April 2009 - Spring Issue
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The Economic Importance of High-Tech Industry in Arizona

William P. Patton, PhD

The importance of the high-tech sector in Arizona cannot be overstated. High-tech industries are major sources of employment and income, provide high wage jobs, and support new company spin-offs, as well as new product development. Moreover, innovative high-tech industries may be better equipped to compete in the global market place than traditional industries such as manufacturing. Finally, a healthy high-tech sector can be an engine of regional economic growth and development. This article updates and expands on data and analysis provided in our article “High-Tech Powers Arizona’s Economy,” from the July 2006 issue of Arizona’s Economy. 

In 2007, high-tech industries employed 278,700 workers, accounting for 11% of total employment in Arizona. While high-tech accounted for 11% of employment, high-tech industries contributed $20.3 billion to payrolls, 18% of the total payroll for all industries in 2007. The average wage for all high-tech industries combined is 75% higher than the average wage for all industries. In 2007, the average annual wage for high-tech industries was $72,700 vs. $41,600 for all industries.

This positive divergence between employment and payroll shares is even more pronounced in the high-tech manufacturing sector. High-tech manufacturing firms tend to be larger than traditional manufacturing firms with the average employment in high-tech manufacturing companies being 2.5 times than that in non-high-tech manufacturing firms. In 2007, there were 900 high-tech manufacturing firms in Arizona, accounting for 18% of the total number of manufacturing firms and 47% of the employment in the manufacturing sector overall. However, high-tech manufacturing payrolls totaling $6.4 billion were responsible for a whopping 60% of all manufacturing payrolls and 6% of total payrolls in the state.

The average annual wage for high-tech manufacturing industries was $80,100. This is 37% higher than the average annual wage rate for the entire manufacturing sector, and almost double the average annual wage rate for all industries in Arizona.

Table of Contents

Identifying High Tech Industries
Importance of High-Tech Industry in the Arizona Economy
Employment in High Tech Industries
High Tech Industry Payrolls
High Tech Industry Wages
High Tech Industries with High Employment Concentration in Arizona
Future High Tech Industries in Arizona
Recruiting and Growing High Tech Industry in Arizona
Conclusion

Identifying High Tech Industries

The high tech industries examined in this study were selected on the basis of a 2005 Bureau of Labor Statistics (BLS) study that identified 46 4-digit NAICS industries as high tech industries. The BLS classified industries as high tech on the basis of the employment of technology-related workers by each industry. The proportion of technology-related workers to total employees in high tech industries must exceed 2 times the average proportion in all industries combined (for a more detailed description of the BLS high tech industries, refer back to the original article in the high tech article in  Arizona’s Economy, July 2006).

Importance of High-Tech Industry in the Arizona Economy

High tech firms constitute a significant share of the total firms in Arizona. In 2007, there were 16,000 high tech firms, which accounted for 11% of the 149,900 total establishments in Arizona.

High tech manufacturing firms are extremely important to the Arizona economy because they offer extremely high wages and tend to be larger than traditional manufacturing firms. In 2007, there were 900 high tech manufacturing firms in Arizona.  These companies represent 18% of the total number of manufacturing firms. In addition, the average employment in high tech manufacturing companies is 2.5 times that in non-high tech manufacturing firms.

Employment in High Tech Industries

High tech industries employ a significant portion of the state’s workforce. In 2007, high tech industries employed 278,700 workers or 11% of the state’s total employment (2,647,100 workers).

High tech manufacturing employment constitutes nearly half of all of the employment in manufacturing industries. In 2007, there were 79,500 jobs in the high tech manufacturing sector. This amounts to a 47% share of total manufacturing employment.

Table 1

The high tech industries with the highest levels of employment are shown in Table 2. Aerospace manufacturing, semiconductor & electronics manufacturing, and management of companies and enterprises all employed roughly 27,000 workers in 2007. Navigation and control instrument manufacturing was a distant fourth place with 12,800 employees. The only other high tech industry with more than 10,000 employees was wired telecommunications carriers.

