“Is there Evidence of ICT Skill Shortages in Canadian Taxfiler Data”1
PLEASE DO NOT CITE
Mike Veall, McMaster University, [email protected]
Prepared for presentation at the Information and Communications Technology (ICT) Talent
Workshop, March 21-22, 2013, University of Ottawa
Abstract: My paper will offer ideas for investigating the existence of skill shortages of ICT workers by looking at the incomes of these types of workers. This approach reflects the standard perspective of labour economists which posits that the wages of workers in short supply should rise. I will, in this context, develop the specific idea of looking at the wages of workers in selected three digit North American Industrial Classification code industries which are likely to have a large percentage of ICT workers (e.g. 517, Telecommunications) over time using longitudinal taxfiler data. Such an approach would complement national cross-­‐section information available in Canadian Industry Statistics based on the Annual Survey of Manufactures and Logging. 1
The empirical part of these notes is from joint research with Brian Murphy and Yan Zhang of Statistics Canada. It includes some preliminary calculations on data that are not for release but are presented here for illustrative purposes only. All errors and opinions are mine alone and cannot be attributed to my co-­‐researchers or to Statistics Canada. 1 Notes for a presentation:
I Introduction
There has been a considerable discussion of a shortage of skilled information and
communication technology (ICT) workers in Canada (Industry Canada (2010) Improving
Canada's Digital Advantage; IBM (2012) Fast Track to the Future; and Information and
Communications Technology Council (2011), Outlook for Human Resources in the ICT Labour
Market, 2011-2016). Other research has identified relatively low use of ICT as a key factor
hampering Canadian productivity growth (e.g. Deloitte, The Future of Productivity in Canada,
2012).
Some economists may have the initial reaction to such comments that there can be no
shortage in any market, because the prediction of the workhorse supply/demand model is that the
price (in this case the wage) will rise until the market is cleared. Accordingly, section II of this
section will discuss this issue in a nontechnical manner and Section III will briefly discuss the
role of institutions such as government, high schools, colleges and universities and government
when the labour market is not clearing.
However the main purpose of the study is to examine whether Canadian taxfiler data in
the Longitudinal Administrative Database can be used to examine labour market shortages. On
the plus side, it is a reasonably timely dataset with a large sample size. For observations since
2000, for each filer with employment income it includes the North American Industry
Classification coding at the 3 digit level. On the negative side, it has little occupation
information: only intended occupation at time of landing for immigrants 1980 or later. In any
case, Section IV will present some very preliminary exploratory empirical research which will
2 attempt to assess this evidence base for the example of a labour shortage in the market for skilled
ICT workers. Section V provides a brief summary and conclusions.
II Theories of Shortage in a Particular Labour Market
The first-pass reaction of most economists to the assertion that there is a shortage in any
market is that this is at most a temporary situation unless the price of the good and service in
question is restrained. If not, the price will increase, demand will be dampened, supply will be
encouraged and excess demand will be removed. The market will clear.2
It does not appear that this view is consistent with the comments of those who argue that
certain labour markets, such as the ICT market, are experiencing shortage. Such comments
typically come from information provided by employers who say that they are offering attractive
jobs with no (or few) takers. They typically say that they believe this situation will last some
time.
Why do wage offers not increase in this situation? The following reviews the arguments,
familiar to most economists, as to why an increase in the wage might be restrained and hence
insufficient to clear the market.
An introductory economics supply and demand example often uses a commodity
example such as apples. Not surprisingly, most of the explanations as to why the market might
not clear for ICT workers hinge on the differences between workers and such commodities.
Workers are very heterogeneous and the matching problem between workers and firms is much
more complex and important than the matching problem between consumers and apples. Also,
2
The vast majority of current discussion about the labour market not clearing is not about labour shortages in specific markets but rather about generalized unemployment. 3 workers have human feelings which, among other things, affect productivity, especially as they
typically work in teams.
One class of explanations that can lead to a worker shortage is imperfect competition
among employers. In the case of a single, monopsony employer, the value of the marginal
product of a worker can be much lower than her/his wage, because the employer will make a
larger profit by keeping wages down. If the existing wage could be maintained, the employer
could earn more profits, but there will be no more workers unless the wage is increased.
While monopsony is an extreme case, there can be cases with relatively few employers
where market power works in much the same way, although to a lesser extent. Indeed if such
employers collude, the monopsony situation can be replicated3, but even if they do not, each firm
does not hire as many workers as it would in a competitive labour market because incremental
hires drive up the wages it pays. Burdett and Mortenson (1998) showed that this same effect can
be relevant in search models with many workers and firms: such matching models have
individual workers bargain with firms with an end result that workers are paid less than their
marginal products and firms would hire more labour at the wage they are paying, provided hiring
costs are small.
