The Bright and Dark Sides of IT

Information technology (IT) permeates almost all aspects of the economy and is what really drives economic growth, according to a report released this month by the Information Technology and Innovation Foundation (ITIF). The report’s authors, Robert Atkinson and Andrew McKay, believe the diffusion of information technology increases worker productivity 3-5 times more than non-IT capital. In Digital Prosperity: Understanding the Economic Benefits of the Information Technology Revolution, they collect and synthesize various reports citing the influence of IT, separated into five key measures: productivity, employment, efficiency of markets, quality of goods and services, and the innovation of new products and services.

 

Atkinson and McKay offer guiding principles for policymakers to help sustain IT-based growth, including:

• Information technology policy should be a centerpiece of economic policy, connecting it to tax policy, regulatory reform, spending and trade policy.
• Governments should push IT development and transformation in many components of its activities including health care, education and infrastructure construction.
• Leverage the tax code to encourage IT investment.
• Ensure that all members within society participate in the functions of a digital economy.
• When making policy to support IT development, do no harm and do not hamper economic growth.

The report considers the expectation that the IT industry itself would be the source of many new jobs, but upon closer examination, Atkinson and McKay note the industry hit its peak around 2000 with 3.4 percent of total private sector employment. By 2006, that percentage had stabilized to around 2.7 percent, and the number of jobs in the IT industry is currently growing slower than the rate of the overall economy. The numbers will remain low because productivity affects the IT industry as well – more output with fewer workers.

 

Besides limited expected growth in the information technology sector, in the coming years many types of service occupations, including positions enabled by information technology, may be susceptible to offshoring. Atkinson further explores this topic in a separate study published through the Brookings Institution, The Implications of Service Offshoring for Metropolitan Economies. This report, coauthored with Howard Wail from Brookings, discusses a model that predicts the number of job losses due to service offshoring between 2004 and 2015 for many of the country’s metropolitan areas.

 

The authors conclude that, in general, the loss of service jobs due to offshoring will be relatively modest, with metro areas having populations of a million or more losing on average 2.4 percent of their service jobs. This offshoring percentage decreases as the size of the metro area decreases, such that regions having less than 250,000 people are predicted to lose on average 1.7 percent of their service positions. But each separate metropolitan area has its own unique vulnerability to service jobs moving outside of the U.S., which is dependent on a variety of factors economic development professionals should understand for their region. Factors include the number of jobs requiring information technology and routine work, positions that do not require personal contact, productivity gains vs. wage savings in each area, the availability of the necessary skills outside of the country, and cultural, institutional and legal roadblocks.

 

Thus, communities with larger shares of positions such as computer programmers, software engineers, data-entry technicians, and telemarketers will be more susceptible to offshoring. But this information should be placed in context for, in the future - as was the case in the past - some types of jobs will grow and others will decline. For example, in 2004, 29 million jobs were eliminated due to business closings and retraction, but 31 million jobs were created because of expansion and business growth. The report concludes with policy recommendations for the federal government and individual states and regions to pursue, including:

• Encourage the federal government to prevent other countries from manipulating their currencies, developing barriers to trade, allowing piracy, and suppressing wages – all of which will reduce artificial cost advantages for other countries;
• Enact or expand tax credits and matching grants for companies who participate in R&D and workforce development;
• Develop a program similar to the Manufacturing Extension Partnership to improve the productivity of service sector companies;
• Extend retraining and provide wage insurance to individuals who have lost their employment from international trade;
• Steer education and workforce training away from service jobs less likely to be moved outside of the country; and,
• Focus on economic development on innovation-based strategies that improve the productivity of existing companies in the region, instead of subsidizing outside companies who may offshore jobs in the future;

Digital Prosperity: Understanding the Economic Benefits of the Information Technology Revolution can be downloaded as a PDF through the ITIF website: http://www.itif.org/files/digital_prosperity.pdf

 

The Implications of Service Offshoring for Metropolitan Economies contains service offshoring predictions for 254 metropolitan regions throughout the U.S. and can be accessed at:

http://www.brookings.edu/metro/pubs/20070131_offshoring.htm



Links to these reports and more than 4,500 additional TBED-related research reports, strategic plans and other papers also can be found at the Tech-based Economic Development (TBED) Resource Center, jointly developed by the Technology Administration and SSTI, at http://www.tbedresourcecenter.org/.

 

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