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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It's because we have mgmt that either due to egos or lack of skills want employees in the office. Sure they'll let you work from home on occasion, maybe 1 or twice a week. However, that means that you still need to live nearby which kills the true power of telecommuting.
It kills me that we're willing to offshore to some 3rd world country where the communication skills often cause numerous problems and the timezone causes inefficiencies in timely communications, but a US tech employee can't work out of his house and live in a cheaper part of the country.
Silicon Valley firms mostly do R&D at home, produce goods abroad, and get profits back home, share the profits among their shareholders, executives and employees.
The individual shareholders, executives and employees as a chunk of households do not (have to) pay much taxes (thanks to the present income tax systems). Hence, income redistribution within the US economy is increasingly insufficient. This is not only a moral problem but also a macroeconomic problem, for the expanding income inequality increases the propensity to save:
The original Keynesian dichotomy of household-income and business-output tells you that the increasing propensity to save demands a correspondingly higher consumption (not on credit) at home so that employment is retained. But, a higher propensity to save means a correspondingly lower propensity to consume. Thus, the produced consumption-goods (and -services) are increasingly redundant. Thus, the propensity to hoard or the speculative demand for money increases correspondingly. It makes a less transaction demand for money (i.e. the money supply minus the speculative demand for money), and thus a stagnating effective demand or stagnating recovery in employment in the US economy.
That may mean that valuable business models are left unexplored and that overall economic dynamism is reduced.
It may mean that. Or it may just mean that the way in which existing rents are being distributed remains unchanged. It may even mean that alternative technology centres are encouraged to develop in competition with the incumbent rent-seeking giant.
What Ryan has failed to do - despite almost a year of being asked - is:
a) to identify to what degree the wealth of Silicon Valley is due to its efficiency in meeting consumers' demands, and to what extent it is due to the exploitation of windfall and incumbency rents*; and
b) to provide a logically coherent theory of how to balance the rights of people wishing to preserve the ambiance of the locality in which they live against the rights of other people wishing to move into it. Bear in mind that any such solution will need to consider not only Silicon Valley but all places to which the rules would be applied.
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* With the politicians running away from SOPA and PIPA in response to the tech lobby flexing its muscles, we might now add political rents to this list. In the rent-seeking battle between Hollywood and Silicon Valley, Silicon Valley appears to have won a major victory.
But what about the hapless consumer? In light of the politicians' recent pandering to the Tech Masters, is there any hope of them doing anything to protect our privacy against this new power in the land??
Here's a bizarre speech from today at Davos by a disgruntled media mogul. He was slamming the conference and Silicon Valley, the Bilderbergers - it was all over the map - but entertaining.
http://mankabros.com/blogs/chairman/2012/01/25/davos-world-economic-foru...
Here's a bizarre speech from today at Davos by a disgruntled media mogul. He was slamming the conference and Silicon Valley, the Bilderbergers - it was all over the map - but entertaining.
http://mankabros.com/blogs/chairman/2012/01/25/davos-world-economic-foru...
"falling real wages are discouraging people from moving to Silicon Valley"
This assumes the average Joe consumer can incorporate latest House price statistics into his calculations of his expected real wage. Such an expectation of an expectation leads to fallacious results indeed!
The average Joe presumably would want to find a place to live before he journeys to the West Coast. And in doing so, he would discover that housing cost in the San Francisco Bay Area is quite high.
Dear Chernyshevsky,
I was getting at the more subtle point of 'rational inattention'; in that decision makers have an imperfect understanding of how the economy works, and a limited ability to process new information.
With the 49ers making the playoffs, don't forget about a good possibility of season/single game tickets rising.
Regards
Hey you're back! You took a break for quite a while.
I was worried about you.
I am on record defending this hypothesis as well. I would add this wrinkle: California really shot itself in the foot when it passed a sweeping property tax blockade (Prop 13) decades ago. This discourages property owners from selling, which is why silicon valley, SF, and other high-skill employment hot spots retain disproportionately large numbers of retirees and low-skill residents. Many retired local teachers and clerks still occupy the large ranch homes they bought in Sunnyvale in the 1970s because they can keep paying 1970's property tax rates. Normally, they would've cashed out and moved to Sacramento. Meanwhile, the young coders must fight each other over the few condo developments that are allowed to be built over old bowling alleys and such.
So this, in combination with local topography, NIMBYism, preservationism, and traditional American fear of density, leads to very little elasticity in the local housing supply. Ironic, isn't it? In one of the world's hotbeds of capitalism, democracy has created a rigid and dysfunctional market for a critical commodity. Perhaps the Economist is right. Liberal capitalism is not always the best system.
Oh joy, Prop 13 rears its head again.
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.
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