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Home Publications Blogs Beat the Press Netflix Overcomes the Shortage of STEM Workers

Netflix Overcomes the Shortage of STEM Workers

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Wednesday, 15 May 2013 04:10

Undoubtedly everyone has seen stories in the media about how we need to expand high-skilled immigration because we have a shortage of workers with degrees in science, technology, engineering, and math (STEM). Claims of a shortage of STEM workers have been disconcerting to those of us who believe in economics since shortages are supposed to result in rising prices, or in this case, higher wages. We don't seem to be seeing rapidly rising wages in most areas, which makes the claims of shortages dubious.

It turns out that at least one major tech firm has figured out how markets work. Netflix apparently doesn't have any problem hiring STEM workers. It offers higher wages. According to Businessweek:

"Netflix can now hire just about any engineer it wants. That’s a function of the computer science the company does and its reputation as the highest payer in Silicon Valley. Managers routinely survey salary trends in Silicon Valley and pay their employees 10 percent to 20 percent more than the going rate for a given skill."

If Netflix can figure this out perhaps it would be possible for companies like Facebook, Microsoft, and other tech giants to get this down as well. It is always good for a company to get lower cost labor, just like they want to pay less for all of their inputs. But if these companies really need workers, the trick is to offer higher pay. Maybe remedial courses for top management would do the trick.

Comments (18)Add Comment
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written by Chris Engel, May 15, 2013 7:19
So if Netflix has to bid for high-tech labor with a 10-20% markup to industry average, is this indicative of the shortage that you've written isn't there?

How much of a mark-up shows normal market conditions (i.e., no shortage), and how much shows an actual shortage? 10-20% seems high, maybe even the kind of activity that shows there is a shortage?

I definitely don't buy into the shortage argument, I think you've made a solid case for the phenomenon being mostly employers unwilling to pay proper wages to get the labor that is indeed out there. I feel like this Netflix case does support your argument that they need to bid up the wages more to capture the labor that is out there, but it also points toward a shortage by revealing that there are firms bidding up wages to get the labor (which was the point you've always used to demonstrate there is no shortage).

So what is the cutoff between "this is a normal healthy labor market supply" and "this is a labor shortage"? Because 10-20% seems like a mark-up indicative more of a shortage in the market. Or is this a difference between aggregate market data and an anecdotal micro example?
For the Love of God, What Will Tom Friedman Write About if Netflix is Successful?
written by Last Mover, May 15, 2013 7:19
Isn't there some way to find Netflix guilty of sedition as a traitor attempting to overthrow the United States Government?

After all, not only does this heinous economic act mock the claim of structural unemployment and weaken the justification for H1B Visas on grounds of unique skill sources, it also constitutes an attempt to match increased productivity of labor with increased wages.

What's next Mr Who's Your Nanny, free markets that actually work under effective competition and pass on gains from more highly paid productive workers to consumers in the form of lower prices?

Have you no shame sir, no sense of decency whatsoever for the 1% who run this country, not to mention Tom Friedman. What will he do for work now? Get a Mcjob to match his skills?
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written by Kat, May 15, 2013 7:56
Have you no shame sir, no sense of decency whatsoever for the 1% who run this country, not to mention Tom Friedman. What will he do for work now? Get a Mcjob to match his skills?

Lastmover,
What makes you think that Mr. Friedman is qualified for a Mcjob?
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written by Chris Engel, May 15, 2013 8:47
Lastmover,
What makes you think that Mr. Friedman is qualified for a Mcjob?


I'm picturing Friedman with his McHat as the manager of a McDonalds, looking for new hires at the price of $7/hour, complaining about nobody taking the jobs due to a skills shortage.

Then spending his hours in his understaffed McOffice concocting theories about why there's a skills shortage that's responsible for his inability to find McWorkers who want his $7/hr McJob offers.
is Netflix a data point
written by pjm, May 15, 2013 9:47
@Chris, I think I get where you are coming from. From what I know about stats, the point Dean is making about an isolated case has essentially no relation to this section of the labor market as a whole (even if wages at this particular company have gone up).

You would have to see an upward trend in the data for evidence of shortage. How long it takes to collect enough data to a be able to measure a trend (as opposed to random fluctuation) depends on how noisy (randomly fluctuating) the data is.

Also Netflix is probably not big enough (no matter how generous) to effect the aggregate numbers. I.e., citing one company almost certainly cannot provide enough data to demonstrate if there is evidence of a shortage (and corresponding increase in wages) or not.

