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Broadband and the economy
Growth, productivity and employment
 
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This article looks at the economic impact of broadband and in particular its effect on employment. Two subsequent articles delve more deeply into the effect that investing in broadband could have in two economically powerful countries — Germany (Germany’s Broadband Strategy) and the United States (United States)*.

Investment in broadband has soared around the world. In the United States alone, telecommunications and cable television companies invested more than USD 97.7 billion in broadband deployment between 2004 and 2010. Since 2009, Chinese companies have invested USD 7.44 billion in broadband, while Malaysian operators have invested USD 1.6 billion, and there are many more examples.

Several developed countries are promoting broadband as part of their economic recovery plans, both to ensure the deployment of these high-cost networks and to stimulate employment (see Table 1).

Research aimed at generating hard evidence on the economic impact of broadband is fairly recent. The evidence gathered so far concerns the contribution of broadband to the growth of gross domestic product (GDP), employment creation, and productivity gains.

Table 1 — Counter-cyclical government programmes
Country Broadband focus
United States Launched the USD 7.2 billion Broadband Stimulus program focused on providing service to unserved and underserved areas
Germany Government announced a National Broadband Strategy with the objective of having nationwide broadband access (1 Mbit/s) no later than the end of 2010 and providing 75 per cent of German households access to a broadband connection of at least 50 Mbit/s by 2014 (estimated investment: EUR 36 billion)
Sweden In order to promote broadband, government provides financial incentives to municipalities to fund two-thirds (2/3) of total next-generation network (NGN) investment (EUR 864 million)
Portugal Government announced an EUR 800 million credit line for the roll-out of a next-generation access network (NGAN); this is part of the first step in a EUR 2.18 billion plan to boost the country’s economy
Ireland The government will invest EUR 322 million in a National Broadband Scheme aimed at completing country coverage
Canada Has relied on four programmes to promote broadband development resulting in an overall investment of CAN 300 million
Finland Government funds one-third of the NGN project cost (USD 130.73 million)
New Zealand Government funds USD 1.03 billion investment to boost fibre over the next five years
Source: Raul L. Katz, Adjunct Professor, Division of Finance and Economics, and Director, Business Strategy Research, Columbia Institute for Teleinformation. “The impact of broadband on the economy: Research to date and policy issues”, Chapter 2 of Trends in Telecommunication Reform 2010–2011: Enabling Tomorrow’s Digital World.

Gross domestic product

Broadband has a positive impact on GDP, but research results on the level of growth vary widely. Constrained by data availability, the analyses have primarily focused on countries of the Organisation for Economic Co-operation and Development (OECD) — generally those in Western Europe and North America. One study finds that the contribution of broadband varies from 0.25 to 1.38 per cent for every 10 per cent increase in penetration. There are many explanations for this variance. The use of different datasets and different model specifications is clearly one explanation. Also, researchers lack a host of useful variables and must work at high levels of aggregation.

Job creation

Evidence from research and analysis suggests that broadband does contribute to job creation. For example, broadband network construction creates direct employment in the jobs necessary for building the facility, such as telecommunication technicians, construction workers and manufacturers of the required telecommunication equipment. The creation of direct employment has an impact on indirect employment, which for example includes jobs related to upstream buying and selling between the metals and electrical equipment manufacturing sectors. Finally, household spending based on the income generated from direct and indirect employment creates so-called induced employment.

Four national studies have estimated the impact of network construction on job creation (see Table 2).

To derive the estimates, the studies used input-output tables, which are generally considered to be a reliable tool for predicting investment impact, provided that two caveats are borne in mind. First, input-output matrices are static models reflecting the interrelationships between economic sectors at a certain point in time. Because those interrelationships may change, the matrices may lead to an overestimate or underestimate of the impact of network construction. For example, if the electronic equipment industry is outsourcing jobs overseas at a fast pace, the employment impact of broadband deployment in the country concerned will decrease over time, and part of the investment will “leak” overseas. Second, it is critical to break down employment effects at the three levels estimated by the input-output table in order to gauge the true direct impact of broadband deployment.

