February 18, 2011
The tech industry has generally enjoyed a good reputation with the public and with politicians — unlike those "bad guys" in banking, or health insurance, or oil and gas. However, analysis that I have done in a just-published report — Caution: IT Investment May Be Hurting US Job Growth — suggests that this good reputation could be dented by evidence that business investment in technology could be coming at the expense of hiring.
Some background: In preparing Forrester’s tech market forecasts, I spend a lot of time looking at economic indicators. Employment is not an economic indicator that I usually track, because it has no causal connection that I have been able to find with tech market growth. However, given all the press attention that has been paid to an unemployment rate in excess of 9% and monthly employment increases measured in the tens of thousands instead of hundreds of thousands, it has been hard to ignore the fact that US job growth has been remarkably feeble in this economic recovery.
Of course, both real and nominal economic growth — which I do watch closely as drivers of tech market growth — have been below the rates historically seen in economic recoveries. That can explain a lot of the weakness in job growth. But not all. And explanations that blame the lack of jobs on business unwillingness to invest in new capacity because of government policies like the healthcare reform act are not supported by the behavior of the variables that I do forecast — business and government purchases of technology goods and services — which have shown very strong growth since Q4 2009. Moreover, corporate profits have also shown robust growth, so there is no shortage of cash flow that could be turned to hiring workers.
As I looked at the data that showed tech spending and corporate profits growing strongly and an economy growing at subpar but still solid growth rates, another explanation for the poor job growth began to emerge. Could it be that companies were putting their cash flow into technology instead of hiring? That would be a departure from past practices, when companies have treated new hiring and new tech investment in parallel – cutting both in bad times (for example, during the 2001-2002 recession), raising both in good times like the 2003-2007 expansion.
On the surface, the data certainly suggested that this was happening, with tech buying rising while new jobs barely budged. And the marketing and sales messages of tech vendors that highlighted how new tech investments could help businesses cut costs (e.g., jobs) provide anecdotal evidence that businesses were putting money into job-cutting technology instead of new hiring.
Proving or disproving this thesis would require economic modeling and analysis beyond my scope of responsibilities as a tech market forecaster. However, in my role as an advisor to tech vendor strategists, the possibility of technology being — or being labeled as — a job killer would be a public relations challenge that technology vendors needed to address head on. Since I already do sizings and forecasts of industry tech spending, I decided to compare that industry data on tech investment with Bureau of Labor Statistics’ data on industry employment to see whether there was evidence at the industry level of technology investment hurting job growth.
What I found suggests that in many industries businesses have been investing in technology instead of hiring. The data showed that this was not a universal pattern, because some industries cut both investment and employment from 2007 to 2010, while other industries increased both in the same period. However, 41 of the 62 non-government industries in the North American Industry Classification system increased their IT investment over this period while cutting employment at the same time. In a fifth of the industry groups, the contrast was especially sharp, with tech investment rising by 10% per year from 2007 to 2010 while employment was down by 7% on average. This pattern was most pronounced in manufacturing industries like mining, forestry products, fabricated metals, motor vehicles, and machinery. In a quarter of industries, tech investment rose by 7% on average while employment was down by 2% on average.
The thesis that technology is currently causing poor job growth still remains unproven, because this analysis shows correlation, not causation. For example, companies could be investing in technology to sustain their business operations when they were forced to lay off employees for economic reasons. That is likely to be the situation in the public sector in 2011, where local, state, and Federal departments and agencies will probably be laying off government workers as they cut costs to balance budgets, yet still preserving if not increasing tech investments to keep vital public services functioning. (If a local government has to fire clerks and reduce the number of fire fighters or policemen to balance a budget, it may still invest in a Web site for citizens to get information or pay fees on line, or mobile communication systems to deploy the fewer public safety workers against problems that arise.) But our analysis suggests that it is certainly possible that causation has gone the other way in the private sector, that is, the companies with good profits have chosen to invest in technologies that allow them to operate with fewer employees on a broad enough basis to be hurting job growth in the US.
Still, there is some good news ahead. In past economic expansions, both IT investment and job growth have risen together. So, as this expansion strengthens and job growth improves, we are likely to see a similar pattern. The trouble is, this positive relationship between tech investment and job growth won't materialize until other forces cause businesses to want to hire more workers.