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On Pay Raises, It's Google or Bust

The split between the haves and have-nots of the workplace couldn't be more dramatic.

On Nov. 29, President Obama announced a two-year pay freeze for non-military federal workers. And on Dec. 3, the government is expected to confirm that the U.S. unemployment rate remains stuck at 9.6 percent, according to the median estimate of 57 economists surveyed by Bloomberg, which will translate to anemic pay gains. But not at Google (GOOG). The search-engine behemoth, looking to stem the defection of key workers to other hot Silicon Valley employers, announced last month that its 20,300 employees will get a 10 percent wage hike starting in 2011. (Imagine, when will the average employee feel it's a reasonable gamble to walk into the boss' office and demand a 10 percent raise or threaten to walk?) "Google has to preempt the desire for its talented employees to seek work elsewhere," says Richard Florida, director of the Martin Prosperity Institute at the University of Toronto. "I've seen talented employees flee the previous employer of the moment for the next employer of the moment—just ask Microsoft (MSFT)."

With $33 billion in cash and a stock market capitalization of almost $180 billion, Google can afford to throw money and shares at its employees. Yet the significance of Google's across-the-board pay raise extends far beyond corporate competition. It reflects a war for brains and talent that is heating up throughout the information technology ecosystem. Web-based search engine companies, mobile Internet providers, application developers, wireless companies, and other innovative communication businesses are jockeying for position in growing, and profitable, markets. And while the implosion of housing, the bank bailouts, and the divisive politics of fiscal and monetary policy received most of the headlines since 2007, those years also marked the acceleration of the information-intensive creative economy. Google's growth and shared prosperity serve as a punctuation point. "I have been convinced for some time that we are going through a major restructuring of the economy that is much bigger than the difficult time we are going through right now," says Erik Brynjolfsson, director of the MIT Center for Digital Business.

Where Employment Is Up

Certainly, compared with most sectors of the economy, innovation is flourishing in the communications and information ecology. Think Apple (AAPL) and apps. Genentech and tailored pharmaceuticals. Amazon (AMZN) and online retailers. That activity is showing up in jobs and wages. From October 2009 to October 2010 , the number of jobs in computer systems design and related services rose 7.5 percent, according to the Bureau of Labor Statistics, or BLS. Telecommunications employment was up (0.9 percent), as was data processing, hosting and related services (0.5 percent), computer and peripheral equipment (0.7 percent), and communication equipment (0.7 percent).

The split shows up in geography as well. Workers in the most cosmopolitan cities are seeing wage gains. For instance, the average weekly wage increase for all private industry workers in the U.S. from the first quarter of 2009 to the first quarter of 2010 was 1 percent, according to the BLS. Yet average weekly wages in tech-heavy San Francisco over the same period showed an increase of 5.4 percent. The gain in information-rich Washington, D.C., was 2.8 percent. New York City had an 11.9 percent increase, with the biggest pay earned in finance (22.7 percent) and professional business services (10.9 percent). "This isn't about information technology," says Paul Saffo, a longtime Silicon Valley consultant and managing director of foresight at the startup Discern Analytics. "This is about knowledge work."

It's intriguing to note that almost a century ago another pay raise signaled a coming transformation of the U.S. economy. Henry Ford announced on Jan. 5, 1914, that he would double his factory workers' wages, to $5 a day. (He also reduced daily hours worked from 9 to 8.) Ford (F), like Google, had good business reasons for its move: The Model-T assembly line was a brutal place, and in 1913 Ford had to hire 50,448 people to maintain a workforce of 13,623, according to Richard Tedlow, business historian at the Harvard Business School. Paying workers a better wage than they could get elsewhere encouraged loyalty. But the $5 wage also marked the passage toward a mass-production economy where factory workers were "working class" on the job but "middle class" at home, once they shared in the remarkable productivity bounty of manufacturing. And since Smokestack America was such a dominant part of the economy, the benefits spilled into industries outside manufacturing.

Fast-forward to today: The wealth of the emergent knowledge economy or creator economy is being pocketed largely by employers and employees in the creative industries. It's a growing sector of the economy with knowledge work or creative work—people who are paid to think—including everyone from software programmers to scientists to graphic designers. According to Richard Florida, the "creative class" made up 32.1 percent of the American workforce in 2009, up from 28.9 percent in 1998. In sharp contrast, service jobs, typically low-paying work, make up about 45 percent of the workforce. It's an open question whether America will remain a house divided between a relatively well-off knowledge sector elite and everyone else. But there's no doubting that the knowledge economy is one of the few bright spots in the private-sector labor market and is giving some upward momentum to a struggling economy.

Farrell is contributing economics editor for Bloomberg Businessweek. You can also hear him on American Public Media's nationally syndicated finance program, Marketplace Money, as well as on public radio's business program Marketplace.

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