A Blog by Jonathan Low


Jan 22, 2023

How San Francisco Lost High Earners - and Got Richer

San Francisco benefitted from what economists and demographers call "the donut effect:" people moved, but not all that far, usually to surrounding areas so that their wealth continued to benefit the region, including the city. JL 

Justin Fox reports in Bloomberg:

Tech and tech-adjacent companies had a spectacular 2020 and 2021. Despite some recent departures, the tech sector remains  based in the San Jose and San Francisco metropolitan areas - Greater Silicon Valley - so its booming profits and stock prices drove up incomes there and in surrounding regions. The pandemic-unleashed shift to remote and hybrid work sent people and money pouring out of big cities, with San Francisco seeing “noticeable outflows of residents and reductions in real estate values.” Most of these people stay in the region, though, hence the donut effect of more activity on the fringes and less at the center.

A big economic story of the pandemic years has been one of jobs and people leaving big cities and expensive coastal regions, with the South and the Mountain West the big gainers. San Francisco has been perhaps the most vivid example of a previously booming place that has lost residents and cachet since Covid-19 arrived.

So it is interesting that the nation’s biggest gains in real per capita incomes between 2019 to 2021 were to be found around and near the San Francisco Bay.

The metropolitan areas atop this list are among the most affluent in the country, with San Jose-Sunnyvale-Santa Clara boasting a nation-leading per capita personal income of $136,338 in 2021 dollars; San Francisco-Oakland-Berkeley in fourth place at $123,711; Napa at eighth at $90,608; Santa Cruz-Watsonville at 11th at $85,554; and Santa Rosa-Petaluma at 14th at $81,006.(1) Big dollar increases in such places therefore don’t always translate into big percentage gains, but sort by percentages and there’s still a Bay Area tilt to the top 15 list, although San Francisco-Oakland-Berkeley does fall to 24th place (out of 384) with a 15.2% gain.


One thing these statistics reflect is that tech and tech-adjacent companies had a spectacular 2020 and 2021. Despite some prominent recent departures, the tech sector remains more or less based in the San Jose and San Francisco metropolitan areas — what you might call Greater Silicon Valley — so its booming profits and stock prices drove up incomes there and in surrounding regions. Last year was much less spectacular for tech, and when the 2022 metro-area income numbers are released next November, they will paint a different picture. Quarterly state per capita income numbers show California to be the second-worst performer in the first three quarters of 2022, outpacing only New Hampshire.

Such tech downdrafts are nothing new. Statistics adjusted for local inflation rates (such as those in the above charts) are available only back to 2008, but nominal per capita incomes fell 11% in 2001 and 2002 and 9% in 2008 and 2009 in the especially tech-heavy San Jose area, only to leap much higher within a few years. Still, a question that’s been on many people’s minds recently is whether future tech-sector gains will increasingly be enjoyed by people living outside of the San Jose and San Francisco metro areas, and here these charts may shed some light.Some definitions are probably in order. A metro area — formal name: metropolitan statistical area — is one or more economically linked counties with a core urban area of at least 50,000 inhabitants. Commuting patterns largely determine which neighboring counties are added to the core county, and the dispersed nature of economic activity around the San Francisco Bay (the region’s seven biggest companies by market capitalization are based in seven different cities) helps explains why it is split into so many distinct metro areas. 

Adjacent metro areas with some commuting ties are also grouped into what are called combined statistical areas, and the San Jose-San Francisco-Oakland combined area is the nation’s fifth largest, with an estimated 9.5 million people as of mid-2021, not far behind Washington-Baltimore-Arlington and Chicago-Naperville. Economic statistics are generally reported by metro area, which often has the impact of diminishing the region’s significance, given that its most populous metro area, San Francisco-Oakland, ranks only 13th nationwide. But in these charts it has the opposite impact, allowing the Bay Area’s intraregional dynamics to dominate the top gainers list.

