Why isn’t the tech boom helping the economy?

By Nishant Bhajaria

As I wrote last week, 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.

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, 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.

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