Thursday, May 28, 2015

Utah’s Advanced Industries Drive Employment and Wage Growth

Matt Schroeder, Regional Economist

A recent report by the Brookings Institution touts the importance of Advanced Industries, which are defined as those that perform a high level of research and development per worker and employ a high percentage of workers with STEM (science, technology, engineering, and math) training. Fifty industries are identified as “advanced” in the report, including some that you would expect, such as semiconductor manufacturing and software publishing, while others are a bit surprising, like clay products manufacturing. But all have a common thread. According to Brookings, these industries provide the bulk of new inventions and innovative processes while driving down consumer prices and spurring regional and national growth.

The Share of Utahns Employed by Advanced Industries is Larger than the National Average

Nationally, Advanced Industries employ about 9 percent of the total working population but produce about 17 percent of GDP. According to Brookings, therein lies the importance of these industries: their ability to innovate leads to greater productivity at lower cost in the long run. Lower production costs flow through to consumers in the form of lower prices; and, because per-worker productivity is higher, employees of these industries tend to earn higher wages.

In Utah, this group of industries employs about 147,000 people, or 11 percent of the state total — larger than the national share. And like Advanced Industries nationwide, Utahns in
these industries are paid higher-than-Utah-average wages. Not only that, but wage growth tends to be faster than other industries as well. In 2014, the average wage of a Utahn employed by an Advanced Industry was nearly $69,000 per year, while the average for all other industries was about $39,000. Since the end of the recession in 2009, Advanced Industry wages have grown at an average annual rate of 2.7 percent while other industry wages grew at just 1.9 percent (see chart below).

By definition, these industries employ more STEM occupations, which tend to have higher-than-average levels of education, which likely accounts for the majority of the wage difference. But a quick look at current Utah job openings in Advanced Industries reveals that about 30 percent of available jobs require less than a Bachelor’s degree, and about half of those are estimated to be in wage ranges greater than $30K per year. This suggests that these industries need skilled workers at all levels of education and training. And, thanks to the rate of wage growth in Advanced Industries, workers in the below-Bachelor’s cohort appear to be offered slightly higher wages on average than their peers in other industries.

Despite Fears of Workers Being Replaced by Robots,
Advanced Industries are Hiring New Employees at a Faster Rate than Other Industries

Technological advances and innovative production techniques increase efficiency, which means that fewer resources are needed to produce the same amount of stuff. If a computer can do a job better/faster/cheaper than a person, then inevitably, the person will be replaced. Given this fact, one might expect Advanced Industries to experience slowing job growth and a reduction in employment levels as they innovate; but, in fact, the opposite is true. Since the end of the recession, Advanced Industry employment has increased faster than other industries. In Utah, from 2009 to 2014, Advanced Industry employment grew at an average annual rate of 3.6 percent, while all other industries grew just 2.4 percent (see chart below).

This implies that the new innovative techniques’ effects on net employment are positive. There are a few things that help explain this. First, as new processes and technologies are developed, new jobs are created to support them (e.g., just look how many IT folks we need to help keep our computer networks secure and running). Next, as efficiency and productivity increase, businesses can offer their products at lower cost to customers. Lower costs are usually met by higher demand, so overall production increases to meet that demand, thus creating more jobs. Finally, innovation itself requires new workers to develop it. All combined, these effects appear to more than offset the inevitable jobs losses that technological advances produce. There may be a shift in the types of jobs that are available, but by in large, these new jobs appear to be higher quality.

The Sub-Sector of Advanced Services Leads in Total Employment While the Advanced Energy Sub-Sector Leads in Wages

Within the Advanced Industries there are a few distinct sub-sectors worth looking at separately — Manufacturing, Energy and Services. Since 2007, in Utah, the Advanced Services sub-sector has had the largest total employment of the three, with more than 76,000, on average, in 2014. An influx of IT-related services into Utah over the last decade, and the sub-sector’s relative resilience through the recession, elevated it into the leading spot. Employment growth in Advanced Services is driven by the computer system design, and management/scientific/technical consulting industries, which have grown 6.7 and 10.2 percent respectively, each year since 2004.

The Advanced Energy sector, which includes oil and gas extraction, electrical power generation and transmission, and metal ore mining, has a far lower level of total employment than other sub-sectors. Yet, its average wages are significantly higher. At more than $90K per year on average, one might assume that the high wages in these industries reflect a higher share of positions that require advanced education. But looking at current openings across the country shows that these energy industries hire individuals with less than a Bachelor’s Degree at about the same rate as the other Advanced Industries. Workers in these industries often face greater risks and/or workplace hardships and are therefore compensated for it.

According to the Brookings Institution, the Advanced Industries Sector is Composed of 50 Individual R&D and STEM Knowledge-Intensive Industries

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