There are some critical factors that contribute to the possibility of excess demand for
workers in an industry. Perhaps most important is the presence of existing workers at each firm.
The standard supply and demand model would predict that if demand goes up for such workers,
their wages would go up, or otherwise they would go to positions at other firms. But in a world
with imperfect competition for labour and/or frictions (including imperfect information), this
3
It is striking that hiring a worker from another firm is sometimes called “poaching”. Firms may have tacit agreements not to poach. A group of former employees of Apple, Google and Intel are suing over anti-­‐poaching agreements which they see as unfair restraint of trade. See Cheng (2013). 4 won’t happen. Now consider a new hire, quite possibly no more skilled than existing workers
and certainly lacking in experience specific to this particular firm. If a firm offers a higher salary
to a new employee than it is paying to its current employees, it risks a backlash, a general fall in
morale and productivity and perhaps the loss of existing employees freshly informed about the
potential value of their services. Anticipating this, the firm does not offer a higher salary and
ends up with vacancies, which it would be like to fill, but only at existing wage rates.
Another factor particularly relevant to ICT is that the tasks of some positions are ever
changing in a dynamic economy and require ongoing training. While this can allow more offer
flexibility to some employers, who will be able to convince their existing employees that the new
hire is different in that she/he has a new and necessary skill, it also makes them particularly
vulnerable to the turnover effect just discussed. It also may make firms less likely to hire new
employees who might have been attracted only by a higher offer (as opposed to other aspects of
an offer such as working conditions), for fear that such employees will only absorb costly
training and then move on to the next high offer.
A third factor may be a volatile economy, as we have just experienced. Employers have
just been schooled in the difficulties in lowering nominal wages during a low-inflation downturn.
If nominal wages are downwardly rigid, it implies that an employer with foresight will want to
be more reluctant to offer high wages to incoming employees.
Finally, any price signals that due arise from excess demand are inevitably blunted by
marginal tax rates.
In summary, there may be situations in certain labour markets where demand has risen
quickly yet firms are slow to raise wages, leaving a situation where young potential employees
5 choosing their fields may receive encouraging signals about job availability but muted signals
about compensation. For ICT workers, this would be a theoretical explanation as to why a
shortage could persist. Nonetheless, it would seem likely that with a shortage eventually wages
would increase, albeit by not enough to eliminate the shortage. If the underlying change is an
increase in demand for (as opposed to a reduction in the supply of) ICT workers, we would also
expect an increase in the number of ICT employees. Section IV includes some preliminary
evidence on this question for Canada.
III Government and Educational Institutions
There are two main areas where government policy towards an individual interacts with
occupation. The first is immigration policy. If new immigration targets certain occupations, it
potentially could worsen labour market outcomes for Canadian residents already in that
occupation. At the same time it might improve the position of firms who require employees in
that occupation. Regardless, for a given level of immigration, it seems obvious that the most
constructive approach is likely to tilt immigration towards occupations where there are
vacancies.
The second interaction is training or education. ICT training for those who are
unemployed and who have the required underlying skills seems likely to be desirable. This is an
alternative to the price system in moving workers from an occupation in which there is surplus to
an occupation in which there is shortage. As noted the tax system and market rigidities may
hamper that reallocation so there is a clear argument for government programs to encourage it.
However by far the bigger issue is the role of the education systems, both K-12 and postsecondary, in helping individuals match the labour market. Most of the attention seems to have
6 been focussed on that system steering individuals into occupations with few vacancies. Such
labour market mismatches with broad excess supply occur in public sector areas such as for
teachers, police officers and firefighters. But there are quasi-public sector areas such as those for
health professionals, where the educational system applies strict inflow controls and there is
often no surplus. And there are private sector occupations, such as lawyers and performing
artists, where there appears to be considerable surplus. This all may be due to poor information
flows or poor decision making, although an alternative view is contained in Alstadsæter (2009)
who argues that there are large consumption values attached to certain occupations. (She studies
in depth the case of Norwegian teachers.)4
4
Very tangentially, a conceivable policy option for educational programs where there is a low probability of subsequent field-­‐related employment would be to impose as a condition of the public subsidy mandatory training in a field with more employment opportunities. For example, those in teacher college could be required to take more ICT courses 7 IV Can the shortage be identified in taxfiler data?
