They are familiar refrains in California: The state is losing its best and brightest to other states where the cost of living is cheaper and jobs are more plentiful. The personal income tax rates in California are high enough to provoke an exodus of skilled people -- a brain drain.
The problem is these concerns from economists such as Alan Reynolds, Arthur Laffer and Stephen Moore aren't true. According to the Milken Institute's new report, "What Brain Drain? California Among the Best in U.S. at Retaining Skilled Workers," California actually had the lowest skilled out-migration rate in the nation over the past decade. Particularly noteworthy is how little foreign-born talent moves from California to other states.
Misleading measures: Perhaps the gloomy perception stems from studies of net migration, regardless of skill level. Based on these studies, it's easy to conclude that California had increasingly more out-migrants than in-migrants in the middle of the last decade. But California leads the nation when it comes to retaining skilled workers. It has had less success in attracting them from other states.
Some believe a high cost of living, unattractive tax structure and seemingly adverse business climate have deterred potential new residents. But this fails to explain the small out-migration rate of skilled workers. A more likely reason is that skill-intensive industries that were once focused almost exclusively in California can now be found nationwide. As a result, skilled workers have more options.
A real possibility of skill shortage: While retaining and attracting skilled workers are undoubtedly desirable goals, the overarching task is to have a sufficient supply of skilled workers to meet demand and maintain a vibrant economy. Nationally, the wage premium between college and high school graduates has been climbing rapidly, a sure sign that skilled workers are in short supply. This means national competition for talent will intensify, which is particularly alarming for California.
aEUR? In the Milken Institute's "State Tech and Science" rankings, California's share of science and engineering baccalaureate graduates per civilian worker dropped to 45th place in 2007 from 14th in 2001 despite a high concentration of tech industries.
aEUR? The state's current demographics -- a relatively large share of young, less-educated Hispanics -- likely means fewer replacements for the skilled workers who are now retiring.
aEUR? Given that California lagged most of the nation in attracting skilled workers from other states over the past decade, the state can't expect to make up for the lack of home-grown talent with domestic in-migration.
The last challenge, though not the least, is what's been called a "reverse brain drain" -- that is, foreign-born talent returning to their home countries. Its net economic impact will depend on whether the returning immigrants maintain their ties to the state. But there's no escaping the fact that California must replenish the talent pool, which will require a very different approach to supporting higher education than we see today.
Make developing home-grown talent a top priority: The real and pressing problem California faces is finding the will and the revenue to improve educational opportunities for home-grown talent. Because California's revenue is largely tied to levies on volatile capital gains, state funding for universities and colleges ebbs and flows with the economy. And the annual budget deadlock in Sacramento adds more fuel to the fire by making financial planning for public education institutions ever more unmanageable.
As a long-term trend, California's spending on higher education as a share of total program expenditures has been steadily declining, to 7.5 percent in fiscal 2011-12 from 15.2 percent in 1977-78. At the same time, demand for postsecondary education has surged. As a result, a growing proportion of education costs has shifted to students and their recession-weary parents. For prospective students from less privileged backgrounds, the investment risk in higher education may be too great to bear if they do not obtain sufficient grants and scholarships.
To create more home-grown talent, the state must minimize the number of college-eligible students who don't attend because they cannot afford the risk. In the short term, California could create a rainy-day fund dedicated to higher education to counter the volatile nature of tax revenue.
This measure alone would not eliminate the imminent skill shortage, but it could help to blunt tuition spikes and to maintain the distinguished faculty members who are the backbone of quality higher education.