Why data centers have a big impact on the economy

The U.S. presidential election is now only a week away, and if there is one thing that this election is about, it’s jobs. The tech world has had its own running debate about jobs—one focused on the question of just how much large-scale data centers contribute to employment and the economy. After all, not only has the New York Times bemoaned energy use by data centers —using an analysis I’ve argued misses the bigger picture —but it’s also claimed that although data centers may cost hundreds of millions of dollars, they  “don’t bring in very many jobs [since it] takes relatively few people” to run them. It is true that today’s data centers don’t require hordes of on-site staff, but that’s ultimately an incomplete way to look at their impact on employment and the broader economy.

One might calculate the jobs impact of data centers by considering a company that uses its data centers to offer search, mail, video, apps, compute, storage, or other services over the Internet. A large data center might have from 100 to as many as 300 on-site employees. And a large company might have a dozen such data centers, or perhaps a few more, which works out to a couple of thousand jobs. Good, but not earth shattering in today’s economy.

Such a simplistic calculation misses the larger point, however. Although the data centers are but one element of a collaborative organization that includes research & development, marketing, sales, service, and support, those couple of thousand on-site positions help such a company to employ tens of thousands more on a full-time basis offering the services delivered from those data centers, even after adjusting for employees in non-services divisions. Eliminate the data centers and there goes the service delivery; no services, no revenue; no revenue, no jobs. To put it another way, data centers are the physical embodiment of a digital services business that employs many more people than the on-site staff.

Even that argument doesn’t tell the whole story. After all, such companies also have part-time employees, and hire temps, consultants, general contractors, and so forth. Procured components or systems such as chips and storage must be designed, manufactured, distributed, and supported, creating more jobs upstream in the supply chain.

The income from those tens of thousands of jobs also serves to create even more jobs. Presumably, virtually every employed worker pays part of his or her salary to pay taxes and thus employ federal, state, and local government workers or drive stimulus projects that employ still other workers in the private sector. And, most employees buy clothes, order lattes, pay for utilities, and so on. Economists refer to the marginal propensity to consume: the percentage of an additional dollar of disposable income that people will spend, thus creating other manufacturing or service jobs. For example, someone who is deeply in debt and earning minimum wage may have a low marginal propensity to consume, paying down debt rather than rushing out to buy goods and services.

But, in the realm of high tech and data centers, UC Berkeley economics professor Enrico Moretti argues that so-called innovation jobs have a substantial  multiplier effect. He calculates that each job in an innovation industry creates five additional jobs indirectly. A high-tech employee might use part of his or her income to retain a lawyer, who in turn engages an architect, who hires a landscaper, who patronizes a restaurant, and this process continues, ad infinitum. I would argue that it may not be innovation per se that creates the high multiplier, but rather that innovation and high technology jobs (as well as jobs in other professional disciplines, writing bestselling novels, professional sports, etc.) are likely to offer pay higher than minimum wage, and therefore, as higher-paying jobs, correlate to a higher marginal propensity to consume, and thus a greater multiplier effect.  According to the Bureau of Labor Statistics, the average hourly pay in the “Data Processing, Hosting, and Related Services” subsector is more than four times the federal minimum wage.

Consequently, if we are assessing job creation, we shouldn’t just be looking at how many people happen to be walking down the aisles of data centers at a given moment, but the total employment impact—full-time, part-time, and indirect—of high-tech firms whose entire service portfolio is delivered via those data centers. In addition to those firms, in today’s increasingly competitive economy, it is hard to find a company in other sectors, like hospitality, healthcare, petrochemicals, and transportation, among others, that doesn’t in some way benefit from IT either for basic table stakes (say, reservation systems, patient records, logistics, customer relationship management) or to achieve some sort of competitive advantage: think better movie recommendations, more realistic computer graphics animation, faster equities trading, richer customer experiences. This IT, whether delivered through enterprise data centers, outsourcing or managed or cloud services, can help create or preserve jobs as well. Then, there are the pure-play companies in the multi-tenant data center and interconnection space (such as my employer, Telx) which employ not just on-site data center staff, but sales, support, operations, product management, and so forth.

If a firm were a person, one might argue that the data center is its brain. The human brain only weighs an average of three pounds, and thus accounts for only a few percent of body weight, yet uses 20 percent of the body’s oxygen and 25 percent of its glucose. It’s tempting to complain about energy use or to argue that something that only accounts for a few percent doesn’t play much of a role, but this is hardly the case. Similarly, rather than considering only the few percent of a company’s staff that is employed in a data center, understanding the big picture requires considering the enormous multiplier effect that a company’s brain—its data center(s)—has on the whole corporation. In the example discussed, a couple of thousand jobs enable hundreds of thousands of others.

As the world increasingly exploits information technology for innovative services and competitive advantage, the data center is playing a rapidly expanding role in job creation and preservation and the health and recovery of the broader economy.

Joe Weinman is a senior vice president at Telx, the author of Cloudonomics: The Business Value of Cloud Computing, and a regular guest contributor to GigaOM. You can find him on Twitter@joeweinman.