While an ICT worker “shortage” may not be consistent with a strict interpretation of the
standard supply and demand model, a shortage generated by an increase in labour demand would
still suggest that (a) the number of ICT workers should be increasing relative to the number of
other workers and (b) the wage incomes of ICT workers should be increasing relative to other
workers, albeit perhaps not quickly enough to clear the market. (If the reason for the shortage is
a reduction in supply of ICT workers, there could be fewer ICT workers but the prediction of
increased wage incomes would be maintained.) I now present some exploratory and extremely
preliminary results using Canadian taxfiler data (the Statistics Canada Longitudinal
Administrative Database) from 2000 to 2010. They may not be cited.
The Longitudinal Adminstrative Database (LAD) is an anonymized, annual 20% sample of
taxfilers for Canada from 1982 to 2010. The analysis in this study begins in 2000, the first year
the LAD includes the North American Industrial Classification System (NAICS) Code discussed
in the next paragraph. While all records are linked longitudinally, the following only uses cross
sectional analysis. Each cross section contains close to 5 million tax records.
While occupation is not available for all workers in these data, from 2000 to 2010 there is
industry 3-digit coding using the North American Industrial Classification System (NAICS).
Hence this exploratory analysis will focus on workers in industries with NAICS codes 517
(Telecommunications) and 518 (Data processing, hosting, and related services.) Intended
occupation is available for immigrants at time of landing. Hence for some of our analysis we will
8 focus on immigrants in NAICS 517 and 518 who landed with intended occupation National
Occupation Code 217 (Computer and information systems professionals).5
Unfortunately although understandably, NAICS changes three times during the sample.
The 1997 classification is used for 2000 and 2001, the 2002 classification is used for 2002 to
2006 and the 2007 classification is used for 2007 to 2010. The classification changes apply at the
4-digit and 5-digit level and cannot be controlled for within the LAD, which only uses the
NAICS 3-digit level. To give an example, in 2002, NAICS 518 contained Internet Service
Providers, Web Search Portals as well as Data Processing, Hosting and Related Services but by
2007 it only included Data Processing, Hosting and Related Services with Internet Service
Providers moved to NAICS 519. Hence it is obvious that these results must be treated as
preliminary and with caution.
Noting all the above problems, the first two figures give the industry changes with
respect to number of taxfilers. Turning to the first graph for NAICS 517, the lowest (red) line
shows the number of NAICS 517 filers as a percentage of the 2002 number. The second lowest
(blue) gives the comparable value for all filers. These data suggest that there has been no rush
into NAICS 517 and, while there may have been an effect from the 2002 NAICS reclassification,
there is no obvious effect from the 2007 NAICS reclassification. There appears to be a reduction
in NAICS 517 employees in 2010.
The second highest (purple) line shows that there are more immigrants in NAICS 517
than in 2002 and the highest (orange) line shows that there are more immigrants in NAICS 517
5
An immigrant is defined as someone who attained landed immigrant status from 1980 to 2010. 9 who had intended occupation NOCS 217. Indeed the orange line shows that this last number
more than doubled from 2002 to 2009, but there is also a dropoff in 2010.
.
Turn to the next preliminary figure for NAICS 518. Again we can see that there is no
obvious evidence that the number of filers in NAICS 518 has grown. There is a bump in 2007
which coincides with the 2007 reclassification, although we note that the 2007 NAICS 518 was a
subset of the 2002 NAICS 518. Moreover the bump continued in 2008. However, as for NAICS
517, there appears to have been a reduction by 2010.
The 2007 and 2008 bump coincided with a bump in immigrant workers in this industry as
well as a larger bump in immigrant workers with intended NOCS 217. Again there is a fall by
2010.
10 Now we turn to the information on wages, by which we mean the LAD value for average
annual real labour income for those with labour income. We note again that a wage increase is
the stronger prediction associated with a labour shortage, as it will be the outcome whether the
cause of the shortage is an increase in labour demand or a reduction in labour supply. Here the
preliminary figures suggest that relatively little has happened in NAICS 517. There appears to be
an uptick in 2010, although with only one year, it is hard to assess its importance.
11 For NAICS 518, the picture is quite different. There appears to have been a large increase
2005 to 2008, and the timing suggests it cannot all be attributed to a reclassification. However,
all the estimates for real wages in NAICS 518 stopped increasing in 2008 and 2009 and there is
some evidence of a tailing off in 2010.
