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High-Tech Powers Arizona's Economy
William P. Patton and Marshall J. Vest
May, 2006
William P. Patton, Ph.D., is Chief Economist for Tucson Regional Economic Opportunities (TREO), a loaned executive from Tucson Electric Power Company. Marshall J. Vest is Director of the Economic and Business Research Center, Eller College of Management, The University of Arizona.
The high-tech sector is an important component of the Arizona economy. It is a major source of employment and income in Arizona, and is considered to be a vital component of the state’s economic future. Research from the Milken Institute i , shows Arizona to be a “second tier” state with a ranking of 17 among all states, and they note that “the new engine of regional economic prosperity is based on how successful a given location is in attracting and expanding technology and science assets and leveraging them for economic development.”
This article examines the role of the high-tech sector in the Arizona economy, using new data and a fresh definition of what constitutes high-tech activity. Specifically, it discusses: 1) the magnitude of Arizona’s high-tech industry, 2) the definition of high-tech industries, 3) the wage structure of high-tech industries compared to that of the state’s overall industries, 4) the fastest growing high-tech industries, 5) the high-tech industries with the largest employment concentration, and 6) the major companies which comprise the high-tech industries that have the highest employment concentration.
Table of Contents
How important is high-tech in the Arizona economy?
In 2004, there were 14,140 high-tech establishments in Arizona. This represented 11% of the total number of establishments in Arizona. These include firms in service and information sectors as well as manufacturing. The state’s 839 high-tech manufacturing firms accounted for only 1% of the total firms in Arizona, but they comprised 18% of the state’s total manufacturing firms.
The high-tech sector provided 251,277 jobs in Arizona in 2004. 11% of all Arizona workers were employed in high-tech industries. The high-tech manufacturing sector employed 3% of all workers in Arizona, but it represented a substantial share of the state’s total manufacturing sector. The proportion of Arizona manufacturing employment in high-tech industries was 44% of total manufacturing employment, even though high-tech firms accounted for only 18% of the total number of firms engaged in manufacturing. This situation is explained by the fact that that the average number of employees in high-tech manufacturing was 2.5 times the number in a typical manufacturing company.
Arizona’s high-tech industries contribute a massive amount of earnings relative to other industries. In 2004, the Arizona high-tech sector generated over $16 billion in total wages or 19% of the State’s total wages. This huge amount of earnings results from the fact that high-tech firms tend to be both larger than other firms and pay significantly higher wages than firms in other sectors. The total wages in the high-tech manufacturing
sector represent a whopping 61% of all the wages paid in the Arizona manufacturing sector.
What is high-tech?
How does one determine which industries are high-tech? Various studies have used a number of methods to do so, and each method produces different lists of industries. Criteria commonly used include the intensity of technology-oriented workers; the proportion of R&D employment; whether “advanced-technology” products are produced; and the use of high-tech production methods and processes.
In a study published last summer ii , the Bureau of Labor Statistics identified some 46 four-digit NAICS industries iii , based on employment of technology-oriented workers. Included are occupations such as computer and mathematical scientists; engineers; drafters, engineering and mapping technicians; life scientists; physical scientists; life, physical and social science technicians; computer and information systems managers; engineering managers; and natural science managers. An industry is considered high-tech if “employment in technology-oriented occupations accounted for a proportion of that industry’s total employment that is at least twice the 4.9 % average for all industries.”
Within this definition, three levels are identified: Level I includes 14 industries with intensity at least 5 times the average; Level II includes 12 industries with intensity between 3.0 and 4.9 times; and Level III includes 20 industries with a proportion between 2.0 and 2.9 times the average. See table listing all 46 industries.
The Arizona data used for this article come from annual data published by the Bureau of Labor Statistics iv . These special tabulations of 4-digit NAICS employment are available annually from 2001-2004 aggregated to the state level. No sub-state data is tabulated.
