The Downside Of Having A Booming Tech Sector

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Earlier this year it was announced that construction on Amazon’s HQ2 was to be paused as a result of both the wave of redundancies at the tech firm and the shift towards remote work. The episode marks the latest in the long-running saga to host HQ2 that saw some refer to the affair as more of a con than a contest.

Critics argued that the huge tax cuts and other concessions offered to the tech firm wouldn’t produce sufficient returns to justify the outlay, especially as evidence from other tech firms suggests that local businesses fail to benefit from proximity to tech campuses as so many employees use the gyms, dry cleaners, restaurants, and cafes on campus rather than in the community.

Tech booms

Of course, most cities that have a thriving tech sector contain a much bigger pool of companies, but the evidence is equally mixed as to how valuable such a presence is for the typical resident. A recent study from Yale explores whether cities generally benefit from having a thriving tech scene.

The research explains that when a city has a thriving tech scene, house prices often soar as the city attracts a wave of well-paid tech workers. This also forces local employers to up their salaries to try and attract and retain employees.

After tracking VC investments across over 350 metro areas in the United States, the researchers also found that a tech boom also impacts employment, wages, and even rates of entrepreneurship. The analysis found that there was a particular impact on businesses whose sales are greatest outside of the region.

Negative impact

For such businesses, there was a decline in both the number of companies, the jobs they had, and the wages of their workforce whenever venture capital poured into the region. The researchers believe this is likely to be because of the increased competition for capital, talent, and resources.

This means that so-called “tradable” businesses, which sell outside of their local region, become less competitive. The losses suffered by these tradable businesses are not sufficiently offset by gains made in nontradable businesses, such as hair salons, restaurants, and convenience stores, which trade solely within the region they’re located.

The local nature of these businesses means that they tend to thrive through the introduction of a lot of new and well-paid jobs into the region. This results in growth in the number of nontradable businesses and the jobs and wages of those occupied in them.

Changing economy

While non-tech parts of the tradable economy tend to suffer, those parts that are backed by venture capital tend to thrive and become much more important to the local economy.

“Although an expanding high-tech sector may stimulate the demand for local goods and services, it can crowd out other tradable industries within the region, as it consumes human and financial capital,” the researchers explain.

The infusion of venture capital creates a localized version of The Dutch Disease, which befell the Netherlands after they discovered gas in the North Sea over 50 years ago. This resulted in huge investments in the energy sector and the soaring value of the Dutch currency. In turn, other sectors of the Dutch economy suffered. A similar phenomenon occurs when the local tech scene booms, as the costs for other businesses rise.

“Rising wages and real estate prices increase the cost of doing business. These rising costs prove particularly problematic for the tradable sector because these businesses must compete with those operating elsewhere, in lower-cost places,” the researchers explain.

Silicon Valley Syndrome

It’s an issue the researchers refer to as the “Silicon Valley Syndrome”, which highlights that encouraging the tech industry can have very real consequences not only for other sectors of the local economy but also in areas such as housing, where prices can quickly grow out of reach of many workers.

The study indicates that venture capital for the technology sector exacerbates pay inequality in the broader economy. When venture capital doubles, the average wages of the highest 25% of nontradable businesses increase by about 2%, while the two pay tiers below also experience gains.

On the other hand, the findings reveal that the average wages of employees in the lowest pay tier of nontradable businesses decline by approximately 1%. This category encompasses many waiters, hotel staff, and fast-food workers.

“This combination of the crowding out of the other segments of the tradable sector with rising income inequality appears to be the signature symptoms of the Silicon Valley Syndrome,” the authors explain.

While this is not a case of the absolute wages of those lower down falling, their pay relative to those around them usually is. What’s more, the buying power of their income also falls as the cost of living rises. It provides a reminder that while attracting tech companies to a region can be a good thing, local authorities need to do much more to ensure that other sectors of the economy aren’t left behind.



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