Beyond the Techlash: Silicon Valley and structures of inequality

Beyond the Techlash: Silicon Valley and structures of inequality

Silicon Valley was once seen as the harbinger of a new information economy that would help spread prosperity. Learn more via Dr. Chris Benner, as part of our series on a more inclusive economy.
July 25, 2019
Print Page

Dr. Chris Benner is the Dorothy E. Everett Chair in Global Information and Social Entrepreneurship and a Professor of Environmental Studies and Sociology at the University of California, Santa Cruz.

In the midst of the growing public animosity towards Silicon Valley–based technology firms—the so-called techlash—it is easy to forget that Silicon Valley was once seen as the harbinger of a new information economy, built on dynamism, innovation, and a meritocratic labour market that would help spread prosperity around the globe. During the 1990s internet boom for example, Seattle-based Microsoft or older technology firms like IBM and Digital Equipment Corporation (remember them?) were seen as hierarchical and market-dominating, while Silicon Valley–based firms were seen as nimble, progressive, and world-changing. World-changing in a good way, such as organizing all the world’s information and making it universally accessible and useful—Google’s mission statement at its founding in 1998. 

The reality of course, even in the 1990s, was not quite as rosy as the popular image. Many tech firms paid their service workers (janitors, cafeteria workers, and security guards) poverty wages,while providing free food, on-site gyms, and foosball tables to their prized employees. The number of contract employees in the industry exploded—presaging many of the challenges of gig workers today. The arrogance of tech leaders at the time, and their sense that they somehow operate outside the rules, is well-captured in a comment that Scott McNealy, CEO of Sun Microsystems (remember them?), made in 1999: “You have zero privacy anyway, get over it.” 

Share

If we do not address these broader structural problems, we might discover that in trying to break up Facebook or Alphabet, we end up with a new boss that is the same as the old boss.

But in today’s rush to vilify tech companies and their leadership, we run the risk of missing the more important deeper issue: there are structural features of an information economy that tend towards inequality and concentration of market power. If we do not address these broader structural problems, we might discover that in trying to break up Facebook or Alphabet, we end up with a new boss that is the same as the old boss.

Inequality and insecurity

Over the past 20 years, the Silicon Valley labour market has been characterized by stagnating wages for many, growing inequality, and continued insecurity (though there are also signs that California’s minimum wage laws, alongside related state and local policies empowering lower-wage workers, have helped provide some wage protection for the very bottom of the income distribution). 

In a report released last fall by the Everett Program and Working Partnerships USA, we highlight a few key indicators of these problems in the US: 

  • Business owners are keeping more of the gains from growth at the expense of workers, especially in high-tech industries: Labour’s share of total output in the region declined from 64 percent in 2001 to 60 percent in 2016, with striking declines in key information technology industries, including a decline from 76 percent to 58 percent in hardware manufacturing overall, and from 77 percent to 53 percent in computer and electronic products.
  • Despite economic growth, workers’ wages are being pushed down: Wages are lower than 20 years ago for nearly 90 percent of income earners, despite overall per capita economic output increasing by 62 percent since 2001 alone (in inflation-adjusted terms).  
  • The economy is shifting towards low-wage job growth: Net job growth in the last 20 years has been disproportionately in low-wage jobs, with the proportion of workers in low-wage jobs increasing by 25 percent, while the proportion of workers in middle- and upper-wage jobs declined. 
  • Older high-tech workers are experiencing underemployment and lower wages: Challenges for older workers in the industry have accelerated in the region. In the mid-1990s, the highest paid workers in high-tech had an average age of 51; today that average age has crept down to 48. High-tech workers older than 48, on average, earn less than younger workers.

