Why California's reeling economy still has a 'golden' lining

California's dismal fiscal outlook is well known: It's the record-holder for the largest state deficit in American history and it boasts the nation’s second-highest unemployment rate, among other ills. You'd be forgiven for assuming that all the high-skilled workers that helped make California the eighth-largest economy in the world were fleeing the state in droves. But you'd be wrong.

That’s the finding of a major, 50-state report titled “What Brain Drain?” released Wednesday by the Milken Institute. In fact, California has the least annual “skill out-migration” of any state. From 2000 to 2009, the share of skilled workers leaving the state averaged 2.2 percent a year, a full percentage point less than the national average.

“This shows that contrary to the popular notions, California is still the Golden State for investment in technology,” says David Fiorenza, an economics professor in the Villanova School of Business.

Brain drain is important because many companies that drive job growth look to locate in areas with high numbers of skilled workers. In that way, brain drain is seen as an index of falling economic potential.

Yet with California considering deep cuts to higher education – which is closely linked with the creation of a skilled workforce – the study is also being seen as a cautionary tale.

The study charted how well states did at retaining skilled workers overall, as well as how well they did at holding on to high-skilled workers native to the state. By the second measure, California ranked No. 2. During the past decade, about 65 percent of skilled California natives were living and working in the state, far above the national average of about 50 percent. Only Texas scored higher, with nearly 70 percent of its skilled natives living in the state.

Of those natives who did leave the state in 2009, 12 percent went to Texas, the biggest single destination for skilled Californians. Overall, however, California had a lower skill outflow rate than Texas.

“I applaud the methodology of this study because they have parsed out data that had been used to give the wrong impression,” says Eric Darr, executive vice president and provost of Harrisburg University in Pennsylvania.

One such notion in recent years was that California was doing poorly because of its shrinking percentage of skilled workers nationally. While it’s true that California’s share of skilled workers was diminishing, Mr. Darr says, "that was more due to the fact that the entire technology sector was growing, not any diminishment on California’s part."

At a time when the national technology sector is growing bigger, more widespread, and more important to economic growth, skill retention has become an important strategy for cash-strapped states.

“Most important in California’s case, the concentration of young innovators with advanced skills has been key to the success of Silicon Valley and other innovation clusters,” said I-Ling Shen, co-author of the report. “These clusters collectively act as an economic engine that breeds other industries providing professional, financial, and personal services.”

Several analysts, however, say that the Milken report does not address the dire situation in California, where the state has made some $650 million worth of cuts to higher education, forced by its budget deficit.

“The larger issue is that California needs more educated workers,” says William Tierney, director of the Center for Higher Education Policy Analysis at the University of Southern California. “It’s not that we’re losing the ones we have, it’s that we’re not producing enough to meet the needs that are projected.”

Though the outflow of skilled workers remains relatively low in California, the state has other issues to consider.

"California’s overall unemployment rate is the second highest in the nation, and its high-tech sector alone shed more than 75,000 jobs from 2008 to 2009," the report says.

What's more, the state's heavy reliance on foreign-born skilled workers may backfire if these immigrants respond to new opportunities in their native countries, according to the report.

Ben Agger, director of the Center for Theory at the University of Texas in Arlington finds the results of the study a puzzling paradox.

We live in a knowledge-based economy, says Dr. Agger. “This makes it extremely ironic that California, like Texas, retains skilled workers and yet has massively disinvested in public higher education ... Perhaps the Milken people will next study the ‘brain drain’ of California faculty to other states."