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Economics of Technology and the Engineering Career

Daniel N. Donahoe, Ph.D., P.E.Michelle Poliskie, Ph.D.

April 12, 2006April 12, 2006

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Introduction to Economics and Technology

ProblemThe central question is how should GOLD members face economic challenges in our modern technology-driven market system?

Approach Tools

The coincidence of technology and economicsHow technology evolves in product marketsHow understanding the market requires embracing irrationality

DataEmployment and economic data analysisExperimental data

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Technology and Economics

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Model of Population Growth

Rdtdy

= R is the net population growth [number/year]

ryRdtdy

== r is per capita population growth [number/(person/year)]

∫∫ =ty

yo

rdty

dy

0

rtyy

=⎟⎟⎠

⎞⎜⎜⎝

⎛

0

ln

( ) rteyty 0= Malthus’ Law of Growth

Because Malthus1 painted a gloomy population prediction of mass starvation, Economics was named “The Dismal Science”Technology is the answer, as explained by a Nobel Laureate

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Technology as the Solution

Professor Smalley (Rice University), 1996 Nobel Laureate for Chemistry, used a version of Malthus’s prediction to promote technology, specifically Nanotechnology2

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Redefined Model of Population GrowthryyKR )]ln()[ln( −= K is the carrying capacity

⎟⎟⎠

⎞⎜⎜⎝

⎛=

yKry

dtdy ln Gompertz’s ODE, Ky <

∫∫ −=⎟⎠⎞

⎜⎝⎛

ty

y

rdt

Kyy

dy

o 0ln

Let ⎟⎠⎞

⎜⎝⎛=

Kyu ln , then

ydu 1

= and left integrand becomes 0lnln0

uuuduu

u

−=∫ , so

⎥⎥⎥⎥

⎦

⎤

⎢⎢⎢⎢

⎣

⎡

⎟⎠⎞

⎜⎝⎛

⎟⎠⎞

⎜⎝⎛

=⎥⎦

⎤⎢⎣

⎡⎟⎠⎞

⎜⎝⎛−⎥

⎦

⎤⎢⎣

⎡⎟⎠⎞

⎜⎝⎛=

⎟⎠⎞

⎜⎝⎛∫

KyKy

Ky

Ky

Kyy

dyy

yo 0

0

ln

lnlnlnlnlnln

ln

rt

KyKy

−=

⎥⎥⎥⎥

⎦

⎤

⎢⎢⎢⎢

⎣

⎡

⎟⎠⎞

⎜⎝⎛

⎟⎠⎞

⎜⎝⎛

0ln

lnln , exponentiating gives rte

KyKy

−=⎟⎠⎞

⎜⎝⎛

⎟⎠⎞

⎜⎝⎛

0ln

ln

( )rte

Ky

Kety−⎟

⎠

⎞⎜⎝

⎛

=0ln

The Gompertz equation

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Example of Gompertz Equation (in Finance)

Let y be income [dollars], t time [years], K be limiting incomeAnd set r at 25% per year (r = 0.25)

Gompertz Function Example (y0=40,r=0.25, K=200)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

-5 0 5 10 15 20 25

Years

Inco

me

[K$]

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Technology and Product Evolution

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Economics: Technology Shocks and Diffusion

Technology shocks create business cycles (Kondratieff cycles)3

It takes time for acceptance of new technology, “diffusion”4

Old technology declines with the rise of the new technology

Units of a substitute com

modity

Examples of Substitute Technologies:

time

Uni

ts o

f a c

omm

odityhorses automobiles

calculatorslide rule

flash memoryfloppy

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Technology Trends (curves within curves)

Once new technology creates new markets, new inventions come along that are substitutable for the previous technologies; this sequence of inventions can be viewed as a mathematical progression or, more appropriately, as a series of superimposed Gompertz curves

In business school jargon, theseare called “S curves”Prof. Christensen5 pointed out thatthese cycles defy what managers often think of as “good management”such as the mantra “being close to the customer”

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The Influence of Business Cycles on Technical Jobs

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Market Psychology: Speculation

Business SpeculationThe boom and bust cycle created by speculation is not studied inengineering school An early historical example of speculation is the growth of the tulip trade in Holland at the end of the 17th century6