Quoting from the Bureau of Labor Statistics study, “these high-tech industries are a heterogeneous group in terms of production processes and output, covering a broad range of industries. Level I includes the computer and electronic products, aerospace, and pharmaceutical and medicine manufacturing industries; the computer software, Internet, and data processing industries in the information sector; and three professional, scientific, and technical services industries. Levels I, II, and III combined cover all four-digit industries within computer and electronic products manufacturing (NAICS 334), as well as merchant wholesalers of professional and commercial equipment and supplies (a category that encompasses wholesalers of computers, software, and some electronic instruments). Levels I, II, and III combined also include all but one of the telecommunications industries within the information sector, four machinery-manufacturing industries, and all but one industry in chemical manufacturing. Finally (but not exhausting the list), included as well are (1) four industries within professional, scientific and technical services; (2) the Federal Government except the Postal Service; (3) all three pipeline industries in NAICS 486; and (4) management of companies and enterprises, a category with no equivalent in the SIC. Biotechnology and nanotechnology are not on the list of high-tech industries, because they are not identified as industries in the NAICS. Most biotech companies are located in scientific R&D services or pharmaceutical and medicine manufacturing industries, according to a recent Commerce Department survey. No similar information has been found regarding nanotechnology.”
Many of the above “technology-oriented-occupation intensive industries” are also R&D intensive, and many are identified as producing high-tech products. BLS researchers note the lack of data for preventing incorporation of other input or output measures into the definition.
How do high-tech wages compare to other sectors?
The wage structure in the Arizona high-tech industries is significantly higher than that of most other sectors of the state’s economy. The 2004 average annual wage in Arizona for all industries was $36,646. The average annual wage for high-tech industries was $63,687 or 74% higher than the state-wide average. The average annual wage for high-tech manufacturing was even higher. At $72,669, the Arizona high-tech manufacturing wage was almost double the average annual wage rate for Arizona. The average annual wage rate for high-tech industries and high-tech manufacturing industries grew 4% over the period 2001 to 2004. It is interesting to note that the annual wage rate continued to display solid growth even though employment fell over the same period.
The highest wage high-tech industries in Arizona are shown in Exhibit 1:
High-Tech Industries with Highest Wages in Arizona
Which high-tech industries are growing the fastest?
The following table shows the Arizona high-tech industries with the highest rate of employment growth over the period 2001 to 2004. Interestingly, communications-related industries were the fastest growing segments over the past several years. However, the top three fastest-growing industries together accounted for less than 500 jobs. Of the top 12 fastest growing high-tech industries, only Navigational Equipment with 12,083 employees and Management, Scientific, and Consulting Services with 16,839 employees had more than 1,000 total employees.
Ironically, Arizona’s two largest high-tech industries— Aerospace and Semiconductors —declined at annual average rates of 4% and 13%, respectively, over the period 2001 to 2004.
High-Tech Employment Growth in Arizona
Does Arizona have a high concentration in any high-tech sectors?
Arizona has employment concentrations that exceed the US average in several industries, as measured by location quotients. A location quotient is calculated for each industry by dividing the ratio of regional employment in that industry to total regional employment by the corresponding ratio for the US. If the location quotient is higher than one, then there is a higher than average concentration of that industry in the region than in the nation.
The following table shows the high-tech industries that had location quotients greater than one in 2004. Only two industries, Aerospace and Semiconductors, have location quotients that indicate extremely highly concentrations in Arizona. Both industries have employment concentrations that are more than three times that for the nation as a whole. Two other industries, Instrument Manufacturing and Internet Services, had location quotients greater than 1.5.
High-Tech Industries with Concentration in Arizona
What major companies comprise the Aerospace, Semiconductor, and Instruments manufacturing sectors?
