Jan 25th 2012, 17:26 by R.A. | LONDON
THE San Francisco Bay area is undergoing one of its periodic tech booms on the back of the flourishing of social networking firms. That boom, the Wall Street Journal tells us, is very good for local tech workers:
Tech-jobs website operator Dice Holdings Inc. said salaries for software and other engineering professionals in California's Silicon Valley rose 5.2% to an average $104,195 last year, outstripping the average 2% increase, to $81,327, in tech-workers' salaries nationwide. It was the first time since Dice began the salary survey in 2001 that the wage barometer broke the $100,000 barrier, said Tom Silver, a Dice senior vice president.
The findings come amid a Web boom that has fueled companies such as Facebook Inc., Zynga Inc. and Twitter Inc. Last year, several of the companies"”including LinkedIn Corp. and Zynga"”went public, with Facebook poised for an initial public offering this year. Their success has sparked the creation of numerous new start-ups, which in turn has spurred a hiring war for software engineers and others.
I'm reminded of a recent, interesting paper by Robert Fairlie and Aaron Chatterji on entrepreneurship during the tech boom of the late 1990s. They note:
The economic expansion of the late 1990s created many opportunities for business creation in Silicon Valley, but the opportunity cost of starting a business was also high during this period because of the exceptionally tight labor market. A new measure of entrepreneurship derived from matching files from the Current Population Survey (CPS) is used to provide the first test of the hypothesis that business creation rates were high in Silicon Valley during the "Roaring 90s." Unlike previous measures of firm births based on large, nationally representative datasets, the new measure captures business creation at the individual-owner level, includes both employer and non-employer business starts, and focuses on only hi-tech industries. Estimates indicate that hi-tech entrepreneurship rates were lower in Silicon Valley than the rest of the United States during the period from January 1996 to February 2000. Examining the post-boom period, we find that entrepreneurship rates in Silicon Valley increased from the late 1990s to the early 2000s. Although Silicon Valley may be an entrepreneurial location overall, we provide the first evidence that the extremely tight labor market of the late 1990s, especially in hi-tech industries, may have suppressed business creation during this period.
A tight labour market increases the return to being a salaried worker and reduces the return to becoming an owner. Entrepreneurship rates may then fall when labour is scarce, reducing the level of new business creation associated with whatever innovation is driving the boom. That may mean that valuable business models are left unexplored and that overall economic dynamism is reduced.
The question is: why is the battle for talent in Silicon Valley so fierce? Ordinarily, we might blame lagging educational standards and strict immigration limits for insufficient supply of capable labour. It's much harder to make the case for these bottlenecks when most of the country continues to suffer from high unemployment. Back to the Journal:
In contrast, job growth elsewhere in the nation has remained relatively slow. U.S. employers added 200,000 jobs in December, and the unemployment rate ticked down to 8.5%, its lowest level since early 2009. But it is unclear how sustainable such gains may be.
"There's a tussle for talent growing in Silicon Valley and employers have to pay up," said Mr. Silver. Overall, tech-job postings in Silicon Valley on Dice rose to 5,026 earlier this month, up 26% from 3,974 a year ago, he said, even as tech-jobs postings nationwide only rose 11% over the same period.
If tech-jobs postings aren't rising as much elsewhere, then why aren't tech workers moving to Silicon Valley in droves, boosting employment and slowing the rate of tech-worker wage growth? Some surely are, but the labour market obviously isn't clearing at current wages.
My own hypothesis, which I've detailed elsewhere, is that the Bay area's tight housing market means that booms quickly translate into rising housing costs, which hold down real wage gains. In the late 1990s, home prices in the area rose faster than wages, leading to a net outflow of households from the Bay area to other parts of the country. It might be difficult to imagine a similar dynamic occurring now, given the devastation in California's housing market. And indeed, home prices in California remain somewhat moribund thanks to the continued dysfunction in the owner-occupied housing sector. Rents, on the other hand, are soaring:
San Jose apartment rents climbed higher in 2011 than any other major metro market in the nation, according to a RealFacts RealFacts Latest from The Business Journals San Jose metro rent hikes top US at 11.7%Three tenants sign leases at Mtn. View Research ParkPeninsula housing: If you build it, they will rent Follow this company Inc. survey released Thursday, followed closely by San Francisco at No. 2...
Average rents in the San Jose-Sunnyvale-Santa Clara metropolitan area climbed 11.7 percent to $1,783 by the end of 2011 compared to $1,596 at the end of 2010.
Average rents in the San Francisco-Oakland-Fremont market rose 10.4 percent for the year to $1,708 by the end of the year.
No other market rents rose in double digits for 2011.