Table 2 — Broadband impact on job creation
Country Authors — Institution (*) Objective Results
United States Crandall et al. (2003) — Brookings Institution Estimate the employment impact of broadband deployment aimed at increasing household adoption from 60 per cent to 95 per cent, requiring an investment of USD 63.6 billion
  • Creation of approximately 140 000 jobs per year over ten years

  • Total jobs: approximately 1.2 million (including 546 000 for construction and 665 000 indirect)

Atkinson et al. (2009) — ITIF Estimate the impact of a USD 10 billion investment in broadband deployment
  • Total jobs: 180 000 (including 64 000 direct and 116 000 indirect and induced

Switzerland Katz et al. (2008b) — CITI Estimate the impact of deploying a national broadband network requiring an investment of CHF 13 billion
  • Total jobs: 114 000 over four years (including 83 000 direct and 31 000 indirect)

United Kingdom Liebenau et al. (2009) — LSE Estimate the impact of investing USD 7.5 billion to achieve the target of the “Digital Britain” Plan
  • Total jobs: 211 000 (including 76 500 direct and 134 500 indirect and induced)

(*) Note:
ITIF: Information Technology and Innovation Foundation
CITI: Columbia Institute for Tele-Information
LSE: London School of Economics
Source: Raul L. Katz. “The impact of broadband on the economy: Research to date and policy issues”.

Productivity

Researchers have also studied the impact of innovation or network effects on employment (categorized by economists as “network externalities”). Broadband penetration creates numerous such effects. These range from new and innovative applications and services, for example telemedicine, e-commerce, online education and social networking to: the reduction of excess inventories and optimization of supply chains; business revenue growth; and growth in service industries. Most of the research regarding this impact has been conducted using data from the United States.

The impact of broadband on employment creation appears to be positive, with growth varying from 0.2 per cent to 5.32 per cent for every 1 per cent increase in penetration. The spill-over employment effects of broadband are not uniform across sectors. Some researchers say that the job creation impact of broadband tends to be concentrated in service industries (such as financial services, education and health care), although a positive effect was also seen in manufacturing. One study found that, for the state of Kentucky, county employment was positively related to broadband adoption in the construction, information intensive and administrative sectors.

The only sector where a negative relationship was found with the deployment of broadband was the accommodation and food services industry. This may result from a particularly strong capital-labour substitution process, whereby productivity gains from broadband adoption yield reduced employment. It should therefore be borne in mind that the productivity impact of broadband can cause capital-labour substitution and may, in some cases, result in a net reduction in employment.

Consumer surplus

Consumer surplus is the amount that consumers benefit from buying a product for a price that is less than what they would be willing to pay. Consumer surplus can also be conceptualized in terms of the benefi ts that broadband represents to the end user. The variables driving willingness to pay include rapid and efficient access to information, savings in transport for conducting transactions, and benefits in health and entertainment.

Broadband gaps and investment requirements

When calculating investment costs of infrastructure, policy-makers have often taken three different approaches. The first is the conventional engineering approach, which is based on estimating the coverage requirements, and then using those estimates to project the necessary investment to fulfil them. This is the method followed for the investment estimation of Australia’s National Broadband Plan.

The second approach, labelled “top-down”, begins by determining the amount of financial resources to be invested and then seeing how much coverage will be achieved given those resources. To some degree, this is the approach that has been followed in the United States with the Broadband Technology Opportunity Program.

Because this programme was part of a stimulus package passed by the United States Congress, no specific plans for the construction of broadband networks were specified in the relevant legislation. Instead, the funds available for broadband deployment are assigned through grants, and construction plans defined as the grants are given out. The third approach, labelled the “public-policy” framework, defines targets (such as coverage and speeds), but leaves the amount of investment required unaddressed. This is the approach adopted in Germany’s National Broadband Plan.

Weighing the evidence

The evidence is fairly conclusive about the positive contribution of broadband to GDP growth. While estimates of the degree to which broadband contributes to economic growth vary from study to study, the discrepancies can be related to different datasets as well as model specifications.

Broadband has been found to have a positive impact on productivity within the firm.

Broadband does contribute to employment growth, both as a direct result of network construction programmes and as a result of spill-over effects on the rest of the economy.

Finally, beyond economic growth and job creation, broadband has a positive effect on consumer surplus in terms of benefits to the end user. These benefits include efficient access to information, savings in transport, and benefits in health and entertainment.

Most of the research so far has been conducted in developed nations, specifically in the United States and Western Europe. The challenge going forward is to test for similar effects in developing countries.

 

* This article is adapted from “The impact of broadband on the economy: Research to date and policy issues,” Chapter 2 of Trends in Telecommunication Reform 2010–2011: Enabling Tomorrow’s Digital World. This chapter is authored by Dr Raul L. Katz, Adjunct Professor, Division of Finance and Economics, and Director, Business Strategy Research, Columbia Institute for Tele-information.

 

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