The industries with the largest employment concentrations in Arizona include a number of well known and highly respected companies. The Aerospace industry includes such notable companies as Raytheon Missile Systems, Honeywell Aerospace, Bombardier Aerospace, Boeing, Northrop Grumman, Orbital Sciences, Sargent Controls & Aerospace, and Dunn Air. The Semiconductor industry includes Intel, Motorola, Texas Instruments, Freescale Semiconductor, Microchip Technology, and ON Semiconductor. The Instruments Manufacturing industry features Honeywell, General Dynamics, Medtronic Microelectronic Center, and Universal Avionics Systems.
A high regional concentration in one or two major industries can at times be either a blessing or a curse. When an industry is experiencing a strong market, it is a source of economic growth, employment, tax revenue, and wealth generation for the region. However, when the market is weak, regional economic growth slows, unemployment rises, housing markets soften, etc. For example, the level of employment in the Arizona semiconductor industry declined from 40,605 in 2001 to 26,738 in 2004 in response to weakened world markets in semiconductors. This loss of semiconductor employment slowed the potential rate of growth in the Arizona economy during the early part of this decade.
Recent trends
Overinvestment in high technology in general and Internet related initiatives in particular during the late 1990s led to unprecedented declines during the first half of this decade. From 2001 to 2004, the number of Arizona high-tech firms grew at a modest 1% annual average rate. However, the number of Arizona high-tech manufacturing firms declined at a 2% annual average rate, slightly slower than the US sector as a whole.
Moreover, the number of Arizona employees in high-tech industries has been declining at a 2% average annual rate since 2001. The rate of decline has been even more pronounced in the high-tech manufacturing sector. Arizona’s high-tech industries have declined at a 6% annual average rate versus a 4% rate for the state’s overall manufacturing sector. The rate of decline in Arizona’s manufacturing sector is similar to that of the United States, where total manufacturing and high-tech manufacturing employment have been falling at 5% and 6% annual average rates, respectively, over the period 2001 to 2004.
In a research report by Tom Rex v , Arizona’s high-tech employment rose 41% between 1990 and 2001, slightly faster than the 33% gain nationwide. During that period, high-tech’s share of total employment declined from 9.1% in 1990 to 8.3% in 2001, while the nationwide share increased. The high-tech definition used by Rex was based on SIC codes and used County Business Pattern data, and therefore is not directly comparable to our NAICS-based analysis.
Overall wages in the high-tech sector grew at a modest 2% annual average rate between 2001 and 2004. US high-tech wages were flat over the same period. Wages in the Arizona high-tech manufacturing sector declined at a 2% average annual rate, identical to the decline in the US sector. However, the growth in the high-tech manufacturing sector held up rather well as compared to that of the US manufacturing sector in general, which declined at an average annual rate of 10% over the period 2001 to 2004.
High-tech really does power Arizona’s economy
The Arizona economy has benefited greatly from the presence of high tech, particularly the Semiconductor and Aerospace industries. These industrial sectors have been major sources of employment, income, and wealth generation in Arizona. A vigorous high-tech industrial sector is a key to Arizona’s economic development strategy.
At the present time, the continued health of the Arizona economy depends, in large part, on the strength of world markets for semiconductors, commercial aircraft, and defense. However, in the future, new high-tech industries such as bio-industries, pharmaceuticals, nanotechnologies, optics, telecommunications, software development, and unidentified industries of the future not yet incubated, will provide high incomes, jobs, wealth, and a more diversified economy that is less susceptible to industry-specific business cycles.
End Notes
i DeVol, Ross and Rob Koepp, “State Technology and Science Index: Enduring Lessons for the Intangible Economy,” Milken Institute, March 2004.
ii Hecker, Daniel E. “High-technology employment: a NAICS-based update,” Monthly Labor Review, July 2005, p 57-72
iii NAICS is the North American Industrial Classification System adopted in the late 1990s to replace the SIC (Standard Industrial Classification) coding system.
iv Employment and Wages Annual Averages, BLS Bulletin 2569.
v Rex, Tom, “High-Technology Activities in Arizona,” Center for Business Research, L. William Seidman Research Institute, W.P. Carey School of Business, Arizona State University, July 14, 2003.
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