1. As an Engine for Economic Growth and Employment September 2014 Dr. Robert J. Shapiro

2.  For a generation, information & communication technologies (ICT) have been a major driver of the American economy. Software provides the operating systems and applications for ICT, and therefore has become a central component of most businesses, and their products and services.  This study uses new empirical analysis to assess and measure the economic role of the software industry in growth, productivity, exports and employment.

3.  The software industry is defined here as companies operating within the sub- industries of computer systems design (and related services);software publishing; and data processing, hosting, and information services.

4.  From 1997 to 2012, software industry production increased from $149 billion to $425 billion.  The software industry’s growth has averaged more than 7.2 percent per-year, or two-thirds greater than the annual growth rate of the overall economy.  As a result, the share of GDP directly attributable to the software industry has increased from 1.7 percent in 1997 to 2.6 percent in 2012, an increase of more than 50 percent.

5. Exports of U.S. software and related services have grown by 9 percent to 10 percent per-year since 2006, or nearly 50 percent faster than all U.S. exports.

6.  The software industry is a significant job creator, raising employment in three ways: ◦ First, its direct employment has risen from 778,000 workers in 1990 to 2.5 million workers in 2014. ◦ These employment gains have consistently outpaced the growth in overall private U.S. employment. As a result, the software industry’s share of the private workforce has increased from 0.9 percent in 1990 to 2.2 percent in 2014.

7.  Second, the software industry creates jobs by creating demand for the products and services needed to design, develop and produce software.  To produce $425 billion in output in 2012, US software companies consumed $212 billion in goods and services produced by other industries. Based on BEA data, we estimate that the economic demand from software companies supported an additional 1.1 million jobs in other industries. ◦ This calculation uses an employment multiplier of about 1.5: Every ten jobs in the software industry supports five more jobs in other industries. This multiplier is significantly higher than the employment multiplier of other industries that contribute to job growth.

8. The software industry also creates jobs by increasing the productivity of the industries that purchase and use software: Contrary to claims that software destroys jobs, the industries that invested most heavily in software, 1997 to 2012, had strong rates of job growth, while industries investing the least in software experienced both high levels (mining) and low levels (apparel) of job growth. Overall, there is a modest but significant correlation between business purchases of software and job gains by industry.

9.  In some cases, software displaces existing jobs. But the use of software also creates jobs to maintain and operate its systems; and the additional wealth created by productivity improvements tied to software also lead to more job creation.  Cautionary Note: While software, on balance, creates many more jobs than it displaces, the positions created by investments in software often require very different skills from those possessed by the people displaced by those investments. As software’s role in economic life continues to expand, all Americans who need it and want it should have access to intensive IT-related training.

10.  Software helps drive greater innovation and efficiency, contributing to rising output and productivity in other industries. ◦ Recent research by economists at the Fed found that 12.1 percent of all U.S. labor productivity gains from 1995 to 2004, and 15.4 percent of those gains from 2004 to 2012, can be traced to the use of software in other industries. ◦ We estimate that software accounted for 9.5 percent of all gains in U.S. output from 1995 to 2004, and 15.0 percent of those gains from 2004 to 2012.

11.  In 2012, productivity gains in other industries attributable to their use of software added $101 billion to U.S. GDP. Therefore, in 2012, the US software industry contributed a total of $526 billion to GDP [$425 billion + $101 billion], or 3.2 percent of GDP.

12.  From 1990 to 2012, US business investments in software grew at more than twice the rate of all fixed business investment.  From 2010 to 2012, software accounted for 12.2 percent of all fixed business investment, compared to 3.5 percent for computers and peripherals.

13. The productivity gains enjoyed by those who invest in IT helped drive rising business expenditures on software and IT hardware.  Throughout the 1990s, an historic acceleration in productivity provided a foundation for a sustained period of strong growth, low unemployment, and modest inflation. ◦.  The role of investment in IT in higher productivity: Studies of the second half of the 1990s estimate that capital deepening in software and other IT accounted for 45 percent of the increases in labor productivity in that period, and advances in these technologies accounted for another 25 percent.

14.  Research shows that rising investments in IT also are linked to rising investments in various intangible forms of capital: Firms that invest in software and computers also undertake larger investments in intangible assets such as worker training, organizational reforms, R&D, and new business processes.

15.  Software accounts for an increasing share of all IT investments. ◦ In the1970s, US businesses invested about as much in IT hardware as in software; and by the 1980s, businesses invested one-third more in software than in hardware; ◦ ◦ From 2000 to 2009, businesses invested 2.6 times as much in software as in hardware; and by 2010 to 2012, US businesses invested 3.5 times as much in software as in hardware.  Given its role in boosting productivity, it is unsurprising that software has become the main factor in IT investment by US businesses.

16.  Through the recessions and expansions of 1997 to 2012, the software industry grew at an average annual rate of 6.7 percent – about twice as fast as the overall economy.  Since 2012, the software industry has grown at an average annual rate of 5.3 percent, while rest of the economy grew at an average rate of 2.3 percent.  Since 2012, therefore, the software industry has grown 130.4 percent faster than the rest of the economy.

17.  The software industry’s growth is accompanied by strong gains in software industry jobs.  From 2000 to 2014, employment in the software industry increased from under 2 million to 2.5 million positions, or 1.7 percent per-year  From 2007 to 2014 – through the financial crisis, recession, and slow recovery – employment in the software has grown at an average annual rate of 3.1 percent – compared to a 0.1 percent decline in total nonfarm employment.  Furthermore, the jobs created by software companies, on average, are much more highly-paid than those created by other industries with large employment gains.

18.  From 2008 to 2014, five industries created large numbers of new jobs: software, home health care, individual and family services, retail, and restaurants The new software workers, on average, earn three times more than workers in the four other industries.

19.  Employment by software companies rose from 778,000 jobs in 1990 and 1,083,000 in 1995, to 2,095,000 jobs in 2010 and 2,501,000 positions in 2014. Thus, the industry’s share of all jobs rose from 0.9% in 1990 and 1.1% in 1995, to 1.9% in 2010 and 2.2% in 2014.  In addition, software companies purchased $212 billion in goods from other industries in 2012, and those purchases supported another 1,080,000 jobs.  In addition, productivity gains attributable to software added $101 billion to GDP, supporting as many as 850,000 more jobs in 2012  Based on all of these effects, the software industry was responsible, at least in part, for 4.43 million jobs in 2012.