Working in Silicon Valley

Economic and Legal Analysis of a High-velocity Labor Market

Alan Hyde

• Publisher: Routledge
• Year: 2015
• Topic: Economics
• eBook ISBN:
  9781317451693
• Subtopic: Business General
• Index: Economics

This work examines the relationship between the rapid technological and economic growth characteristic of high technology districts and their distinct labor market institutions - short job tenures, rapid turnover, flat firm hierarchies, weak internal labor markets, high use of temporary labor, unusual uses of independent contracting, little unionization, unusual employee organization (e.g., chat groups, and ethnic organization), unequal income, minimal employment discrimination litigation, flexible compensation (especially stock options), and heavy use of immigrants on short-term visas. The author suggests that while these distinctive labor market institutions are somewhat unorthodox and may present legal problems, they play essential roles in high growth.

1

THE DEVELOPMENT OF SILICON VALLEY’S HIGH-VELOCITY LABOR MARKET

Silicon Valley, the nickname for the region of high-tech industries clustered around Stanford University at the south end of San Francisco Bay, has now given rise to a small library exploring the ecology, management, and psychology of high-technology businesses and districts (Saxenian 1994; Kenney 2000; Lee et al. 2000). This book focuses entirely on its distinctive labor market, in particular the way Silicon Valley represents a “high-velocity” labor market in which job changes are frequent and employees do not expect ever to make careers inside a single employer. In this book, Silicon Valley means its high-technology industries, from CEOs and engineers to janitors and manufacturing workers. I will not discuss Santa Clara County’s work force outside high technology, for example the Mexican-American agricultural workers whose history is told in Pitti (2003).

The Valley’s labor market has not been a neglected topic either. There are excellent studies of many subgroups of workers on which I will draw. However, the economic and legal analysis of these distinct ways of working has lagged behind the sociological and management literatures. We know little about the causes and consequences of rapid employee turnover and short job tenure. While turnover and short tenure are closely associated with high-technology employment, and with Silicon Valley more so than other high-technology districts, they are becoming more important throughout the U.S. labor market. So our gaps in their understanding are increasingly important.

This chapter is a brief history of Silicon Valley, describing its changing industrial base, and summarizing what little we actually know about job tenures and turnover at different stages of the Valley’s history. This draws on the research of others. It is here partly for the convenience of readers who may associate the Valley merely with computers, or the Internet, and to provide context for the following chapters, many of which present research that represents a particular point in time.

The Silicon Valley analyzed in this book has a nearly century-long tradition of scientific and technological innovation. During at least the latter half of that period, its labor market has been characterized by frequent mobility, short tenures, career paths that journey through entrepreneurialism and consulting, and flexible compensation—a high-velocity labor market. This book is not particularly focused on the immediate past five or ten years.

A Brief Historical Outline of Silicon Valley

For purposes of this book, I will employ a fairly conventional stylized history that divides the history of Silicon Valley into seven phases: Pre-World War II Radio and Electronics; the Defense Period (1941–59); Semiconductors and Other Components for Large Computers (1959–80); Consolidation and Slump in Semiconductors (1980–86); Revival Built Around Microcomputers (1983-present); Internet and Other Communications Boom (1984-present); and Slowdown (2000-present).

Before World War II

Guglielmo Marconi’s first radiotelegraph signals were in 1895, but by 1909 practical applications were scant. Few homes had receivers, so when the first radio station in the United States with regularly scheduled programming was set up in San Jose, California (later the metropolitan hub of Silicon Valley), in 1909, it gave away crystal receivers to listeners within its range. Communication with ships was limited by the difficulties of generating radio waves from sparks passing between poles.

In 1908 a recent Stanford University graduate named Cyril Elwell realized that an arc transmitter that he had seen demonstrated at an exhibition in Paris in 1900 would generate waves that would be more practical for longdistance voice transmission. He negotiated the rights from the European developers, and, on returning to Palo Alto in 1909, proceeded in ways that will come to be identified with “Silicon Valley”: the best technology; ties between Stanford and industry; venture capital; mobility of key scientific personnel to start-ups; and the role of intellectual property law in shaping high-technology enterprise. (Sturgeon 2000, the source for this entire section, gets the credit for tracing Silicon Valley back to 1909.)

Elwell turned to David Starr Jordan, president of Stanford, and C.D. Marx, head of its civil engineering department, to finance a new company to provide wireless telephone and telegraph services using arc technology. A small system was built to transmit between Stockton and Sacramento, and financing was obtained from a group of San Francisco financiers including the Crocker family. In 1912 Elwell demonstrated the Federal Telegraph Company’s (FTC) system to the Navy. As it was superior to the competition, FTC became “the navy’s darling of the World War I period” (Howeth 1963, as quoted in Sturgeon 2000). Technical improvements in the system were made in the Stanford High Voltage Laboratory, where Stanford professors worked with FTC employees (including the son of Stanford professor and FTC investor C.D. Marx). In return, FTC donated an arc to Stanford where it was used for other investigations. Around the same time at the FTC laboratory in Palo Alto, Lee de Forest in 1912 perfected a vacuum tube that could amplify faint radio signals.