Recent technology speculation has been captured in “Gartner’s Hype Cycle of Emerging Technology”7

Timeline

Introduction oftulips into Holland

Early 1600sEarly 1600s 16331633

Wild speculation

16371637

Bankruptcy results as the bottom falls

out of the market

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Venture Capital Investment

Venture Capital

0

20

40

60

80

100

120

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Year

Inve

stm

ent [

billi

on $

]

Internet bubble 1998 to 20008

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The Dow Jones Average

The Dow reflects the boom-bust of the internet bubble; the Dow had been almost monotonic for decades until 2000

Dow at Year Start

0

2000

4000

6000

8000

10000

12000

1970 1975 1980 1985 1990 1995 2000 2005 2010

Year

Dow

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Business Cycles

time

Average 4.5 years (1857)peak

tough

peak

business activity

There have been 32 business cycles in the U.S. since 1854 and 10 business cycles since WWII 9In 2003, EE unemployment reached 6.7% due to a downturn in thebusiness cycle10

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Business Cycles, Leading Indicators

Various indicators can be used to predict the direction of the business cycle; some are more effective than others 11

0

20

40

60

80

100

120

140

160

180

200

1985 1990 1995 2000 2005 2010

Indu

stria

l Pro

duct

ion

Inde

x

Computers,communication andsemiconductorDurable consumer goods

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Areas for Concentrated Venture Capital Spending

0

50

100

150

200

250

Biotechnology Medical/Health Internet Specific Semiconductors

Tota

l Ven

ture

-Bac

ked

Off

erin

g Si

ze (M

illio

ns o

f Dol

lars

) Q1 2006

Venture Capitol Funding Today12

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Engineering Job Market

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Topics in Engineering Salaries

Engineering salaries are plotted on the following slide by discipline

The salaries are contrasted to a Family Practice MD which almostoverlies the compensation of “executives;” the explanation for the difference in compensation is multifaceted, but one underpinningreason for the difference is the number of medical doctors in private practice However, this is a snapshot in time; may the difference decrease as HMOs become more prevalent?

Salary observations related to employer sizeLarger employers appear attractive due to the perception of job security; however, there are trade-offsLong term engineering employees in large firms sometimes suffer “salary compression” defined as the narrowing pay differentials between new people and senior people

A personal salary historyI am going to be bold and plot my normalized salary history for 30 years

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Business Cycle Indicators: Supply Changes

The higher the degree of attainment the lower the anticipated unemployment

It is believed that the higher the level the degree of educationattainment the less susceptible to changes in the business cycleHowever, “white collar engineers” are not immune

0

1

2

3

4

5

6

7

8

9

10

No Diplomas High SchoolDiploma

Some College Associate degree Bachelor's degree Master's degree Doctorate

Perc

enta

ge o

f Une

mpl

oym

ent (

%) Workers over 25 years of age, 200313

4.8% National Unemployment Rate

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US Engineering Degrees

Graduation trends plotted below14

The increasing percentage of graduates are foreign nationals and who return home after graduation?Will baby boomer retirements create a shortage of engineers?

U.S. Engineering Degrees

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

1965 1970 1975 1980 1985 1990 1995 2000 2005

Year

Num

ber BS

MSPhD

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Engineering Starting Salaries

Salaries decreasing for graduates from 2000 to 200115

Engineering Field 2000 2001Aerospace 51 46Chemical 55 50Civil 45 44Electrical 55 51Mechanical 52 46

Graduation (BS)

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Engineering Wages versus Professional

A wise man sets expectations consistent with observations16

U.S. Professional Compensation

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

0.400

0.450

0 20000 40000 60000 80000 100000 120000 140000

Annual Income

Freq

uenc

y

CompEEEMatEMEMD

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Number of Employed Engineers in US17

Labor Level Engineers

0

500

1000

1500

2000

2500

1980 1985 1990 1995 2000 2005

Year

Ann

ual [

K]

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One Person’s Story

Dan's Married Income History

0.00

0.50

1.00

1.50

2.00

2.50

3.00

1970 1975 1980 1985 1990 1995 2000 2005 2010

Year

Norm

aliz

ed T

axed

Rea

l In

com

e

Income from taxes for two main employment periods Defense related electronics and commercial electronicsTwo different slopes with different volatilitiesBut I’m still married

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Psychology of Picking a Career

Why do people pick an engineering career over other alternatives?