Those dynamics involve what Economist writer Arjun Ramani and Stanford University economist Nick Bloom have dubbed a “donut effect.” In a recent working paper, Ramani and his former professor Bloom document that the pandemic-unleashed shift to remote and hybrid work has sent people and money pouring out of big cities, with New York and San Francisco in particular seeing “noticeable outflows of residents and reductions in real estate values.” Most of these people stay in the region, though, hence the donut effect of more activity on the fringes and less at the center. Because incomes are higher in San Francisco than in its suburbs (which isn’t the norm in the US), and much higher in metro San Francisco and San Jose than in the smaller metro areas that surround them, this hollowing out can raise average incomes on all sides, for example when someone with an income of $100,000 leaves San Francisco, where that’s below average, for Santa Rosa, where it’s above average.

While per capita (that is, average, or mean) income rose, median household income in the San Francisco-Oakland metro area actually fell from $121,551 in 2019 (in 2021 dollars) to $116,005 in 2021, a 4.6% real decline that was the worst among the country’s 25 biggest metro areas.(2) Different data sources explain some of the disparity between the two measures — the household income numbers come from a US Census Bureau survey, while the US Bureau of Economic Analysis estimates personal income from administrative sources such as tax and state unemployment insurance records — but it’s also just that one is a mean and the other a median, and the departure of a family of four with a household income of $400,000 drives down the San Francisco-Oakland area’s median household income while driving up its per capita personal income.

Recent research into tax data by Stanford Graduate School of Business finance professor Joshua D. Rauh confirms that those with such incomes truly did get itchy feet in California when the pandemic hit. Tax units are roughly equivalent to households, and while taxpayers with incomes from about $60,000 to $300,000 had the highest propensity to move from county to county in the state in 2020, as was the case for most of the previous decade, the biggest increase in such moves in 2020 was among those making $300,000 to $600,000.


The propensity to leave California for other states, meanwhile, was highest in 2020 among those with taxable incomes of more than $5 million. Rauh has been tracking the departures of California high earners after tax changes such as the 2012 imposition of a new 12.3% top state income tax bracket and the elimination of federal income tax deductions for state and local taxes by the Tax Cuts and Jobs Act of 2017. The 2020 departure wave dwarfed those, with a net departure rate greater than 3% among Californians with incomes of more than $5 million. (Statistics for subsequent years aren’t available yet.)

That average incomes went up sharply from 2019 to 2021 in the San Francisco and San Jose areas despite these departures seems to be, again, a testament to the great couple of years the tech sector had. If the outflow continues, it will become harder for the region to post such income gains. The Bay Area tech sector has had a spectacular record through the decades of minting new fortunes, so I wouldn’t count it out, but past performance is no guarantee of future results.

Most of the other metro areas in the above charts can thank donut effects for at least part of their income gain, with some seemingly benefiting from an expansion of the San Francisco and San Jose donut enabled by remote work. Metro Carson City, which includes part of the eastern shore of Lake Tahoe, and metro Redding, which includes mountain communities near Mount Shasta and Mount Lassen, definitely saw some influx from the Bay Area, and metro Grants Pass, along the scenic Rogue River in southern Oregon, probably did, too. Meanwhile, St. Cloud is part of Minneapolis-St. Paul’s combined statistical area, Kankakee part of Chicago’s, Boulder part of Denver’s and metro El Centro borders Los Angeles–Anaheim–Riverside’s. Other factors include the recreational-vehicle boom that boosted incomes in Elkhart-Goshen, where US RV manufacturing is concentrated, and a big increase in corn and soybean revenue that benefited all the Midwestern metros.


It also didn’t hurt to be poor. Brownsville-Harlingen had the second-lowest per capita income among US metro areas in 2019, and El Centro and Las Cruces were both in the bottom 25. Pandemic aid programs generally delivered the biggest percentage income increases to those with low incomes to begin with, so poor places benefited. According to calculations by economist Jed Kolko, the undersecretary of commerce for economic affairs, the difference in per capita incomes among rich and poor metro and micro areas, which are like metro areas but with a core urban area of 10,000 to 49,999 people, and counties that belong to neither contracted from 2019 to 2021 thanks to transfers (i.e. government payments). 

Inequality before such transfer payments still rose from 2019 to 2021, and both measures of inequality have increased over the decades. Hopes that the increased ability to work from anywhere will reduce this geographic inequality in the US are so far mostly just that. But the shifts in incomes apparent in and around San Francisco during the pandemic are at least an indication that something is afoot.


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