By 1913 Elwell and de Forest had both left FTC, Elwell for Universal Radio Syndicate (UK), holder of European rights to the arc technology; de Forest to start Radio Telegraph and Telephone company, destined to fail in the Bronx. Under intellectual property law, FTC retained “shop rights” (a nontransferable license) in inventions that Elwell and de Forest had made while they were its employees. Between 1910 and 1932, other groups of FTC employees left to found, successively, Magnavox, Fisher Research Laboratories, and Litton Industries.

Perhaps the strongest thread that runs through the Valley’s past and present is the drive to “play” with novel technology, which, when bolstered by an advanced engineering degree and channeled by astute management, has done much to create the industrial powerhouse we see in the Valley today. Indeed, the caricature of the “ham” radio enthusiast—the shy but intelligent teenage boy who, bent over his homemade radio set in his bedroom late at night, taps into a secret world known only to him and his far-flung community of fellow hams—bears a striking resemblance to that of the “computer geek,” “code hacker,” and “web surfer” of more recent vintage. (Sturgeon 2000: 44)

A more typical dating of Silicon Valley’s origins is the founding of Hewlett-Packard Company (HP) in 1937 in a Palo Alto garage that is now a historic landmark. Hewlett had developed an audio-oscillator as a Stanford graduate student. His professor Frederick Terman encouraged Hewlett and his fellow graduate student David Packard to commercialize the device, lent them $538 to start the business, and arranged for a further loan from a Palo Alto bank (Packard 1995; Saxenian 1994: 20). Saxenian quite correctly notes, however, that the scale of industrial activity in the Valley before World War II was “insignificant compared to that of the Boston area” (Saxenian 1994: 21) and that both firms and individuals commonly migrated east.

Defense Period (1941–1959)

Firms like HP, Litton, and the Varian brothers’ early operations (also supported by use of Stanford laboratories and equipment in exchange for half their patent royalties) prospered during World War II. Terman spent the war years at Harvard. When he returned to Stanford in 1946 as dean of the School of Engineering, he had a particular vision of expanding partnerships between Stanford and industry. Stanford, wrote Terman, “had not been significantly involved in any of the exciting engineering and scientific activities associated with the war” (quoted in Saxenian 1994: 22). Terman helped found the Stanford Research Institute to conduct defense-related research, the Stanford Industrial Park, and other institutional ties between Stanford and electronics and aerospace companies. Research was funded mainly by federal defense funds during this period (Leslie 1993, 2000; Henton 2000), and initially continued to focus mainly on radio and microwave technology (Lécuyer 2001: 668).

The most powerful and enduring industry proved to be semiconductors. Their chief ingredient was to give the Valley its name in the 1970s (Hoefler 1971). Some histories date the origin of Silicon Valley to the founding of Shockley Transistor in Palo Alto in 1955. Shockley, a Stanford graduate and one of the inventors of the transistor, left AT&T’s Bell Laboratories to commercialize the invention. He attracted outstanding engineering talent but was an impossible person, and two years after the firm’s founding, eight of its leading engineers—later known as the “traitorous eight”—left to form Fairchild Semiconductor, a competitor. Fairchild produced silicon transistors for military markets. Its departing personnel—ten spin-offs in its first eight years—eventually founded numerous technology companies (including Intel, National Semiconductor, and Advanced Micro Devices) and venture capital firms (including Kleiner Perkins) (Saxenian 1994: 25–26; Kenney and von Burg 1999: 81–85; Kvamme 2000).

Semiconductors and Other Components for Large Computers (1950–1980)

The integrated circuit was invented in 1959. During the 1960s, over thirty semiconductor manufacturers, nearly all the U.S. firms, were started in the Valley. From one perspective, this was a quite undiversified industrial base that would suffer severe recession in the early 1980s. An observer of these electronics manufacturers would hardly have noticed much difference from such other centers of electronics as Boston or southern California, or at least few observers at the time did.

Nevertheless, with hindsight, this is the period in which Silicon Valley developed some distinctive features that would later distinguish it, even though most of these features became clearer in retrospect than they were in the 1970s. They include the culture of start-ups, high labor mobility, informalties across firm boundaries, nonhierarchical management practices associated with HP, and venture capital. All of these continue to characterize Silicon Valley to this day, though all have evolved since the 1970s. Saxenian (1994), the best source on these innovations, is quite clear that their importance lies in the way they facilitated a very different kind of growth in the late 1980s. Less careful celebrations (or critiques) of Silicon Valley sometimes treat these as if they had survived intact (e.g., Putnam 2000: 324–25; Storper and Salais 1997: 174–88).

