EconSouth (Third Quarter 2005)

John C. Robertson is assistant vice president in charge of the regional group of the Atlanta Fed’s research department.  

On and Off the Information
Technology Rollercoaster

 

If the information technology (IT) sector were a rollercoaster, it would have provided quite a ride over the past decade. Businesses’ use of and investment in IT contributed significantly to the U.S. economy’s rapid growth during the 1990s. Between 1996 and 2000, the IT-producing sector was responsible for an estimated 1.4 percentage points of the nation’s average annual real gross domestic product (GDP) growth of 4.6 percent. Since 2000, however, the IT sector has struggled. The level of IT manufacturing output declined sharply as business investment spending on IT retrenched during the 2001 recession. The Economics and Statistics Administration estimates that in 2002 IT-producing industries contributed only 0.1 percentage points to the economy’s 2 percent annual growth.

IT’s boom rolled through labor markets
The boom in demand for IT products and services during the 1990s led to a dramatic rise in employment in IT-producing industries, and the subsequent IT retrenchment resulted in a large decline in employment in the early 2000s. And because the IT-producing sector is concentrated in a few locations such as California, Texas, Massachusetts, Washington, and Georgia, the IT boom and bust had disproportionate regional impacts.

Such extraordinary movement in the labor market presents unusual incentives and opportunities as well as challenges for workers. For instance, the IT boom may have led some workers to invest in training that may not be easily transferred to other industries. Other workers may have enjoyed wider opportunities derived from having worked in the sector during the boom.

Experience pays off—maybe
A recent Federal Reserve Bank of Atlanta study, “Earnings on the Information Technology Rollercoaster: Insight from Matched Employer-Employee Data” (Working Paper 2005-11), used matched employer-employee data for the state of Georgia to examine workers’ average earnings during the IT industry’s employment boom and bust. The study documents the significant wage premium that workers in IT-producing industries earned during the boom relative to their non-IT counterparts. The research also shows that, after the boom ended in 2000, IT workers who were able to remain employed in the IT sector could expect to maintain this higher pay level and that those who took a job outside the IT sector experienced a large pay cut.

According to the study, workers transitioning from the IT service sector likely earned higher wages than comparable workers who had no IT experience during the boom. In other words, having worked for an IT service provider during the boom appears to have boosted those workers’ post-boom, non-IT earnings. For IT manufacturing workers, however, having produced high-tech goods during the boom seems to have brought no wage benefit, probably because manufacturing experience is not typically transferable to jobs in nonmanufacturing industries.

Following the boom to Georgia
One restrictive feature of the study is that it focuses only on the dynamics of job-to-job transitions. But many workers in IT industries lost their jobs when IT’s boom went bust, and some moved out of Georgia to seek employment elsewhere. In a related study, Atlanta Fed researchers examined worker flows into and out of the Georgia workforce before, during, and after the IT boom. This analysis finds evidence that the IT boom pulled workers into Georgia’s workforce to take advantage of the increase in IT jobs, especially in the software and computer services industry.

Interestingly, though, the decline of the IT sector did not cause a disproportionately large shift out of the Georgia workforce. In fact, Georgia’s IT boom brought a net migration of skilled workers into the state, and many of them have remained in Georgia even if they are now working at businesses whose primary activity is not IT-related.

While these results are compelling, more research is needed. For instance, the nature of the data used in these studies restricted the analysis to workers classified by industry. But not all workers in IT-producing industries have IT occupations, and many non-IT industries, such as finance or healthcare, have a large pool of IT workers. Indeed, it is likely that the demand for IT service workers such as computer programmers or network administrators in non-IT industries generates the relatively higher wages for workers who had IT-industry experience during the boom. In contrast, the absence of IT manufacturing occupations outside the IT sector explains why workers transitioning out of such jobs experience relative drops in wages.

Not everyone, it seems, enjoys a rollercoaster ride.

 

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