Software is Eating Washington’s Economy

0
Image by James Osborne from Pixabay

In 2011, Silicon Valley legend Marc Andreessen declared that “software is eating the world. . . we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy.”

Andreessen was referring to the operations and output of companies, but here in Washington and in the Seattle area, software is eating the input side of our economy.

It is customary to assess the impact of an industry by looking at employment levels. Figure 1 shows the share of total employment in the state by major sectors of the economy in 2019. See end note for definitions of the software/internet sector.

In terms of total jobs, the position of the internet/software sector does not look too overwhelming, as it is a much smaller employer than most of the other major sectors. But the employment numbers alone are deceiving. The 109,000 employees in this sector are, for the most part, paid very well. Figure 2 shows the average annual wage paid in the major sectors.

Combining the employment and wage data we get something closer to the real impact of these employers. Figure 3 shows the share of total wages paid in the state for the sectors.

Software and internet industries pay 11 percent of all wages paid in the state. This is larger than all private sector industries and second only to the total of government wages. Software may not be eating the jobs numbers, but it is rapidly eating the income numbers.

And it’s not just the 11 percent, but the way that that income is multiplied as it circulates through the economy.

To understand the impact of that 11 percent we need to distinguish between the two main types of economic activity: primary and secondary. Primary activity, also known as the economic base, exports value out of the state and brings new money in. Secondary activity circulates money within the state. The software and internet industries in Washington are almost entirely primary activities: compared to their global markets, sales in Washington are very small.

The size and composition of the primary economy, or the economic base, drives the growth and stability of the state, and the secondary economy is largely dependent on the primary economy. The relationship between the two is established through economic multipliers, which tell us how many total jobs are created in the economy for every new job created in a part of the economic base. The Washington Input-Output Model found that the software/internet sector had a multiplier of about four, meaning that for every job created in the sector, a total of four jobs would be created (the original plus three new jobs elsewhere in the state economy). A 2010 study of Microsoft found that it had a multiplier of 6.8, meaning that for every new Microsoft job, another 5.8 jobs get created.

Using the more conservative multiplier of four, it appears that the software/internet sector is responsible for about 430,000 jobs in the Seattle area, or about 25 to 30 percent of jobs in King County. This is up from 235,000 jobs and less than 20 percent of King County jobs in 2010. If Amazon filled all the 6,600 job openings it has listed for the Seattle area today, that hiring alone would increase county employment by 2 percent.

Looking Ahead

One of the outcomes of the pandemic has been a trend toward the big getting bigger, and that certainly applies to the internet firms that stepped into the voids left by the lockdowns of businesses. Amazon has announced plans for technology employment centers in several cities around the country, but it still has thousands of openings the Seattle area and announced that it will have 25,000 employees in Bellevue by 2025. The Silicon Valley firms continue to expand their operations in the state, and Microsoft continues to grow.

The software/internet sector is famous for fostering job creation in the leisure/hospitality sector: all those young workers crowding into bars and restaurants and seeking out new thrills in the “experience economy.” As the leisure/hospitality sector struggles to find new operating models in the Covid era, where will all those highly paid software/internet workers spend their discretionary income? There is an enormous amount of money out there for the entrepreneurs who figure out new ways to entertain the tech workforce.

While technology industries always have uncertainty surrounding them, there appear to be few obvious clouds on the horizon in the Seattle area. We have little reason to believe that software will not continue to expand its domination of the economies of the state and Seattle area.

The feast will continue.

Industry definitions

Federal and state agencies compile employment data according to the North American Industrial Classification System (NAICS) which uses six-digit codes at the finest grained level. The data is collected from unemployment insurance filings and employers will use different NAICS codes for different parts of their workforce. For example, Amazon would report its employees in e-commerce, cloud services and logistics under different NAICS codes and only some Amazon employees will appear under the software/internet classifications.

The data in this article is taken from the following codes, as defined by the NAICS Association:

Software Publishers (NAICS 511210) This industry comprises establishments primarily engaged in computer software publishing or publishing and reproduction. Establishments in this industry carry out operations necessary for producing and distributing computer software, such as designing, providing documentation, assisting in installation, and providing support services to software purchasers. These establishments may design, develop, and publish, or publish only. These establishments may publish and distribute software remotely through subscriptions and downloads.

Data Processing, Hosting, and Related Services (NAICS 518210) This industry comprises establishments primarily engaged in providing infrastructure for hosting or data processing services. These establishments may provide specialized hosting activities, such as Web hosting, streaming services, or application hosting (except software publishing), or they may provide general time-share mainframe facilities to clients. Data processing establishments provide complete processing and specialized reports from data supplied by clients or provide automated data processing and data entry services.

Internet Publishing and Broadcasting and Web Search Portals (NAICS 519130) This industry comprises establishments primarily engaged in (1) publishing and/or broadcasting content on the Internet exclusively or (2) operating Web sites that use a search engine to generate and maintain extensive databases of Internet addresses and content in an easily searchable format (and known as Web search portals). The publishing and broadcasting establishments in this industry do not provide traditional (non-Internet) versions of the content that they publish or broadcast. They provide textual, audio, and/or video content of general or specific interest on the Internet exclusively. Establishments known as Web search portals often provide additional Internet services, such as email, connections to other Web sites, auctions, news, and other limited content, and serve as a home base for Internet users.

This story originally ran on our partner site Puget Sound Indexer.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.