One reason lies in psychology: People balance their attitudes (beliefs about outcomes) and internalized norms (societal expectations) to determine shape their intentions and, thereby, their behavior

What should a reasonable person do in making career decision?

The best simple metric is the one proposed by social scientists:minimization of regret18

normsattitudes

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Summary

A poem by Richard Hodgetts quoted by Norman Augustine before the Committee on Science, Engineering and Public Policy of the US Congress in Oct. 200519

Every morning in Africa a gazelle wakes up.It knows it must outrun the fastest lion or it will be killed.

Every morning in Africa a lion wakes up.It knows it must outrun the slowest gazelle or it will be starve.

It doesn’t matter whether you’re a lion or gazelle-when the sun comes up, you’d better be running.

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References

1. Malthus, T., An Essay on the Principal of Population, 1798. 2. Smalley, R., Nanotechnology and the Next 50 Years, Presentation to the University of

Dallas Board of Councilors, Rice University, 7 Dec. 1995 (http://smalley.rice.edu).3. Miller, H., How Economics of Business Cycles Impact the Electronics Industry, Chip

Scale Review Sept.-Oct. 1999, http:www.chipscalereview.com (25 Feb. 2006).4. Stoneman, Paul The Economics of Technological Diffusion, Oxford: Blackwell

Publishers, 2002.5. Christianson, C., The Inventors Dilemma: When New Technologies Cause Great Firms to

Fail, Harvard Press, 1997, p 45. 6. Dash, M., Tulipomania: The Story of the World’s Most Coveted Flower & the

Extraordinary Passions it Aroused, Three Rivers Press, NY, 1999.7. Twist, J., Peering Beyond the Technology Hype, BBC News, 30 Aug 2004,

http:newsvote.bbc.co.uk (26 Mar 2006).8. National Venture Capital Association, Industry Statistics, 28 March 2008,

http://www.nvca.org (28 March 2006).9. National Bureau of Economic Research NBER), Business Cycle Expansions and

Contractions, 26 Feb. 2006, http://www.nber.org/cycles.html (26 Feb. 2006). 10. McManes, C., U.S. EE Unemployment Moves Upward as Thousands of Non-US Workers

Continue to Flood the Job Market, 14 Oct 2003, http://www.ieeeusa.org (8 April 2006).

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References (cont’d)

11. U.S. Department of Federal Reserve, Industrial Production and Capacity Utilization, February 2006, http://www.federalreserve.gov/releases/g17/ipdisk/ip.sa (9 Apr 2006).

12. Mendell, E. and Raddler, J., Venture-Backed IPO Market Languished while Sacquisition Market Maintained Bullish Pace in First Quarter of 2006, 3 April 2006, http://www.nvca.org/pdf/2006Q1exitpollreleasefinal.pdf (8 April 2006).

13. More Education; Lower Unemployment, Higher Pay, Occupational Outlook Quarterly, Fall 2004, http://www.bls.gov/opub/ooq/2004/fall/oochart.pdf (8 April 2006).

14. Hill, S and Johnson, J., Science and Engineering Degrees: 1966-2001, National Science Foundation, Arlington, VA, March 2004.

15. Tsapogas, J., Recent Engineering and Computer Science Graduates Continue to Earn the Highest Salaries, NSF, Arlington, VA http://www.nsf.gov/statistics/inbrief/nsf060303 (1 April 2006).

16. U.S. Department of Labor Bureau of Labor Statistics, Occupational Employment and Wages, November 2004, http://www.bls.gov (24 Feb. 2006).

17. Labor Force Statistics From the Current Population Survey, Series LFU42511000 (1), http://data.bls.gov/cgi-bin/dsrv (2 Apr 2006).

18. Janis, I. and Mann, L., Decision Making: A Psychological Analysis of Conflict, Choice and Commitment, Free Press, NY, 1977.

19. Augustine, N., National Academy of Engineering, For Congress, 20 Oct. 2005, http://www7.national academies.org (4 March 2006).