The Great Tech Exodus: Why California's Policy Choices Are Driving Tech Jobs to Other States

For decades, California enjoyed a powerful first-mover advantage in the tech industry. Dense networks of talent, capital, and research institutions allowed the state to absorb policy mistakes that would have crippled competitors elsewhere. High spending and taxes, restrictive housing rules, and regulatory complexity were seen as nuisances rather than binding constraints, because growth could outpace their costs.

However, that margin of error has dramatically narrowed. What California is experiencing is not a cyclical tech downturn or a post-pandemic anomaly. It is a measurable, policy-driven decline in relative competitiveness. The most telling evidence is not that tech employment has fallen in absolute terms, but that California’s share of national tech employment has been shrinking, while other states gain ground.

Employment Share, Not Headlines, Tells the Story

According to Bureau of Labor Statistics data, California’s technology employment growth has underperformed national trends for several years, including during periods when tech hiring stabilized or rebounded elsewhere. California’s share of US tech jobs is falling from roughly 19% pre-2020 to closer to 16% in recent years—a significant shift for an industry this large. This is a classic example of relative decline: California still employs more tech workers than any other state, but it is no longer where the marginal job is being created.

Commercial real estate data corroborates these employment figures. Office vacancy rates across Silicon Valley remain elevated well beyond what remote work alone would explain. Bay Area office markets have not recovered in the way peer regions have. Persistent vacancies signal not just a shift to hybrid work, but a geographic reallocation of firms and labor.

Migration as a Labor Market Signal

Labor mobility reinforces the same conclusion. US Census state-to-state migration data show continued net domestic outmigration from California, particularly among working-age adults. While international immigration partially offsets population losses, domestic migration is more relevant for employer location decisions, especially in high-skill sectors. Economic theory predicts that firms follow labor when relocation costs are low and regulatory frictions are high. California now faces both: high regulatory frictions at home and increasingly credible substitutes elsewhere.

Founding Versus Scaling: A Crucial Distinction

California still dominates early-stage venture capital totals, as shown in venture investment data. This is often cited as evidence that concerns about the state’s competitiveness are overstated. However, that interpretation conflates firm formation with firm expansion. Founding activity reflects legacy advantages such as universities, networks, and capital concentration. Scaling decisions reflect marginal costs. Increasingly, firms are choosing to incorporate or raise seed funding in California while expanding headcount in lower-cost, lower-regulation states.

From an economic standpoint, this is predictable. Scaling in California exposes firms to the nation’s highest marginal income tax rates, comparatively punitive capital gains taxation, rigid labor mandates, slow permitting processes, and volatile regulatory expectations. These costs rise nonlinearly as firms grow.

AI Regulation as a Binding Constraint

Artificial intelligence policy may become the clearest illustration of California’s regulatory overreach. A recent analysis documents how California lawmakers have pursued some of the most expansive state-level AI regulations in the country. These proposals extend liability, mandate preemptive risk assessments, and impose compliance obligations before alleged harms are empirically demonstrated or even defined.

From an economic perspective, this approach treats innovation as a presumptive externality rather than a productivity-enhancing input. AI is widely understood as a general-purpose technology. Research shows that such technologies generate broad, economy-wide productivity gains, not sector-specific benefits. Overregulating AI therefore depresses expected returns not only in software, but across healthcare, logistics, manufacturing, finance, and education.

California’s AI regulatory framework has drawn federal scrutiny, which is instructive. State-level AI mandates were referenced in a recent presidential executive order, citing concerns over fragmented and inconsistent state regulation. Regardless of political framing, the economic concern is straightforward: regulatory fragmentation raises fixed costs and discourages upscaling.

Regulation, Market Structure, and Incumbency

California’s regulatory posture also has implications for market structure. Extensive empirical literature shows that high fixed compliance costs reduce entry and increase concentration. The OECD’s work on regulation and competition consistently finds that heavier regulatory burdens favor large incumbents at the expense of startups and challengers. This dynamic undermines the very competition that drives innovation. Europe’s experience with digital overregulation offers a cautionary parallel. California risks reproducing that outcome domestically, exporting innovation to other states rather than other continents.

Costs Complete the Incentive Structure

AI regulation is best understood as the marginal constraint layered atop an already expensive environment. California has the highest top marginal income tax rate in the United States, and taxes capital gains as income. Housing scarcity raises labor costs without increasing real purchasing power. Energy prices remain among the nation’s highest. In combination, these policies alter the expected return on investment at the margin. States like Texas and Florida offer credible alternatives: no personal income tax, faster permitting, lower housing costs, and a lighter regulatory touch.

Firms do not need ideological motivation to relocate. The incentive structure does the work.

Opportunity Costs and Distributional Effects

The economic cost of tech job relocation extends beyond headline employment figures. When tech employment relocates, these spillovers disappear as well. The distributional consequences are regressive. High-skill workers are mobile. Lower-income workers tied to local economies are much less so. Policies that suppress growth (even under the banner of equity) often hurt the poor most.

A Predictable Outcome

Unless California changes course, the trajectory is clear. AI firms will incorporate elsewhere. Venture capital will follow labor. Scaling will increasingly occur in states that treat innovation as an asset rather than a liability. California will remain an important source of ideas. It will be a diminishing source of jobs. Markets are not ideological. They respond to incentives. On that front, the verdict is already in.