Based on the data points in these stories, then, we have a rise in tech salaries in 2011 of 5.2% versus a rise in Silicon Valley rents of north of 10%. To the extent that falling real wages are discouraging people from moving to Silicon Valley to take advantage of the boom, the country is losing out on employment opportunities, a potential increase in incomes, and new business formation. That's pretty disappointing. And one then has to ask why the area's housing market is so tight. Historically, the answer has been slow growth in housing supply, which is itself a reflection of the development priorities of the local residents. Through November of last year, the San Jose metropolitan area had approved just 2,400 new housing units for all of 2011, with an additional 5,400 approved in the San Francisco-Oakland metro area. To put that into context, Fargo, North Dakota approved over 1,400 units over that period; Detroit approved over 3,000 units; Las Vegas approved over 4,600 units, and Houston approved over 28,000 new housing units in that time.
The big story of the American economy remains the macro. But the micro matters, and this is one case where it may matter a lot.
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First, there has been an explosion of need for programming. Demand is outpacing supply for sensible reasons.
Second, specific to Silicon Valley, it's a cluster competing globally for primacy. That means there is a push for not merely programming talent but the best they can find. This will tend to increases salaries but it also means they want to recruit overseas as much as possible because they need to bring that talent to their cluster.
Third, there is a cluster lockout phenomenon. That is the culture of the place, the expectations and the skill sets become self-defining and people in that culture, in that cluster, tend to believe only people in the cluster fit. They tend not to recognize they have mediocre people too. They tend to wall out people who may be similar to themselves because they define themselves as really good. This is a version of not-invented-here; it becomes not-trained-here.
This should lead to more entrepreneurial development elsewhere which is a good thing. There are advantages to colocation, large workforce, ease of transition, but there are also disadvantages, common thinking, boom and bust.
as a non-compsci college student who's fairly involved with entrepneurship, I know that in the Chicago area, alot of startups are having severe difficulty finding good coders. At a recent mingle event downtown, the ratio of entrepeneurs to tech people was something like 10:1. In fact, alot of my peers who I consider to be not all that decent coders are still able to secure jobs these days. Yet, not that many kids are swapping from an English, Economics, or Pre-med track to compsci here (too hard, average GPA is like a 2.7 since its math-proof based).
I interviewed for and was offered a position in San Jose last week. My salary would have increased by about 25%, but rental costs would have increased by 100% (I currently work and live in a small, not-congested, suburban area on the east coast). The increase was just enough to 'break-even' with the higher cost of renting. I declined, seeing no upside to savings and considering the downside of the cost of living remaining 'sticky' when the inevitable bust happens.
There IS a professional advantage as far as opportunities go to living in pricier big urban centers (for any industry, not just tech) where lots of companies make their headquarters. In my case I wasn't sure if this theoretical opportunity was worth the risk.
Another factor contributing to the relative immobility of labor is the fact that many job seekers are unable to sell their current homes. This is used as justification, real or imagined, for not relocating.
Finally the Boston and Austin areas, home to many potential Silicon Valley employees are enjoying a bit of a resurgence as well, thus reducing the pool of qualified workers looking to relocate.
California also does not offer the amenities that other currently-booming areas offer. You can get nearly that salary in NYC, in Boston and a salary that is worth more in purchasing power in Austin, TX, which has public transportation with wifi.
There is the sense in software development that California is where the work-all-night people, who don't do anything but work, or the fresh-out-of-school people go. The more senior developers, those who like work-life balance or those with hobbies have more options for jobs elsewhere in the country.
The housing market explanation seems pretty solid. In the case of the Bay area, that's probably less a matter of policy than geography. It's a tricky place to build up what with the San Andreas fault running underneath and there's a lot of water around. Maybe houseboats?
According to CNN's cost-of-living calculator, a person making $81,327 in Austin, Texas would need $132,848 to maintain the same living standard in San Jose:
Groceries will cost: 29% more Housing will cost: 206% more Utilities will cost: 24% more Transportation will cost: 14% more Healthcare will cost: 19% more
The situation is muddied by a factor not accounted for in any study that I have seen. Increasingly, high tech jobs allow people to live far away from wherever their company is located. I know one company where none of the staff is within a 2 hour drive from anyone else on the staff; and some are across the continent. Does that company care about the availability of high tech workers in the neighborhood of their headquarters? Not so much. Does their job creation show up in statistics for their local area, or only for the country as a whole?
One other thought: company formation may have risen between the late 1990s and the early 2000 precisely because of the dot com bust. If you are a high tech worker, and your company goes thru significant downsizing or just out of business, you look for work elsewhere. but if you can't find it, the obvious next step is to start your own company. Even if you never get it off the ground, and never come up with a viable product, it still shows up in the statistics.
I guess there is a correlation between salaries and the amount of private funding by fund managers and Wall Street in hopes of a "pop" or a good ROI at the IPO.
Regards
In this blog, our correspondents consider the fluctuations in the world economy and the policies intended to produce more booms than busts. Adam Smith argued that in a free exchange both parties benefit, and this blog's aim is to encourage a free exchange of views on economic matters.
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