To summarize this section, these preliminary data suggest that there have been some
increases in the number of employees and wages in NAICS 518 (Data processing, hosting and
related services) but by 2010 both number of employees and wages seemed to have decreased
from earlier highs. In NAICS 517 (Telecommunications) the trends in both series seem to be
fairly flat, with a decline in employees in 2010 and the few years preceding and some sign of an
uptick in wages in 2010. Information and Technology Council (2011) uses a special tabulation of
the Labour Force Survey (by occupation, not industry) and also finds a decline in employment
for computer technicians, software engineers, computer engineers and computer information
systems managers in 2010. However, the study does find a fairly large increase in the number of
12 computer employers and modest increases in database analysts and database administrators and
information systems analysts and consultants as well as a small uptick in the number of electrical
and electronic engineers after a recent significant decline. Of course to the extent any numbers
suggest that the shortage of ICT workers in 2010 was not acute, this may simply be a reflection
of the ongoing effects of the macroeconomic crisis.
V Conclusions
The main purpose of this study was to examine whether the Longitudinal Administrative
Database would provide useful information about labour shortages in the Information and
Communications Technology industries. As a by-product, some discussion of the nature of
labour shortages was included. Some models suggest reasons why labour shortages are not
eliminated by wage increases. Nonetheless it would be expected that over time a labour shortage
would be alleviated by increased wages and, if driven by an increase in the relevant labour
demand, increased hires.
Very preliminary and exploratory evidence, which is not ready for citation, provides
limited evidence of this occurring earlier in the decade. However, for the two industries studied,
North American Industry Classification (NAICS) code 517 (Telecommunications) and NAICS
518 (Data processing, hosting and related services), there is some suggestion that by 2010, the
number of employees is actually falling. The only occupational information available is for
immigrants, who provide intended occupation upon landing. For immigrants in these industries
with National Occupation Classification System (NOCS) code 217 (Computer and information
systems professionals) and indeed for all immigrants in this industry, there was some increase in
employment earlier in the decade but again there is a suggestion of a fall in 2010.
13 The stronger prediction from the basic theory is that a labour shortage will lead to an
increase in wages, although not necessarily a large enough one to eliminate the shortage.
Whether one looks at the industry as a whole or immigrants with NOCS code 217, there is some
evidence of this occurring earlier in the decade in NAICS 518 (Data processing, hosting and
related services) but not in NAICS 517 (Telecommunications). However the wage surge in
NAICS 518 has largely reversed while there is a slight bump for NAICS 517.
Again we emphasize that the preceding numbers are preliminary, exploratory and not to
be cited. As noted, the main purpose of the study was to determine the applicability of the LAD
data in this context. One issue is that the NAICS codings change over time. Hence a useful next
step may be to follow a cohort of workers, perhaps young workers, who were in the industry in a
particular year and study the time path of their employment and wages in comparison to a similar
cohort of workers not in that industry. We are pursuing this avenue.
Similarly, it may also be useful to follow immigrants in the LAD. Immigrants are a group
of independent interest. They are also the only group for which there is LAD information on
occupation (albeit intended occupation on landing), they might be “markers” of changes in
labour market tightness by occupation. In the case of ICT, it might be useful to follow a cohort of
immigrants with an intended ICT occupation who first work in an ICT industry, and compare
that cohort to other immigrants without an intended ICT occupation. We are also pursuing this
approach.
14 References
Alstadsæter, A. (2009) “Measuring the consumption value of higher education,, CESifo Working
Paper 2799.
Burdett, K., & Mortensen, D. T. (1998) “Wage differentials, employer size, and
unemployment,”International Economic Review, 257-273.
Cheng, J. (2013), “Angry over employee poaching, Steve Jobs threatened Palm with patent suit,”
Arstechnica, January 23. http://arstechnica.com/apple/2013/01/angry-over-employee-poachingsteve-jobs-threatened-palm-with-patent-suit/ as accessed March 1, 2013.
Deloitte (2012), The Future of Productivity in Canada,
http://www.deloitte.com/view/en_CA/ca/pressroom/ca-pressreleasesen/a072cc796ba1a310VgnVCM1000003256f70aRCRD.htm as accessed March 1, 2013.
IBM (2012), Fast Track to the Future: The IBM 2012 Tech Trends Report,
https://www.ibm.com/developerworks/mydeveloperworks/blogs/9a1ba618-dfdd-45af-b55ead7f6442045/entry/fast_track_to_the_future_the_ibm_2012_tech_trends_report10?lang=en as
accessed March 1, 2013.
Industry Canada (2010), Improving Canada’s Digital Advantage: Strategies for Sustainable
Prosperity, http://publications.gc.ca/collections/collection_2010/ic/Iu4-144-2010-eng.pdf as
accessed March 1, 2013.
Information and Technology Council (2011), Outlook for Human Resources in the ICT Labour
Market, 2011-2016. http://www.ictc-ctic.ca/wpcontent/uploads/2012/06/ICTC_Outlook2011_EN_11-11.pdf as accessed March 1, 2013.
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