The Great Leveling of Geographic Pay Differences in Tech – Six Ways it Will Change our Future

by | Aug 25, 2022 | Future of Work

Futurist Speaker Thomas Frey Blog: The Great Leveling of Geographic Pay Differences in Tech

Until recently, there was a significant salary difference between, say, tech workers living in San Francisco and those in Des Moines, even though they may have been doing the same work – even for the same company.

COVID changed all that.

People began working remotely, and over time most made it clear they preferred things to remain that way. Tech companies found it very difficult to argue or to reduce someone’s pay simply because they moved to a different state.

Additionally, following the period of the Great Resignation, the competition for tech employees was so intense that companies had to continue to offer “big city” pay rates to attract qualified employees no matter where they lived.

As a result of these two phenomena, geographic salary disparities in IT have been dramatically reduced in a very short period of time.

An analysis of this differential for software engineers found that between 2019 and 2021, the pay gap between Tier 1 and Tier 3 cities had shrunk from 18.1% to 5.9%.

We all know a Tier 1 city when we see one. There’s little consensus on the definition of a Tier 3 city. The most common studies describe it as a city with fewer than 1 million people, and in this ranking there are no Tier 4 cities. In my opinion, this million people threshold seems high unless the entire metropolitan area is included.

Closing the Geographic IT Pay Gap

This pay gap compression will likely continue because even though companies are not likely to reduce compensation for employees who move from a Tier 1 to a Tier 3 city or its suburbs, they are likely to subtly limit pay increases for those workers, providing a slight downward pressure on top rates.

For the most part, though, the differential or gap will continue to be closed from the bottom until it disappears. Low pay will rise and come closer to parity with high pay. And high pay won’t fall significantly due to the tight IT labor market.

Once these kinds of short-term trends play out, I expect we’ll see geographically neutral pay scales in practice, if not in corporate policies, for specialists in the tech industry.

What Will IT Wage Compression Mean for our Future?

Many studies and anecdotal accounts document this IT wage compression, but few people have analyzed its broader impacts on life and lifestyles and on our nation as a whole.

It’s difficult to analyze the impacts of this pay gap phenomenon without also capturing the impact of increased IT remote working overall – the two trends will work side-by-side to profoundly change our society in at least six ways.

1. There Will Be New Wealth in Smaller Cities

We’re likely to see some gentrification in metropolitan areas as relatively wealthy IT work-from-home employees make their way to Tier 3 cities and their suburbs to be closer to recreation and family or to experience a slower, less-expensive way of life.

Developers will build new upscale communities and compete for these transplants who are now earning San Francisco wages and can buy the biggest houses on the block or homes in the nicest neighborhoods.

2. Tier 3 Cities Will Enjoy Larger Tax Bases

The infusion of money in the form of Tier 1 salaries spent in Tier 3 cities will add to local government coffers. Much of the incremental increase will be used to expand current services to additional citizens, but we’ll also see a renaissance of urban renewal projects and new amenities in some of the Tier 3 cities that were in danger of slipping into insignificance.

Futurist Speaker Thomas Frey Blog: What Will IT Wage Compression Mean for our Future?

3. Communities Will Compete for People, Not Companies

Instead of trying to convince companies to form or relocate within their boundaries, cities and towns will compete for upper-middle-class, work-from-home, tech employees. And rather than crafting tax breaks and other business development incentives, city teams will enhance local IT infrastructure so they can promise remote workers high-speed Internet and strong cellphone signals.

City leaders will also be mindful of the need to upgrade schools, downtown areas, and healthcare access. They’ll creatively promote these amenities to IT workers and describe all of their other quality of life advantages, including proximity to recreational opportunities and, ironically, big city nightlife, albeit on a smaller scale.

4. Societal Institution Diversity Will Be Enhanced in the Long Run

Nothing will shake up a Tier 3 city in the heartland of the U.S. like an influx of “big city” folks.

Religious institutions, political fiefdoms, local governments, and other local foundations will evolve. The newly arriving IT workers will evolve as well, and everyone will move toward a new point of consensus in these often polarizing spheres. Everyone will learn just a little bit from and about each other, and something about themselves in the process.

Let’s hope…

5. In the Short Term There Will Be Cultural Tension in Tier 3 Cities and Regions

Because that spirit of getting along will be tested early on as the newcomers with Bay-area paychecks buy up land, drive up the cost of living and possibly the cost of labor, and generally change the pace and character of life in the region.

We can see signs of the resulting resentment already in some western states. Over time, the original locals who are most bothered, disrupted, and priced out of their hometowns will either learn to integrate or leave the area. At the same time, local service jobs will be difficult to fill as a new economic and social equilibrium begins to emerge.

6. Tier 1 Cities Will Strive to Offer More than Jobs

In the past, Tier 1 cities didn’t compete for residents, they competed for tourists. They’ll have to do both in this new world of geographic wage compression and remote work.

Like Tier 3 cities and their suburbs, Tier 1 cities will need to promote quality of life elements like schools, public safety, and other family-friendly features we don’t necessarily attribute to big cities. To make up for the outflow of IT workers, these cities will need to act and sound more like their Tier 3 competitors.

This will require some creative marketing campaigns, and I can’t wait to see the promotions for a family-friendly San Francisco or New York City.

Final Thought

Too many people have viewed the U.S. as a bifurcated, bi-coastal nation, generalizing that the big important cities are on the coasts, with the inconsequential rest found in the blank space in between.

This tendency has always struck me as unhealthy, if not elitist, so probably the best thing that will come out of the new age of remote work and geographic salary parity is the homogenizing effect it will have on the entire nation.

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