Is increasing the size of a city’s high-technology sector a good way of improving the lives of the poorest residents?
In many advanced countries, the high-technology sector has been at the forefront of development in the past few decades. This sector has the feature of expanding very quickly, creating jobs and paying out wage premiums that are significantly higher than those from other industries, and hence they are very popular among policymakers. Literature has shown that workers residing in a city that classifies as high-tech earn on average 8.6% higher wages than those living in other cities (1).
At the same time, as economic growth has risen around the world, we have also seen a rise in inequality, and although world poverty has fallen generally, the rate of its decline has not kept up with the rate of economic growth of countries and there are still millions of people living in poverty around the world. The question then becomes: is the growing interest of policymakers in high-technology sector in line with the growing interest in removing income disparities and poverty? Albeit being very effective towards economic growth, the high-technology sector alone is not a solution for lifting the poor of the region out of poverty. Rather, if too much focused is placed on it, it can worsen the conditions of the poor instead of improving them.
The benefits produced by innovation are not usually spread across the economy in a uniform manner. Various research studies have shown there to be a positive impact of increased use of technology on wage inequality. In a high-tech city, the workers in a high-tech industry earn 4.4% higher than those living in the same city but working in a low-tech industry (2). In other words, if the government seeks to expand the high-technology industry in a city, it is the workers employed in that industry who will reap the benefits of this expansion, not the outsiders. Furthermore, technology has the tendency to create demand for skilled workers who have smaller training and learning costs and can actually use the new technology with ease, not the unskilled ones who do not have sufficient human capital or the resources to develop relevant skills. This is also known as “skill-biased technological change”. A classic example of this is of the Luddites, the weavers, losing out on jobs and falling into poverty due to the introduction of the mechanical loom in the 19th century.
It is believed by some policymakers that increased employment of skilled workers creates demand for unskilled workers in the services sector, like cleaning jobs. However, for this to actually occur, there is also a need for the unskilled workers to be in a close geographical proximity to these skilled workers. In the presence of high inequality, it is unlikely that the poorest would reside in the same regions as the skilled workers. Moreover, as the high technology sector expands, it is bound to drive up the land rents, resulting in a crowding out effect on the poorest residents of that region.
When we talk about inclusive growth, there should be a focus on “productive” employment of workers as a way of improving their conditions economically. This means improving labour supply by developing the capacity of workers to bring them into the skilled workforce (through increased investment in human capital) as well as improving the demand side of labour and removing any hindrances that keep workers from accessing the jobs. Expanding the high-technology industry may bring about impressive growth to the economy of a region or city but that growth will not classify as inclusive as it would not result in an increased productive employment of all the workers given its skill-biased nature.
All in all, there is no denying the importance of high-technology industries in increasing economic growth. It is a channel through which most economies have recovered themselves after periods of decline. However, when welfare is also an important goal, other forms of interventions like education, skills development, and increased connectivity through better infrastructure are needed alongside the expansion of the high-technology industry as they would make way for productive employment of the poor and would then help to improve their economic standing in the economy.
(1) (2) Echeverri-Carroll, E., Ayala, S. G. (2009) Wage differentials and the spatial concentration of high-technology industries. Papers in Regional Science, 88: 623–641.