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Sunday, June 7, 2015

Job Geography

Several months back, I was watching a morning news show on cable and a governor was talking about his plans to create more good paying jobs in his state. He muttered something about tax incentives and said over the next several years it was likely that on his watch the state would become a hi-tech leader. I just had to laugh. It is simply not going to happen in his political lifetime.

I will not name the man or his state but he seems more than a bit out of touch with the new world of job geography in the United States. I have done more than a little research on this topic and job growth other than in natural resources tends to lean heavily on two major factors--education level of the local population and the degree of innovation going on in the business community.

To explain, let’s back for a minute. A few years ago, I was playing a verbal game of trivial pursuit regarding businesses. Someone threw up the question, “Where was Microsoft founded?” One said Redmond, Washington and everyone else but I said Seattle. I said Albuquerque. “How do you know that,” our lead questioner asked without hiding his annoyance. I told him that I had followed the fortunes of the company for over thirty years and remembered that Paul Allen and Bill Gates, the founders, were Seattle born and wanted to move back home very early on in the game.

At the time, Seattle was not doing all that well as a metropolitan area. Once Microsoft took off and eventually went public, the Seattle metro started to do better. After going public, many Microsoft employees became instant millionaires. So, a number of them cashed out and started their own businesses locally. They started a few thousand new businesses and most stayed in the area. Two prominent firms led by Microsoft alumni are Real Networks and Expedia. Why stay in Seattle? Well, the talent pool is full of very smart people. Demographers often refer to it as a “thick labor market.” If you look at these “thick” markets such as Silicon Valley, Austin, Boston, Denver, Atlanta, and increasingly, little Boise, you see them generating a hugely disproportionate share of patents relative to the size of their population. The number of patents taken out is an excellent surrogate for measuring innovation from my perspective.

If you look at economic history an interesting pattern develops as an industry begins to take hold. First, in the baby stage, the innovators can be scattered all over the place. Take the auto industry. In 1920, there were over three hundred car manufacturers, many in the Midwest but in a large number of states. Many went bust and some were swallowed up by bigger players. When an industry starts to hit its potential, a consolidation takes place and the players become more concentrated, e.g., Detroit for cars and Hartford for insurance. Finally, as you mature, you may move to cheaper markets to operate in and the clustering is gone.

Interestingly, most of our high tech areas tend to be very expensive places to live and to do business. Silicon Valley has a very high cost of living and especially so in housing. Why do startups continue to go there? I think that it is very much a function of the thickness of the labor market mentioned above. If you operate in Silicon Valley, you can attract great people with great ideas. Also, the best and the brightest love the social interactions. Think of the learning opportunities in a community like Silicon Valley where literally hundreds of tech companies are operating and many flourishing. Innovation and higher productivity have to come from such an environment. Many foreign giants have large offices in hi-tech cities for the same reason.

Also, and very importantly, is availability of money. Many venture capital (VC) firms still operate there and use what has been called in the industry “the 20 minute rule.” When a  20 something techie in a hoodie passes muster after their brutal cross examinations in their presentations for seed money, the VC pros do not simply write the checks and patiently wait. They usually want the new venture to open locally. This allows them to offer hands on advice and often help with hiring. Techies may not know how to run an accounting department or find a good general manager while they dream up the next life-changing new product. The VC leaders, who money is on the line, know just the men and women to help fill in those needed posts.

The growth of tech has caused some interesting pay discrepancies across the nation. In the brainiac markets, salaries are higher for ALL workers not just the tech savvy pros. In fact, people with high school diplomas in thick labor markets generally make more than college graduates in places that are struggling such as Flint, Michigan or Johnstown, Pa. Standard of living is another matter. Housing is very inexpensive in the lower income areas but so is pay. Increases tend to be much higher and faster in the high growth tech areas.

Surprising people are reacting to innovation. In 2013, Wal*Mart, yes, Wal*Mart, opened up Walmart.com in San Bruno, CA (Silicon Valley) rather than in corporate headquarters in Arkansas. Why? How many sharp online marketers and designers want to live in Bentonville, Arkansas? The talent pool is in Silicon Valley and if they are to beat back Amazon (a tall order), they need the best people in the business to do it.

So, ad agencies ought to look at this trend look and hard. People often have told me over the years how their mid-sized market would one day become an advertising mecca. It did not happen. Now, a new danger seems to be emerging. What if Apple, Google, Amazon and few others take their online and mobile advertising in-house? There will certainly be a talent pool nearby to handle the speciality jobs required. You probably have noticed that a large number of media assignments for billion dollar global advertisers are under review this year. As they shift away from conventional media (largely TV) over the next several years, will agencies be able to hang on to most of the digital assignments? Or, will they too have offices in Seattle, Silicon Valley and Austin? It will be interesting.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or post a comment on the blog.

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