The COVID-19 pandemic upended California’s economy. The shutdown of most in-person economic activity in spring 2020 led to a dramatic spike in unemployment-especially in hard-hit industries like leisure, hospitality, and personal services. Nine months later, the labor market has improved somewhat but remains precarious, with low-income workers bearing the brunt of the fallout. As a result, the current crisis threatens to reinforce existing inequities and deepen the state’s longstanding economic divide.

In this report, we look at the effects of the current downturn on California’s labor market in the context of growing income inequality. We also examine the policy levers that could help promote an equitable recovery and address the needs of the most affected workers and regions.

• Past recessions have exacerbated income inequality in California. Income inequality has risen substantially in the past several decades, with relatively little progress over the long term for the lowest-income families. Past recessions have tended to worsen income gaps, as low-income families were harder hit and their earnings were slower to recover.
• The effects of the current recession are concentrated among low-income workers, African Americans, Latinos, and women. While no demographic group has been spared, larger increases in un- and underemployment for low-income, African American, and Latino families are likely to worsen preexisting disparities in income and economic opportunity. Women have also been disproportionately affected, jeopardizing long-term gains in their labor force participation.
• Many workers, especially in inland California, were already struggling before the pandemic. Low-income families in many parts of the state had only just recovered-or had not yet recovered-from the Great Recession when the pandemic began. High-income families across the state had returned to prerecession income levels. There were only two regions-the Bay Area and Los Angeles County-where families at all income levels had experienced two years of full recovery from the Great Recession before the pandemic.
• Policy interventions can improve economic opportunity, and Californians support a state role in these efforts. State policymakers will inevitably be limited by the level of federal support, but they still have many options available to promote an equitable recovery. While no policy is without cost, surveys indicate robust support among Californians for state government’s role in reducing poverty and narrowing the divide between the haves and have-nots.

California is likely to face heightened fiscal constraints for some time, and substantially improving opportunity and reducing inequality would require equally substantial public investments. To deploy state funds most effectively, policy responses must consider how to better target both stimulus and stabilization efforts toward the most affected workers, businesses, and regions. Second, investments need to account for the evolving future of work, including structural changes like a shift toward remote work. Third, the state should leverage financial resources and partnerships to expand investments in long-term opportunity through policies such as dependent care, early childhood interventions, higher education, and workforce training. Finally, barriers to opportunity go beyond income and drive disparities in health, education, and housing across race and region; identifying and proactively addressing these barriers are necessary to ensure the state’s economic vitality now and in the future.

Since the full effects of the crisis are yet unknown, policymakers will need to continuously reexamine their priorities and options as our understanding evolves. Despite this uncertainty, ensuring the promise of the California dream is not a new challenge-though maintaining this promise will require a renewed policy commitment.