Wednesday, February 25, 2015

Utah's IT Sector

By Matt Schroeder

The IT Sector as a Catalyst for Growth

The information technology industry in Utah has been a hot topic lately, not just in Utah but on the national stage as well.  A recent article in the New Yorker even touted Utah as the “next Silicone Valley,” referencing the high concentration of “advanced” industry activity along the Wasatch Front.  Utah’s innovative strategies for increasing access to venture capital and encouraging tech start-ups, along with an emphasis on S.T.E.M. (Science, Technology, Engineering, and Mathematics) education have all contributed to the success of the IT sector in Utah, but why all the attention?


As economists love to point out… it’s all about efficiency.  The theory goes that the highest possible level of economic production and social welfare is achieved when an economy’s resources are allocated such that the available inputs of labor, materials, equipment, etc. are used as efficiently as possible and waste is minimized.  In a static world, that would mean there is some fixed point beyond which productive capacity could not reach, but history teaches us that economic boundaries are always being broken.  How can that be?  When new technologies are created that increase productivity without increasing labor or capital inputs then the whole system becomes more efficient and economic growth can be achieved.  This is the realm of the IT industry – creating and providing efficiency.

Success and growth in the IT sector affects not only IT firms and the people employed by them but also the production processes of other industries and thus the overall productive capacity of an economy.  The development of the internet is an excellent example of this.  The total productive value of the internet is not limited to the value of the subscriptions charged by ISPs for people to use it – it’s much bigger than that.  It’s the total value of being able to share information almost instantly, process transactions cheaply, and produce other things more efficiently than ever before.  Granted, not every IT innovation can be equated to the internet, but the idea is the same… the provision of more efficient processes.

Who is included in the IT Sector?

So what does the IT sector look like in Utah?  First of all the DWS definition of the Information Technology Sector is very specific and is split into two categories.  The first group is considered the “core” of the IT sector and includes firms primarily engaged in software publishing, telecommunications, data processing, hosting, internet publishing and broadcasting, wed search portals, computer system design, and related services.  The second group consists of firms engaged in IT “support” activities including computer and electronics product manufacturing, business to business electronic markets, and electronic shopping.  All told, in 2012, these industries comprised about 4 percent of Utah’s employment and more than 6 percent of Utah’s total economic production (i.e. state GDP).

Employment and Wages

Table 1 below gives a run-down of the industry specific numbers and Figure 1 gives a nice visual of the relative employment shares.  The computer systems design and related services industry which includes custom computer programming services comprises the largest share of the IT industry in Utah with 39 percent of employment, 23 percent of total wages, and 59 percent of all IT establishments.  It also ranks high in terms of average monthly wage at $7,346, second only to the software publishing industry at $7,773.  The IT sector as a whole has significantly higher average wages than the state average ($6,132 vs. $3,429) reflecting the generally higher level of training necessary to work in these industries.  The IT “core” industries in particular have even higher average wages compared to the “support” industries ($6,603 vs. $4,628).

Table 1.


Figure 1.



Productivity and Growth

In terms of productivity, Figure 2 below gives an idea of how valuable these industries are to the Utah economy as a whole.  The IT industries represented more than 6 percent of total Utah output in 2012 while the employment share was 4 percent, indicating that the per-employee output of the IT industry exceeds the state average by more than one-and-a-half times.  The computer systems design and related services industry, which accounts for almost 40 percent of IT employment contributed only 23 percent of IT output in 2012.  This is surprising given the high level of average wages in that industry.  The fact that print publishing is included in the publishing industry aggregate in this chart may be exaggerating that effect a bit, but print represents only about one quarter of all publishing (software is the rest), so it can’t be exaggerating it much.  Computer and electronic products manufacturing on the other hand contributed 22 percent of IT GDP in 2012 while it only represents about 10 percent of employment – a highly productive industry in terms of per-employee output.


Figure 2.

 

 

Figure 3 below shows that for the ten years from 2002 to 2012, the IT sector has grown its output at a compound annual rate of 6.3 percent while Utah’s GDP as a whole has increased at a slightly slower rate of 5.8 percent.  IT employment growth was almost 4 percent annually over that same period while total state employment grew 1.5 percent.  While average wages are consistently higher in the IT industry, they have grown at about the same pace of wages for the rest of the state at about 3.1 percent annually.   

Figure 3.

 


The IT sector in Utah is clearly flourishing. Consistently strong employment and productivity growth make it an area of great opportunity for job seekers and businesses alike.  That is worth the attention it’s getting in its own right. But as an economist, what makes it even more exciting is looking forward to the potential future effects that a robust IT sector will have on Utah’s broader economy as IT innovations spur even greater efficiency and growth potential.

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