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In 2003, California voters recalled their governor and elected movie actor Arnold Schwarzenegger in his place. Two crises triggered this event: large ongoing state budget deficits and a failed electricity deregulation plan. In his first year, Governor Schwarzenegger dealt with the budget through large‐scale borrowing and had a reasonably cooperative relationship with the legislature. But in 2005, with the budget still in deficit, he threatened to go to the voters with a budget solution. That decision somehow morphed into a gubernatorial campaign against "big government unions." Ultimately, after vast sums were spent on a November 2005 special election, all the governor's initiatives lost, including one offering "paycheck protection" to public union members. The decision to antagonize unions seemed to result from excess delegation of authority by the governor to outsiders and lack of control of his own staff.

In recent years, California has seen a number of high-profile work stoppages such as an extended dispute in Southern California supermarkets. Despite this, the state does not seem more dispute-prone than other states when California's unionization rate is taken into account. About half of California's unionized workers are in the public sector, where recent pay settlements seem to reflect the state's fiscal crisis. In the private sector, NLRB charges tend to reflect California's industrial composition and areas where organizing activity is occurring, such as building services. A special sample of state union contracts suggests that they have relatively long durations, often years or more. Only 13% have escalator clauses reflecting the relative low and stable inflation rate of recent years. Close to a third have two-tier pay provisions. California unions generally opposed the 2003 recall of Governor Gray Davis. When Davis was replaced by Arnold Schwarzenegger, however, unions supported the new governor's ballot propositions, enabling the state to issue "Economic Recovery Bonds." Various propositions scheduled for the November 2004 ballot will undoubtedly engender new union political activity, including a referendum on a new law mandating employer-provided health insurance. Among the sectors experiencing contract renewal negotiations in 2004 are entertainment, construction, hotels, and supermarkets in Northern California.

California's state budget crisis and soft economy have conditioned its labor relations climate. Roughly half of union workers are in the public sector and so are affected by fiscal distress. Neither employers nor economic forecasters expect a robust economic recovery in the state in the near term. A number of union-supported bills were enacted under Governor Gray Davis, including a new paid family leave program, a hike in unemployment insurance benefits, and a mandated mediation process for union-represented farm workers. Nevertheless, state social programs have come under stress. The California Compensation Insurance Fund, which provides workers' compensation insurance for employers unable to buy it elsewhere, is having financial problems. Lack of job-based health insurance for many low-wage workers has revived legislative interest in alternative proposals for universal coverage. Because of the budget squeeze, threats of layoffs and demands for pay freezes have marked labor relations in government. Job security has been an issue in the private sector, notably in the longshore lockout during the fall of 2002. Health care has been a focus of union organizing and labor disputes, especially involving nurses, against a backdrop of downward pressure on public health program spending and widespread employer concerns about escalating premiums. Until there is a clear-cut improvement in economic conditions, in both public and private sectors, labor relations will continue to reflect an environment of limited resources.

Canada has a universal system of health insurance through single‐payer funds operated at the provincial level. The U.S. failure to adopt some form of national health insurance is commonly seen as the result of the defeat of the Truman health plan in 1949. But could the United States have evolved a Canadian‐style system, with state‐run health funds? California governor Earl Warren proposed such a plan in 1944 and might have succeeded in putting it across.

Various arguments extol public encouragement of profit sharing and Employee Stock Ownership Plans (ESOPs). Generally, advocates of public intervention cite externalities (market failure), provision of merit goods, or social transformation as bases for their arguments. To the extent that profit sharing and ESOPs increase productivity or reduce employer costs, no case exists for public intervention, since such advantages are internalized. Although Congress views retirement saving as a merit good, deferred profit sharing and ESOPs are no more deserving of public subsidy on that basis than are other forms of saving, such as pensions. Finally, the notion that ESOPs promote a social transformation by redistributing equity is untenable. One can make a case for government efforts to spread data and information about these plans. The potential macro stabilizing effects of profit sharing—but not ESOPs—provide a rationale for a tax subsidy to the former.