Google Goes Where Obama Can't on Worker Pay: Chris Farrell

On Nov. 29, President Barack Obama announced a two-year pay freeze for non-military federal workers. And on Dec. 3 the government probably will say that the U.S. unemployment rate is stuck at 9.6 percent, according to the median estimate of 57 economists surveyed by Bloomberg News, which will translate to anemic pay gains.

Not at Google Inc. The search-engine behemoth, looking to stem the defection of key workers to other hot Silicon Valley employers, announced last month that its workforce of about 22,000 employees will get a 10 percent wage hike starting in 2011. (Imagine, when will the average employee feel it’s a reasonable gamble to walk into the boss’ office and demand a 10 percent raise or threaten to walk?)

“Google has to preempt the desire for its talented employees to seek work elsewhere,” says Richard Florida, director of the Martin Prosperity Institute at the University of Toronto. “I’ve seen talented employees flee the previous employer of the moment for the next employer of the moment -- just ask Microsoft.”

With about $33 billion in cash and short-term investments, and a stock-market capitalization of almost $180 billion, Google can afford to throw money and shares at its employees. Yet the significance of Google’s across-the-board pay raise extends far beyond corporate competition. It reflects a war for brains and talent that is heating up throughout the information technology ecosystem.

Scrambling for Position

Web-based search-engine companies, mobile Internet providers, application developers, wireless companies and other innovative communication firms are jockeying for position in growing, and profitable, markets. And while the implosion of housing, the bank bailouts, and the divisive politics of fiscal and monetary policy received most of the headlines since 2007, those years also marked the acceleration of the information- intensive creative economy.

Google’s growth and shared prosperity serve as a punctuation point. “I have been convinced for some time that we are going through a major restructuring of the economy that is much bigger than the difficult time we are going through right now,” says Erik Brynjolfsson, director of the MIT Center for Digital Business.

Certainly, compared with most parts of the economy, innovation is flourishing in the communications and information ecology. Think Apple Inc. and apps. Amazon.com Inc. and online retailers.

Payrolls Expand

That growth is showing up in jobs and wages. From October 2009 to October 2010, the number of jobs in computer systems design and related services rose by 7.5 percent, according to the Bureau of Labor Statistics. Telecommunications employment was up (0.9 percent), as was data processing, hosting and related services (0.5 percent), computer and peripheral equipment (0.7 percent), and communication equipment (0.7 percent).

The split shows up in geography as well. Workers in the most cosmopolitan cities are seeing wage gains. For instance, the average weekly wage increase for all private industry workers in the U.S. from the first quarter of 2009 to the first quarter of 2010 was 1 percent, according to the BLS. Yet average weekly wages in tech-heavy San Francisco over the same time period increased 5.4 percent. The gain in information-rich Washington was 2.8 percent. New York City saw an 11.9 percent increase, with the biggest pay earned in finance (22.7 percent) and professional business services (10.9 percent).

‘Knowledge Work’

“This isn’t about information technology,” says Paul Saffo, a long-time Silicon Valley consultant and a managing director at Discern Investment Analytics. “This is about knowledge work.”

It’s intriguing to note that almost a century ago another pay raise signaled a coming transformation of the U.S. economy. Henry Ford announced on Jan. 5, 1914, that he would double his factory workers’ wages to $5 a day. (He also reduced daily hours worked from 9 to 8.) Ford Motor Co., like Google, had good business reasons for its move: The Model-T assembly line was a brutal place and in 1913 Ford had to hire 50,448 people to maintain a workforce of 13,623, according to Richard Tedlow, business historian at the Harvard Business School.

Paying workers a better wage than they could get elsewhere encouraged loyalty. But the $5 wage also marked the passage toward a mass-production economy where factory workers were working class on the job but middle class at home, once they shared in the remarkable productivity bounty of manufacturing. And since smokestack America was such a dominant part of the economy, the benefits spilled into industries outside manufacturing.

Creative Class

Fast forward to today: The wealth of the emergent knowledge economy or creator economy is largely being pocketed by employers and employees in the creative industries. It’s a growing sector of the economy with knowledge work or creative work -- people who are paid to think -- including everyone from software programmers to scientists to graphic designers.

According to Florida, the creative class made up 32 percent of the American workforce in 2009, up from 29 percent in 1998. In contrast, service jobs -- typically low-paying work -- comprise about 45 percent of the workforce.

It’s an open question as to whether America will persist as a house divided between a relatively well-off knowledge sector elite and everyone else. There’s no doubt that the knowledge economy is one of the few bright spots in the private-sector labor market and is giving a lift to a struggling economy.

(Chris Farrell is a Businessweek.com columnist. A version of this column appears on Businessweek.com. The opinions expressed are his own.)

To contact the writer of this column: Chris Farrell at cfarrell@mpr.org.

To contact the editor responsible for this column: Daniel Beucke at dbeucke@bloomberg.net

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