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Talent Is the New Oil: OPEC of Tech

Silicon Valley and Chesapeake Energy face the same problem: the cost of extraction. The technology industry needs to get smarter about workforce development, and fast.
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Apple Inc. (Photo: Joe Ravi/Wikimedia Commons)

Apple Inc. (Photo: Joe Ravi/Wikimedia Commons)

Tech salaries are too damn low, suspiciously so. Let me explain. The Manufacturing Economy was a boon to management and labor. The wealth generated allowed the working class to buy into the suburban dream. All was well and good, regardless of unions, until something tipped the scale against the growth of manufacturing employment. Suddenly, wages were too damn high for management. Good blue-collar jobs diffused from the industrial North to the struggling agricultural South. Eventually, a giant sucking sound took America's middle-class employment abroad. Or so the story goes. Economist Enrico Moretti expects that the Knowledge Economy would succumb to the same pressures (brief excerpt from The New Geography of Jobs):

The idea is that no matter where people live, they can share knowledge and move products at virtually no cost. According to this view, the good jobs, now concentrated in high-cost locations such as Silicon Valley and Boston, will quickly disperse to low-cost locations, both in the United States and abroad. An experienced software engineer in India makes $35,000. The same person in Silicon Valley makes $140,000. Why would U.S. firms keep hiring in Silicon Valley when they could save so much by outsourcing? By the same token, if labor costs are three times higher in Silicon Valley than in Mobile, Alabama, companies will eventually relocate to Alabama.This process of dispersion, the argument goes, will be faster than the dispersion of manufacturing jobs, because moving software codes across DSL lines is easier than moving bulky goods across borders. In this vision of the future, the great innovation hubs of America will disappear from the map and innovation jobs will disperse evenly across the country. The prediction of this view is the convergence of American communities. Low-cost areas will attract more and more of the new, high-paying jobs. Cities that have been lagging behind-the Clevelands, the Topekas, and the Mobiles-will grow much faster. Bogged down by their high costs, San Francisco, New York, Seattle, and similar cities will decline.

Moretti goes on to say, "the data don't support this view." He's correct. What if the data are wrong? "Revealed: Apple and Google’s Wage-Fixing Cartel Involved Dozens More Companies, Over One Million Employees":

What’s more important is the political predicament that low-paid fast food workers share with well-paid hi-tech workers: the loss of power over their lives and their futures to the growing mass of concentrated power in Silicon Valley, whose tentacles are so strong now and so great, that hundreds of thousands of workers around the globe—public relations and cable company employees in the British Isles, programmers and tech engineers in Russia and China (according to other documents which I’ll write about soon)—have their lives controlled and their wages and opportunities stolen from them without ever knowing about it, all the while being bombarded with cultural cant about the wisdom of the free market, about the efficiency of free knowledge, about the need to take personal responsibility and to blame no one but yourself for everything that happens in your life and your career.

The free market might push innovation jobs to Cleveland or Mobile if the likes of Google and Apple didn't collude in order to suppress wages. To be clear, companies are charged with no-poaching agreements. I'm not aware of any convictions. If the accusations are true, then tech titans are kicking the manufacturing can down the road. The wages should be too damn high.

A similar slight of hand has played out in the Marcellus Shale concerning natural gas. The relatively high cost of extraction was hidden under a land rush to secure drilling rights. The real estate market for the energy industry became disconnected from the supply and demand of natural resources. "Checkmate for Cheap Unconventional Gas":

Essentially, the shale gas boom of the past decade turned a set of engineering advances into a property bubble, in which investors were selling development rights to each other, intermediated by the exploration and production companies. The E&P promoters were spending multiples of their operating cash flow on buying properties and drilling them to show more production, then selling more stock and more debt, etc. Eventually, the promoters could not pedal fast enough. After the (temporary) fall of Aubrey McClendon, the most visible promoter, and chief executive of Chesapeake Energy, the most visible shale gas company, the investment world backed away from shale, even as the political world embraced it.

However, there really is a lot of “unconventional” gas to be produced by the North American industry, just at higher prices than the political class now assumes, and in places that are not adequately connected to pipelines. Unconventional gas is not a miracle; it is a high-cost source of fuel that requires a lot of technical skill, time and capital. You drill for it because there are not enough conventional gas resources on offer in safe places.

Tech and Chesapeake Energy face the same problem: the cost of extraction. For the likes of Google and Apple, "there are not enough conventional gas resources on offer in safe places." Instead of developing more expensive talent plays, management promises not to poach and drive up the price for the key resource. People, prospective employees, are abundant. Ready made talent is scarce:

“Over all, a country gets the most bang for its buck when the so-called demographic window is open – and that is a problem if you look at where things are in the world today. In North America, the demographic window is still open, but only just: It opened in 1970 and will shut by 2015.”

It will mean the demographic circumstances that created the positive economic conditions of the past few decades will disappear. A growing proportion of the population will not be paying taxes, or will be paying fewer taxes than when they worked. As the labour market dwindles, there will be upward pressure on wages, she predicts, which could boost inflation.

We are one year away from peak talent. Either Silicon Valley will get smart about workforce development or the Innovation Economy will converge. Even if Silicon Valley gets smart about workforce development, creating the right human capital takes a lot of time. Microsoft sounded the alarm in 2007:

Microsoft will open a software development office in Vancouver, Canada, later this year, in part as a way to retain talented workers who can't stay in the U.S. because of immigration laws. ...

... Without new regulations, companies across the country are competing for 65,000 H-1B visas issued each year.

"This is especially a problem for Microsoft because it's so big and doing so much hiring," said Susannah Malarkey, executive director of the Washington Technology Alliance, an association of companies promoting education and an entrepreneurial environment in the state. "If you can't use visas to bring people in, you have to take the jobs to where the people are," she noted.

Big Tech has motive and opportunity. If Moretti is right, then why is tech so hot for more H-1B visas? It's the birth rate, stupid.