Job Hopping: Driver of Regional Tech Growth?

What if job-hopping isn’t just a hot topic for millennials’ happy hours but a necessary dynamic of regional economies?

What if the recent agreement by Apple, Google, Intel, and Adobe to pay $325 million to settle claims that they colluded to limit job-hopping only reflects how much is at stake here?

Those are a few questions raised by a fascinating new academic paper that has big implications for America’s sluggish labor markets and the power of regional industrial ecosystems. The takeaway: It now looks like the job-hopping within regional industry clusters may be a significant driver of productivity growth.

The new finding is important because it helps clarify dynamics that have been intuited for a while but that to date have not specified so clearly. 

For a long time, business people and scholars have sensed that a kind of 2+2=5 magic can occur when firms flock together in regions. In 1890, the great economist Alfred Marshall described the economies of scale that resulted from the “localization” of England’s pottery making in Stafforshire and its cutlery trade in Sheffield and noted that such co-location in “industrial districts” created great advantages for firms because “the mysteries of the trade become no mysteries but are as it were in the air.” 

More recently, the Harvard Business School savant Michael Porter and scholars like Maryann Feldman have stressed that regional industry clusters promote “knowledge transfer” among firms by providing thick networks of formal and informal relationships across organizations.

Along these lines, many scholars have suggested that IT investments generate productivity “spillovers,” as the technical know-how required to implement new IT innovations—embodied in the IT workforce and acquired through hand-on experience at firms—is transmitted to other firms through the flow of IT labor, such as the movements of employees, contractors, and consultants.

And yet, despite the plausibility of all these ideas, the discussion has remained a little vague and theoretical, albeit tantalizing. Do “knowledge spillovers” really occur through the labor market? How exactly? And how important are they?

Here’s the Productivity Gain

But now comes the new paper by Prasanna Tambe of New York University and Lorin Hitt of the Wharton School. Tambe and Hitt set out to drill down on labor flow in a serious way, and they did it by exploiting a unique dataset derived from the employment histories of several hundred thousand U.S.-based IT workers matched to information on employers. These records represent the career movements of as much as one-sixth of the U.S. IT workforce over the last 20 years. As such they have produced the most detailed study to date of how labor flows drive knowledge spillovers using microdata on labor mobility.

What did Tambe and Hitt find? Job-hopping contributes hugely to the bottom line, generating up to one-third of the productivity gains that result from firms’ own IT investments. 

The upshot: IT labor flows appear to be the driving mechanism behind positive regional IT spillovers. Job-switching is not a side issue but an incredibly important channel by which new technology know-how and practices are sluiced around a regional economy. 

In fact, the possibility of job switching and the high degrees of job-hopping in dense high-tech regions represents one of the prime attractions in a dense technology ecosystem.

In view of these findings a lot of things begin to make sense. Managers, for their part, will want to work doubly hard to retain talent at the same time as they seek to “spill-in” new talent for its own sake. This is why in 2010 Google gave a 10 percent pay raise to all of its employees to slow the defection of staff to competitors and it is why tech firms have sought to woo new tech talent with signing bonuses and other perks. On the negative side, it is why those big tech firms found it in their interest to collude in anti-competitive ways. 

From a policy perspective, the importance of job-hopping to firm and regional productivity suggests that facilitating employee mobility might be an important way to stimulate growth. This may not be easy. But it could be that more states will want to emulate California’s long-standing proscription of non-compete agreements, which have been shown to depress workers’ job changing.

As for all those millennials plotting their big move over drinks, they should go for it. Beyond advancing their careers, the nation’s techy job-hoppers are driving growth in America’s regions.

This piece first appeared at Ideas Lab.