Structural causes of an inequitable economy

The inability of Silicon Valley to provide broad-based prosperity, despite more than 40 years of dynamic technology-led growth, is a clear sign of deep structural flaws in links between economic growth and people’s livelihoods. The fundamental characteristics of markets in which information and knowledge are key sources of business competitiveness themselves create inequality, volatility, and insecurity. These include:

  • High sunk costs of product development are often combined with low marginal costs of production. The result is that the firm’s revenues are disconnected from the ongoing costs of production once the initial investment is repaid. Investors, top executives, and shareholders can reap enormous profits without necessarily sharing that with direct employees, much less subcontracted workers.  
  • Technology firms operate in markets that are prone to monopolies or near-monopolies. These monopolies can be created by technological advances, rooted in patent protections; some short-lived monopolies are rooted in new innovations. They can also be created through the network-dynamics of platform economies, wherein an initial slight advantage or market lead results in one or at most a few firms dominating an entire market. Think about the market for ride-hailing apps, for example, where the value of the service is in part driven by how many drivers and customers are using the service, thus reinforcing first-mover advantages. In both cases, firms are achieving economic rents (defined as excess revenues due to a lack of competition), earning outsized rewards for their investors and owners, but with little incentive to share with employees or network participants. 
  • Public contributionsfrom governments and universities, and even more so, from the unpaid labour of millions of users—create much of the value that is captured by the tech industry. Silicon Valley businesses depends on the collective inheritance of science and technological progress, supported by decades of public sector investment in research and development. Firms in the information and communication technology (ICT) sector —particularly social media platforms, big data applications, and the large and increasing number of businesses using machine learning algorithms—also reap economic value from consumers’ personal data and their digitally-based social networks. Firms benefit from these socially produced sources of economic value in ways that are disconnected from returns to labour.
  • Growing inequalities between global and local industries: Globally integrated high-tech industries are able to generate enormous revenues, yet these resources are not available to local service industries, which face highly competitive markets and high-price elasticities (if they raise prices, they lose customers). In this large, low-margin sector of the economy, wages and benefits lag far behind the compensation levels provided to high-tech personnel. This inequality occurs when high-tech salaries increase the cost of living by driving up prices for goods and services with a locally constrained supply, such as housing.

These features are not the result of market failures, but rather the expected and predicted result of competitive market dynamics in Silicon Valley’s information economy, and as such, will require significant intervention to resolve if we are to prioritize public interest.

Beyond the practical solutions, concepts like a social wage are important to recognize and reward the collective contributions we make to innovation and economic prosperity.

Strategies for moving forward

In order to deal with these structural problems, there are certainly things we can do to improve labour market outcomes for those workers left behind. We can grow and retain more middle-income jobs, including through investment in infrastructure, education, and health care.  We can raise incomes and career opportunities in low-wage jobs, by raising the minimum wage and investing in training and occupational upgrading programs. We can strengthen connections between high-wage industries and the rest of the labour market, developing responsible contracting policies and empowering workers by promoting sectoral bargaining structures. 

However, we also need to pursue policies and strategies for stabilizing people’s livelihoods outside of their labour income. This is important, in part, to help minimize the traumatic experience of unemployment and technological displacement, as well as to ensure that individuals who are not in the labour force (such as seniors, students, full-time parents/caregivers, or people with disabilities that prevent them from working) can sustain a decent standard of living. It is also important to acknowledge and compensate people for their unpaid contributions to overall economic growth.

Here it is useful to recapture the notion of a social wage. Practically this means expanding the public provision of services such as education, affordable housing, subsidized food, and health care, which can lower the costs of basic expenditures for low- and middle-income people and families. It could also include supporting diverse sources of income, for example, for people who are not in the paid labour force as well as for workers facing more frequent periods of unemployment driven by a rapidly changing economy. This would mean expanding unemployment benefits, universal savings accounts, and exploring universal income programs.

Beyond the practical solutions, concepts like a social wage are important to recognize and reward the collective contributions we make to innovation and economic prosperity. The success of the information economy is only partially rooted in the breakthrough innovations of dynamic tech companies. The information economy is also driven by our shared public investment in basic science and technology development, which has played a key role in many of the discoveries that have literally changed the world. The Google search engine was originally developed as part of a grant from the National Science Foundation and nearly all the technologies found in the iPhone are rooted in major public-sector support, including the military’s investment in cellular technology and the U.S. Department of Energy’s development of lithium-ion batteries. The information economy is also partially driven by all our common contributions to network-based platforms in the form of data and tracking of our activities, which help build value in companies like Facebook, Twitter, Uber, and Lyft, as well as train the algorithms that lead to new innovations. Expanding the social wage is an appropriate way for acknowledging this collective contribution and would help create a more inclusive as well as more innovative economy. 

For media enquiries, please contact Coralie D’Souza, Director of Communications, Events + Community Relations at the Brookfield Institute for Innovation + Entrepreneurship.