing people further away from job centers, with the median household devoting 22 percent of their income to transportation. For many families the cost of childcare is their second largest expenditure. Before the pandemic, there was already a significant childcare shortage in the region. In fact, there were nearly twice as many children under the age of six as there were licensed childcare spaces. During the pandemic, the region lost another 3,200 spaces due to business closures. As demonstrated in the chart to the right, affordability is an even more pervasive issue for San Diego’s non-white residents. The concentration of housing-cost burdened households would be almost 20 percentage points higher in an entirely non-white community compared to an all-white community.

The difficulty that households face in affording the cost of living in San Diego presents many challenges for the region. San Diego households have less discretionary income to support the local economy and face an ever-increasing pressure to relocate to an area where income goes further. This means the talent San Diego businesses need is deterred from living in the region, making economic growth even more difficult.

Although significant progress toward the regional goal had been made from the original report on  Addressing San Diego’s Affordability Crisis , it mostly driven by a refinance boom in 2019 where existing home owners took advantage of historically low mortgage rates. The devastating effects of the pandemic then left San Diego in a worse position than when EDC first began measuring. Rapidly rising home prices coupled with jobs losses have resulted in almost 11,000 fewer thriving households in 2020 than in 2017. While San Diego has been experiencing a steady recovery since the worst of the pandemic, lower-income jobs have been the slowest to return. This means that tackling the affordability crisis head-on is more important than ever, requiring significant investments to bolster San Diego’s chronically under-supplied housing market.

To achieve this goal, the region needs growing household incomes through the development of more skilled workers and the creation of more quality jobs. It also means more housing, more transportation options, and more childcare.  

The region's entire urban core is being reimagined; there are more than 600 building projects and more than $25 billion invested from Otay Mesa and the Chula Vista Bayfront to SDSU West and Seaport Village. At the same time, the COVID-19 pandemic has forever impacted how businesses operate and the needs of their employees. As principal real estate owners and developers in many of these projects, businesses can help spur neighborhood-level economic development, dramatically transform communities, and create thousands of newly thriving households throughout San Diego. To do so, these projects must be coordinated and planned with a holistic view of the region. They must deliver middle-income housing, better connect people to jobs, and provide the infrastructure working families need, such as transportation options, childcare, and high-speed internet. Ensuring San Diego is an attractive and affordable place for talent and business is imperative to the region's future competitiveness.

San Diego’s innovation economy has led the region out of this pandemic-driven economic downturn—just as it did in recessions' past. However, it is not currently accessible to everyone. While high-wage jobs have already more than recovered from the recession, low-wage jobs ended 2021 down nearly 12 percent. San Diego must rebuild an economy that is more resilient than before, so prosperity reaches more people. It means ensuring that small businesses not only recover but thrive. It means that everyone—no matter the zip code they were born in—has access to opportunities and the education that enables them. It means designing a region where owning a car is not a requirement to access opportunities.  

For San Diego to fully recover and remain competitive, an inclusive economic development strategy is imperative. Regional employers cannot just stand by in lukewarm acceptance of the current situation. Rather, they must lead the charge on Inclusive Growth and invest in the communities and individuals that will make up the workforce of the future. This means working with providers of education, developing strategic procurement strategies around supporting small businesses, and addressing the region’s affordability crisis head-on. The region’s future growth and competitiveness depends on inclusion; smart economic development is indeed inclusive economic development.

Join us at  inclusiveSD.org .