From time to time you can read that this or that sector accounts for a vast amount of the job creation in the economy. What you are reading is nearly always misleading.
The sectors concerned might be: new firms; start up firms; small firms; and firms in a particular sector, such as Low Carbon, or Technology. The normative implication for the UK’s policy makers is generally that we should focus on new/startup/VC/tech firms, and that will drive job growth, prosperity, great things all round. Curiously, alongside the overly bullish statements about quite how extraordinary the sector in question is (the backbone of our economy, no less), you often get complaints about quite how difficult things are, what with all the tiresome red tape, property costs, skills shortages, and so on. Even more curiously, this often ends up with a plea for a tax break for the sector in question.
A good example is in today’s FT. Apparently, a quarter of all new jobs created in London were in the “Tech Sector”, which employs 600,000 people. That is over one in six of all employees in London! Wow, I can hear you thinking: I had no idea that web design, Apps, people sitting on beanbags trying to make the next Google, amounts to all that. (Particularly since Google itself, which bestrides the Internet, employs only 50,000 itself, and Facebook some 7000. Worldwide. Two companies with billions of users.) The impression given is that the Internet-related economy is the creator of hundreds of thousands of jobs. No wonder Birmingham is competing hard to get this business. Stop supporting old style business. Help the people online.
This is way too good to be true. The first problem is one of definition. Go to a report about this figure and look at the list of occupations counted as “Tech Sector”. I list some of them at the end of the post. As well as Web Portals, it includes “repair of consumer electronics” and “news agency activities”. There is a whole lot there that is nothing to do with sitting at a laptop, writing code and trying to create the next WhatsApp. Here is a BIS report from 2013. According to it, there are 1.17m employees in the entire UK in the entire “digital, creative and Information Services” sector, or 3.7% of all employees. Naturally, even this will include far more than sitting at a laptop writing code.
Another problem concerns job destruction. Consider the total job creation from new online forms of news since the 1990s – no doubt a large positive number. But at the same time, hundreds of thousands of jobs must have gone through the collapse of revenues for offline news, in printing in particular. This principle applies to every kind of entrepreneur or sector who boasts of how many jobs he has created. The mastermind of a new restaurant chain that now employs 10,000 staff cannot honestly claim to have created 10,000 jobs for the entire economy; most of them will have been diverted from other restaurants. The total amount of money spent going out is unlikely to have shifted much, unless he is claiming to have shifted the entire demand curve for being served by a waiter. This fallacy particularly affects those extolling the job creation of start ups. Um, they CAN’T destroy jobs, they start with zero … (read Muppets and Gazelles)
Another problem is whether equating “this is the sector of the future” with “this will create loads of jobs” makes any sense. Consider the electricity sector. From its birth in the 19th century, it has revolutionised every major economy in ways it must be difficult now to appreciate. But if this had meant ever increasing job creation in the Electricity Sector this could only have meant a massive ongoing productivity drag for everyone else who needs to use electricity and pay their wages. Fortunately that is not the cases. Utilities of every kind employ 327,000 in the UK – what amazing value. Spending a lot on a sector, and having to employ loads of people, is not a sign of success – it is a drain on the entity having to spend the money. The Financial Sector is the biggest customer of the IT sector – a few years ago the Economist found that it spent nearly $500bn worldwide. Ask the bankers whether they celebrate that.
The use of modern computer technology ought to be a massive boon to everyone. It generates extraordinary consumer surplus, amazing productivity, and new services we had never imagined. But believing this also means it will be a massive engine for job growth defies logic and evidence.
The Tech Sector, apparently
1813 Pre-press and pre-media services
1820 Reproduction of recorded media
4651 Wholesale of computers, computer peripheral equipment and software
4791 Retail sale via mail order houses or via Internet
5813 Publishing of newspapers
5821 Publishing of computer games
5829 Other software publishing
5911 Motion picture, video and television programme production activities
5912 Motion picture, video and television programme post-production activities
5913 Motion picture, video and television programme distribution activities
5920 Sound recording and music publishing activities
6010 Radio broadcasting
6020 Television programming and broadcasting activities
6110 Wired telecommunications activities
6120 Wireless telecommunications activities
6130 Satellite telecommunications activities
6190 Other telecommunications activities
6201 Computer programming activities
6202 Computer consultancy activities
6203 Computer facilities management activities
6209 Other information technology and computer service activities
6311 Data processing, hosting and related activities
6312 Web portals
6391 News agency activities
6399 Other information service activities n.e.c.
7021 Public relations and communication activities
7111 Architectural activities
7112 Engineering activities and related technical consultancy
7120 Technical testing and analysis
7311 Advertising agencies
7312 Media representation
7320 Market research and public opinion polling
7410 Specialised design activities
7490 Other professional, scientific and technical activities n.e.c.
8299 Other business support service activities n.e.c.
9511 Repair of computers and peripheral equipment
9512 Repair of communication equipment
9521 Repair of consumer electronics