In short, the type of evidence Dean is talking about would have to be measured in the aggregate (over the labor market in an industry as a whole). Netflix paying more (or less) is anectdotal and so essentially meaningless in terms of the labor shortage debate.
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written by Ellen1910, May 15, 2013 10:39

@ Chris ". . . employers unwilling to pay proper wages to get the labor that is indeed out there."

I don't know about "proper wages," but I think we should presume that the STEM industry is rational. Thus, we can presume that it is paying a wage sufficient to obtain the labor it requires.

Dean's point is that if there were insufficient numbers of STEMers to fill the needs of the industry, the individual firms would be bidding against each other to fulfill their needs. We would see labor compensation rising. That we don't is proof the demand for that labor isn't there.

Perhaps, Dean enjoys his little ironic conceit a bit too much.
STEM wages
written by Jennifer, May 15, 2013 10:59
@Ellen1910 A big issue with STEM jobs, in particular the computer jobs, is immigrant labor. The biggest push behind increasing H1 visas are the tech firms who claim they can't find US labor to fill jobs. Their has been recent data on this suggesting it's not true.
http://www.epi.org/publication...-analysis/
My impression is that in the tech industry entry-level wages are strong-the problem is the older worker who has skills but is expecting more then entry-level wages.
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written by Chris Engel, May 15, 2013 11:19
In short, the type of evidence Dean is talking about would have to be measured in the aggregate (over the labor market in an industry as a whole). Netflix paying more (or less) is anectdotal and so essentially meaningless in terms of the labor shortage debate.


pjm,

This makes sense...sort of. I've emailed Dean regarding this as well. I can see how perhaps it's an outlier and that the true effect of a labor shortage would be seeing that 10-20% markup on the aggregate wages within the sector, not just on an outlier in Netflex.

The flatness of wages was a strong talking point to illustrate that this is not an issue of skills shortage but of managers unwilling to bid up wages. But Netflix might be showing that there is a shortage and once managers actually bid up and compete, that the market is cleared.

So this still strikes me as perhaps indicative of the shortage Dean has otherwise argued well against.
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written by Chris Engel, May 15, 2013 11:27
@Ellen1910, pjm

Let me take another stab at explaining where I'm confused.

We are to believe that there is no skills shortage because wages are flat, right?

If wages _rapidly_ were increasing, that would indicate a skills shortage.

So, on the aggregate, or in individual cases like Netflix, how BIG of a wage increase constitutes "rapid", and thus, a skills shortage? How much of an increase shows good-faith equilibrium in the labor market that clears the supply, and how much of an increase shows a shortage that there is heavy competition for?

10-20% struck me as RAPID and thus indicative of a shortage that required competitive bidding -- but maybe Netflix wasn't competing, just bidding higher because it was easier to clear the talent they needed? Not sure...
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written by freebird, May 15, 2013 12:49
"But if these companies really need workers, the trick is to offer higher pay. Maybe remedial courses for top management would do the trick."
And if unemployed people really need a job, the trick is to accept lower pay. Maybe reducing unemployment compensation would do the trick?

Thankfully I don't believe in economics either, Dean.
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written by PeonInChief, May 15, 2013 12:49
This dumb argument seems to be appearing all over the place. Our local paper ran an article on the difficulty construction firms had hiring workers, now that the economy is recovering--sort of. But down toward the bottom they interview a construction worker who notes that, during the boom, wages averaged $27 an hour, while employers were now offering $16 an hour. And they wonder why workers have moved to other industries. Yeesh!
market supply vs. netflix
written by pjm, May 15, 2013 1:14
Alright you are challenging my memory banks as to basic econ but here goes. A market price has very little relationship to the behavior of one participant in a market. Market prices (and level of supply) arise from an interaction of a large number of actors. That's why the aggregate data is important.

You could make an argument that some single example (i.e. Netflix) is representative and thereby tells you things about the market as a whole, but that is risky (in terms of being wrong).

If anything, I thinks Dean's point/implication is (and it can be confusing) is that Netflix is not indicative of the market, they are doing something atypical. If was typical we would see rising wages in the aggregates (so it doesn't matter if Netflix was paying 100% - if the volume of there purchasing is not sufficient to drive up the market price).

Then there is question:why is Netflix paying more?
Could it be they perceive software talent is in short supply and the want to stock up? Or, is it a prestige thing? A particular theory the management has about the future of the firm or industry or human resources?