Table 2

The fastest growing high tech industries tended to be small industries with rapid growth from a small base. Table 3 shows the fastest growing high tech industries over the period, 2001-2007. While these industries experienced extremely rapid annual average growth rates, they all started from a small base and all of them currently employ less than 1,000 workers.

Table 3

A better measure of employment growth is the overall change in employment over time. Table 4 shows the high tech industries that had the highest gain in employment over the period, 2001-2007. With the exception of navigation and control instrument manufacturing, all of the highest growth industries were professional services related.

Table 4

The high tech industries with the largest employment losses from 2001-2007 are listed in Table 5. The semiconductor industry lost 13,459 jobs over this period. Wired telecommunications lost 4,203 jobs, while aerospace and computer manufacturing both lost over 2,000 jobs.

Table 5

High Tech Industry Payrolls

High tech firms pay a large share of Arizona’s total wages. The payrolls of high tech companies in Arizona represent a significant portion of all the payrolls generated by all firms within the state. In total, high tech industries contributed $20.3 billion of payroll in 2007. This amounts to 18% of the total payrolls for all industries.

Similarly, high tech manufacturing payrolls totaled $6.4 billion or 6% of total payrolls in the state. However, high tech manufacturing payrolls constituted the majority of the payrolls from the Arizona manufacturing sector. In 2007, high tech manufacturing contributed a whooping 60% of all manufacturing payrolls.

The reason that high tech manufacturing industries create such large payrolls is that they employ high wage workers and are 2.5 times larger than non-high tech firms.

Table 6

High Tech Industry Wages

High tech industries, particularly those in manufacturing, pay extremely high wages as compared with other industrial sectors.  The payroll per employee is often used as a proxy for wages by industry. Table 7 shows the payroll per employee (PPE) for high tech industries vs. the average for all industries.

The average wage (PPE) for all high tech industries combined is 75% higher than the average wage for all industries. In 2007, the average annual wage for high tech industries was $72,700 vs. $41,600 for all industries.

Similarly, high tech manufacturing industries offer significantly higher wages than any other sector in the Arizona economy. The average annual wage for high tech manufacturing industries was $80,100. This is 37% higher than the average annual wage rate for the entire manufacturing sector, and almost double the average annual wage rate for all industries in Arizona.

The overall wages in Arizona tend to be lower than the U.S. average. The second column of Table 7 shows the Arizona wages as a percent of the U.S. by industrial category. The average annual wage for all industries in Arizona is 93% of the national average. The average wage for the total Arizona high tech sector is 91% of the U.S. average. Average annual wages in Arizona’s manufacturing and high tech manufacturing sectors both exceed the national average.

Table 7

The high tech industries offering the highest wages are listed in Table 8, along with their average annual wages (PPE). The wages for all of these industries exceed the $41,600 average annual wage for all Arizona industry sectors by a wide margin. The highest paying industry is satellite telecommunications with an annual wage of $102,000.

Table 8

High Tech Industries with High Employment Concentration in Arizona

A location quotient is used to identify the regional employment concentration in a particular industry as compared to the same industry for the nation as a whole. The regional location quotient for an industry is calculated by taking the local industry’s share of total regional employment, divided by the industry’s share of national employment.

A location quotient greater than one indicates that regional employment in an industry is relatively more concentrated than it is at the national level. The higher the location quotient, the more concentrated the regional employment in an industry.

The Arizona high tech industries with the highest employment concentrations are shown in Table 9. Semiconductor and electronics, and aerospace manufacturing have the highest employment concentrations. Their respective location quotients indicate that their employment levels are roughly 3 times higher than the U.S. average. Navigation and control instrument manufacturing, and facilities support services have employment concentrations 50% higher than the national average.

The average annual growth rates for the industries with the highest location quotients are shown in the second column of Table 9. Unfortunately, semiconductor manufacturing and aerospace manufacturing, the two high tech industries with the highest employment levels in 2007 have been losing employment over the period 2001-2007. Semiconductor manufacturing and aerospace manufacturing lost 13,500 and 2,800 jobs, respectively, over the 2001-2007 period.

