Dangerous Territory

05/29/2020 CHRC

Dangerous Territory

For many years, we have been working with clients to explain the difference between labor market differentials and cost of living differentials, two related, but different numbers.  Obviously, Mark Zuckerberg has never called us to ask for a tutorial. Put simply, it explains why a cold Midwesterner might give up a 4,000 square foot house to live in a 1,000 square foot home in San Diego—yet pay the same for both dwellings. While a basket of goods might cost more in San Diego, that same former Midwesterner will gladly pay it because they intend on never wearing a parka again, and spending more time outdoors, in the sun, than inside sheltering from the cold.

Labor costs, on the other hand, are all about the supply and demand of certain skills. If too many former Midwesterners with the same set of skills move to San Diego all at the same time, the labor market floods, and the price for their labor goes down. Perhaps the newly warm people don’t care?

Labor markets have been shifting along geographic lines since the US began to emerge from the 2008-2009 financial crisis. CHRC began to see it when clients would call with one-off jobs that were suddenly experiencing turnover, and they couldn’t believe it was due to an increase in wages, but it was. One project, in particular, clearly painted this new picture. We examined roles at various income levels across the entire US expecting all geographies to converge to a national geographic differential of 0% at some point; for all these geographies, north, south, east, west, rural, urban—they never did. The correlations that compensation consultants had typically seen to explain geographic differentials no longer held.  

Our observations are well explained by the writings of economist, Enrico Moretti, including his book, The New Geography of Jobs. He uses examples to explain how the concentration of industries and human capital in certain areas leads to innovation (e.g. Detroit at the beginning of the 20th Century or Silicon Valley at the end of the century).  

So, what will happen if tech talent is incented away from the Bay Area? Will this de-concentration dilute both talent and innovation? Perhaps it could drive down housing costs and the cost of living (but probably not proportionally). Our advice to Mr. Zuckerberg is that the law of unintended consequences will probably take over; the labor market pricing for talent will hold, people will take their talent to other firms, and move wherever they like.  The new recipients of their talent will innovate with it. Mr. Zuckerberg might very well be left with those workers whose skills are not nearly as in demand, who are less likely to innovate, and who are very grumpy about their cost of living. Read More Here