So, even if Netflix does believe that there is (or will be) a shortage and acts on that belief (by offering higher salaries), that doesn't make it true (unless Netflix purchasing volume was big enough by itself to affect the market price). Or put it another way, you know the shortage is real when most of the firms that can afford to start offering higher salaries as well.

It appears Tom Friedman IS willing to work for less if pushed, but not at a McJob
written by John Wright, May 15, 2013 3:16
Perhaps some have seen the advertisements for "The Next New World .. A global forum with Thomas L. Friedman" that is scheduled for June 20 in San Francisco.

As of April 24, the tickets were $995.00, but now the tickets are priced at $495.00 with a month to sell the all 400 tickets.

http://www.nytfriedmanforum.com/invitations.php

One has to "Request an Invitation", I'm assuming so only properly qualified individuals can attend.

If Friedman's personal take from this event has dropped in half with the price decrease, maybe he will be more concerned that highly skilled knowledge workers (like TF, of course) will be able to command high wages in the future.

Perhaps there will be other downward adjustments to the invitation price and a more reflective Tom Friedman in the future?

One can hope..
there is a shortage
written by DavidS, May 15, 2013 10:37
Software engineer salaries ARE actually going up pretty quickly (I work in this field) and have been for the last 3-5 years.

It might not show up in the macro statistics for a while, if ever, but there has absolutely been a shortage, and yes, wages are going up. It's generally not possible to hire anyone good for under $150K or so because everyone you'd want to hire already has a job, or is starting his own venture.

Dean should consider a trip to the bay area to see how fast apartment rents and housing sales (now marked by bidding wars) throughout SF city and the valley are climbing as a result.

Another possibly important point is that the skills that most tech firms are hiring for are rarely taught them directly at universities. People who first develop these skills on their own are the ones who often become the best software engineers.

The last point to make is that there is a winner-takes-all aspect to software engineering, since in contrast to those in other fields (such as civil engineering where the engineer cannot mine the ore, cast the steel, or assemble the bridge all on his own), a software engineer can create almost all the economic value by himself, so in practical terms, the output from the best engineers can be orders of magnitude greater than an average engineer.
See http://www.geekmind.net/2012/0...tware.html

This means that everyone wants to find the top 5% of all software engineers and won't bother with the bottom 95%, since it's much more cost-effective to have 2 or 3 really great people @ $400K/each instead of 10-15 average people at $100K each.
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written by liberal, May 16, 2013 7:28
DavidS wrote,
It's generally not possible to hire anyone good for under $150K or so because everyone you'd want to hire already has a job, or is starting his own venture.


LOL. Yes, we can have any definition of "good" we want.

Similarly, universities are hard-pressed to hire Nobel prize winners for their science departments---anyone else doesn't merit the label of "good".
freebird!
written by this is me being generous, May 18, 2013 11:03
...
written by freebird, May 15, 2013 11:49
"But if these companies really need workers, the trick is to offer higher pay. Maybe remedial courses for top management would do the trick."
And if unemployed people really need a job, the trick is to accept lower pay. Maybe reducing unemployment compensation would do the trick?

Thankfully I don't believe in economics either, Dean.

Apparently, though, you believe in debtors' prisons as a labor pool..
Low wage STEM workers...
written by David Helveticka, May 20, 2013 2:39
The word in Silicon Valley for a long time has been: "If you want to pay $60,000 for someone to write code for you, there is no labor shortage; but if you only want to pay, $45,000 for someone to write code for you, you will have to hire H1B Visa workers."
There is no STEM shortage
written by m, May 22, 2013 3:17
(S&E = Science and Engineering)

Individuals with an S&E bachelor’s degree or higher (17.2 million in 2008) or whose highest degree was in S&E (12.6 million in 2008), substantially outnumbered those working in S&E occupations.
In 2008, about two-thirds of those with an S&E highest degree but not working in an S&E occupation reported that their job was either closely or somewhat related to their degree.”

from http://www.nsf.gov/statistics/seind12/c3/c3h.htm

so 1/3 of people, in 2008, with S&E degrees were in unrelated fields. Around 9 million people. This doesn't count the myriad, like myself, who have science degrees, and are out of the work force.

By the way, we are happy to take entry level pay.

The visa holders are prefferred because they are cheaper and much more obedient.

What rational employer would choose an employee over an indentured servant?

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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