 Table 9

It is evident from the information presented in this report that there are three high tech manufacturing industries that are especially important to the Arizona economy: aerospace, semiconductors and control instruments. These three industries have high levels of employment, offer high wages, and have large location quotients. Figure 1 shows the employment in each of these industries over the period 2001-2007.

Semiconductor and electrics manufacturing employment dropped from 40,600 jobs in 2001 to 27,150 jobs in 2007. The Arizona semiconductor industry suffered a steep decline in employment in 2002 and 2003. This was related to a worldwide downturn in the semiconductor market. Employment levels have remained relatively flat since that time. However, Arizona’s semiconductor and electronics industry remains susceptible to conditions in world wide commodity markets.

Major semiconductor companies with a presence in Arizona include: Intel, Motorola, Freescale Semiconductor, Microchip Technology and On Semiconductor. Texas Instruments used to have a significant presence in Arizona, but it has radically scaled back its operations in the state.

Aerospace manufacturing employment declined from 30,240 jobs in 2001 to 27,420 jobs  in 2007. Currently aerospace employment is slightly higher than semiconductor employment. Aerospace manufacturing employment is affected by conditions in civilian aviation markets and by defense contracting.

Important aerospace companies in Arizona include: Raytheon Missile Systems, Honeywell Aerospace, Boeing, and Northrop Grumman.

Control instrument manufacturing, on the other hand, has been experiencing a gradual increase in employment over the years 2001-2007.  Employment in control instrument manufacturing totaled 12,800 in 2007. This is a significant amount of employment, but it still amounts to less than one-half of the employment in aerospace or semiconductor manufacturing.

Major Arizona control instrument manufacturing companies include: Honeywell, General Dynamics, Medtronic, and Universal Avionics.

Figure 1: Employment in Aerospace, Semiconductor and
Control Instrument Manufacturing in Arizona
2001-2007

Future High Tech Industries in Arizona

The future of economic development in Arizona is going to be heavily impacted by the state’s ability to attract, retain, expand and start up high tech industry. The aerospace, semiconductor and electronics, control instruments manufacturing industries will undoubtedly continue to play major and important roles in Arizona’s economic future. However, other high tech industries are expected to increase their size and importance over time.

Several of these emerging technologies will involve heavy emphasis on science and engineering occupations, as well as requiring significant research and development activities. Some of the likely emerging industries in the future are bioindustries, optics, and nanotechnologies. Arizona’s three universities will play major roles in supporting the requirements of these industries by preparing highly skilled technical workers and by performing R&D activities.

Another cluster of industries that is likely to have a significant presence in the future is “green” or sustainable industry. This would include environmental technologies, renewable energy, and water resource management. It is likely that solar energy manufacturing and power generation will add jobs in Arizona due to the fact that Arizona’s solar resources are among the best in the country.

Recruiting and Growing High Tech Industry in Arizona

High tech industries value many of the same location factors as non-high tech industries. Ideally, they would like to locate in a place with low operating costs (labor, transportation, taxes, materials, etc.). They would also like to have good access to their markets and to sources of specialized inputs. However, high tech industries have additional requirements that are critically important to their business location decisions. Table 10 highlights important high tech location factors that they take into consideration when they choose their business location.

Table 10 – High Tech Industry Location Factors

1. Availability of a highly skilled and educated workforce
2. Location in urban areas
3. Access to strong universities
4. Access to air transport
5. High concentration of R&D activity
6. Availability of capital (especially venture capital)
7. High quality of life

The most important of the location factors for high tech firms is to have a highly skilled and educated workforce in the region. Since their workforce is critically important to the success of high tech businesses, they like to locate in areas with strong universities that can produce educated employees. The also like to locate in urban areas with a good overall quality of life. This helps them to retain workers who might otherwise move elsewhere.

Conclusion

High tech industries are major economic drivers in Arizona. They are major sources of jobs and major generators of state payrolls. High tech industries offer high wages and employment growth opportunities for Arizona’s citizens. A healthy high tech sector will improve Arizona’s competiveness in global markets.

Arizona’s ability to attract, expand and retain high tech industries is going to depend on its ability to maintain a strong educational system from K-12 through graduate school, and on its ability to create and retain a high quality workforce.