Published on May 26th, 2015 | by Millennium Magazine Staff


Why isn’t the tech boom helping the economy?

By Nishant Bhajaria

The hi-tech sector in the U.S. is red hot in terms of job opportunities. Even as the rest of the economy barely registers a pulse for many, hi-tech is vibrant with capital and jobs.

This made me wonder: why is the tech boom not boosting the overall economy?

Just so we’re clear, no one can deny the innovation and disruption to daily life that technology makes possible. My argument is that it is possible to have a major impact on our daily life while generating wealth without growing the overall economy. To understand why the tech boom has a limited impact on economic growth, consider the following reasons.

First, unlike traditional sectors like agriculture, infrastructure and healthcare, technology is inherently different in terms of the relationship between output and labor. In those sectors, you need a lot of workers consistently to convert plans into product. That is not the case with tech jobs, where one of the main appeals of technology is to use automation to do more with less labor and fewer iterations.

For example, when Facebook acquired WhatsApp for $19 Billion, the latter employed just 55 employees. This purchase was great for WhatsApp employees, but did not create any profit or income for anyone outside of those 55 people. Similarly, when Yahoo bought Tumblr, about 40 employees made millions, and about 178 employees made about $300K. There are other examples similar to this one all over the world.

As far as tech sector being a jobs engine is concerned, reputation is not the reality. As advertised, technology creates great wealth; that wealth, however is distributed among a small slice of society. There is a bright green line between those who make millions and the remaining minions. Put simply, the tech sector can create wealth without creating a lot of work.

Second, 90% of startup tech ventures fail. In such instances, employees come away with marketable skills and contacts, but the benefit to the rest of the economy is negligible in the near term. For a business to create jobs outside of its immediate scope, the business needs to sustain itself to profitability.

Third, the tech sector is more of an urban phenomenon compared to sectors that have historically boosted the U.S. economy.

This is significant since technology and resultant automation are at least partly responsible for the decline of manufacturing jobs. That decline in manufacturing affected the whole country. Tech jobs are mainly concentrated on the coasts, along with venture capital funders (See Figures 1 and 2 below), tech-centric universities and a workforce with transferable skills. Urban America, therefore, had an easier transition from a manufacturing to a service-oriented economy while the rest of the country did not. Vast areas of the U.S. have been historically dependent on manufacturing with skills to match for ages.

During my undergraduate years in rural Missouri, driving through the midwest often made for depressing viewing. Town after town featured abandoned homes and factories, all a symbol of what once was and will never be. These are shards of a shattered past that would never join together again, and the jobs they once provided have gone forever. The tech sector, with its vast footprint, has not stepped in to fill that void.

To the degree that rural America does offer job opportunities, it is from traditional sectors like healthcare and automobiles. Smaller towns in Nebraska and Indiana, for example, are surviving due to hospitals that offer high-paying jobs. Beyond those jobs, the next best options for locals include small, low-skill factories, the dollar store or a Dairy Queen.

Similarly, the benefits of a reviving auto industry are not confined to states like Michigan and Ohio. Ford is building plants and creating jobs in other rural states. Alcoa is a supplier of aluminium to auto companies, and spent $300m expanding an aluminium plant in rural Iowa. It will soon spend $275m expanding a factory in rural Tennessee.

The tech sector is different from these older sectors when it comes to job creation. Its power is deep, but its reach very limited. The above three points make clear: the booming tech sector creates a few vastly successful startups that create a handful of millionaires and many more failed startups that create no tangible economic benefit. The remaining middle-class jobs created by the tech boom are concentrated in pockets of the country among the highly educated. All this mitigates the economic impact.

Fourth, even when tech companies venture outside of urban coastal locations, they provide limited benefits at best to their communities.

The author is based in Portland, OR where there is a severe shortage of skilled tech workers. Just a few hours away is a small town called Prineville, OR. After years of economic decline, the town recently saw Facebook and Apple put in sizeable data centers. Most jobs created by these data centers, however, proved to be temporary construction jobs. Most full-time tech jobs required the kinds of experience and qualifications that the locals did not possess, minimizing the benefit for the community. The influx of outsiders to take those jobs caused the price of land to go up, pricing out already impoverished locals.

You cannot blame tech companies if the population where they are based is not qualified for the jobs that are created. There is, however, an attitude demonstrated by educated tech workers that harkens back to the town-gown mentality.

I was recently at a tech-talk where folks were discussing how the tech sector did not create many jobs for Prineville locals even after Apple, Google and Facebook moved there. One of the engineers remarked that it was all for best, since most of the small-town locales were “inbred yokels” who could not find their fingers on a keyboard. It is, to say the least, hypocritical to market high-priced tech products to a wide market for profit, but then claim that some of your customers are yokels unworthy of your employ.

This social separation makes hi-tech seem like the Wall Street of Silicon Valley.

Finally, there are numbers to back up the fact that participation in high-tech prosperity is confined to fewer Americans – mostly upper middle-class and wealthy ones. According to fivethirtyeight.com, the tech recession from 2000-02 destroyed $6.2 trillion in household wealth. The housing crash that lasted from 2007-09 caused similar carnage – $6 trillion in household wealth. However, the tech recession was very mild and short-lived. The housing crash, on the other hand, unleashed a great recession that still lingers much like the stench of bad meat.

The number of people impacted by the tech economy is much smaller compared to housing, both in terms of the kinds of jobs housing created and how housing-related wealth is spread out. The reason behind this is simple: anyone can use an iPhone but very few have the skills needed to partake in the creation of such technology. Housing, on the other hand, creates several kinds of jobs that benefit a broader swath of society.

This is not to suggest that hi-tech does not have a role to play in the economy. This is still a young area, and it may be that economic and social factors need to play out before it can drive real economic growth.

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