Culture of Start-ups

Crucial to Saxenian’s entire contrast of Silicon Valley with Boston’s Route 128 is the Valley’s culture of start-ups. Engineers in the Valley dream of founding their own firms, and often do, while their counterparts back East are likelier to spend careers inside one large corporation. This was true for the period of Saxenian’s research (the late 1980s), true, as we have seen, for 1909; probably true today, although there are signs that Route 128 has become more receptive to start-ups since Saxenian’s research. This culture of start-ups alters employee incentive structures and career planning and is the key influence on every other item on the list that follows.

Its precise origins, however, remain somewhat mysterious, and do not become clearer when we trace the Valley’s origins back to 1909, rather than 1937 or 1955. The answer must lie in some combination of a young region with few established industrial corporations and the active role played by private investors, and Stanford University, in encouraging start-ups. Once start-up culture reaches some critical stage of development, it can sustain itself through the accumulated institutional expertise that facilitates newer start-ups, such as venture capital and specialized law firms (e.g., Lee et al. 2000: 3–15).

Fortunately it is not necessary for purposes of this book to pin down the origins of start-up culture more precisely, although it is the crucial mystery for planners who seek to replicate the Valley elsewhere. Kenney and von Burg (1999) emphasize semiconductor technology; this can hardly be taken seriously since the Valley’s start-up culture long predates that technology and extends to other technologies. Indeed, semiconductor production actually became quite concentrated for a time in the late 1970s. Bankman and Gilson (1999) note that employers should normally be able to outbid outside investors for the services of particular employees—an important point, to which we shall return in chapters 3 and 4. This suggests to them that startups will be found where employers would incur particularly heavy costs to their compensation arrangements by engaging in such bidding. It is not clear how this model applies to real-world examples, such as the traitorous eight’s departure from Shockley, or later departures from Fairchild. What costs would Fairchild have incurred that prevented it from outbidding the investors who funded Intel? Nor does it distinguish among regions. Hellmann (2002) models employee and firm decisions whether to develop innovations inside the firm or in a start-up. The crucial variable is the hospitability of the environment to start-ups, when that is just what one wanted to have explained. Perhaps if there were data on propensity of employees to leave and start-up, such propensity could be associated with firms of particular size, market position, R&D expenditure, and the like.

High Labor Mobility

If new firms start up and draw their employees from existing firms, tenures will be short and mobility high. This began to be observed in the 1970s. People familiar with technology firms in the Valley and back East observed that Valley engineers frequently changed employers (e.g., Parden 1981). There is no reason to doubt this observation—no reason to assume bias in the observation, for example—though hard data on turnover rates are not available either for this period or subsequent periods (see estimates in Hayes 1989: 49). Saxenian (1994: 34–35) notes:

Silicon Valley was quickly distinguished by unusually high levels of job hopping. During the 1970s, average annual employee turnover exceeded 35 percent in local electronics firms and was as high as 59 percent in small firms. It was rare for a technical professional in Silicon Valley to have a career in a single company. An anthropologist studying the career paths of the region’s computer professionals [quoting Gregory 1984: 216] concluded that job tenures in Silicon Valley averaged two years. One engineer explained: “Two or three years is about max (at a job) for the Valley because there’s always something more interesting across the street. You don’t see someone staying twenty years at a job here. If they’ve been in a small company with 200 to 300 people for 10 or 11 years you tend to wonder about them. We see those types coming in from the East Coast.”

I have found no evidence that any Silicon Valley employer in the 1970s consciously encouraged short job tenures. Hewlett-Packard was one of the few companies whose executives had much to say about management in the 1970s (“the HP Way”). Their relaxed, creative management style became a national cult after popularization in Peters and Waterman (1982). HP’s preference, then and for many years thereafter, was to encourage loyalty (through encouraging creativity, delegating to teams). Layoffs were avoided by the practice, rare in U.S. companies, of shared pay cuts in slow times (Peters and Waterman 1982: 244). Not as many Valley employers followed HP as the number that respected it, but I have not found any articulated rejection of HP’s emphasis on loyalty during this period. The short job tenures observed in the 1970s reflected, rather, the natural statistical result of start-ups (if firms start up, tenures will be short and employees will change employers); employee choices; and employer decisions not to impede this process (by, e.g., aggressively suing departing employees for violation of trade secrets). Silicon Valley’s heavy conscious use of temporary help agencies or outsourced production, for example, still lay in the future.

Ties Across Firms

If people move from firm to firm, any individual will know others at rival firms with whom they previously worked. “Competitors consulted one another on technical matters with a frequency unheard of in other areas of the country” (Saxenian 1994: 33; see also Sitkin 1986). Crucially, these questions were normally answered. “As a result, Silicon Valley’s engineers developed stronger commitments to one another and to the cause of advancing technology than to individual companies or industries” (Saxenian 1994: 36).

Other ties linked individuals across firms in the 1960s and 1970s, but they were never as important as networks among friends and former coworkers, and became less important over the next two decades. In the 1950s and 1960s, when the “Fairchildren” who had worked together at Fairchild founded companies, “The wives all know each other, and remain on the friendliest terms. The men eat at the same restaurants, drink at the same bars, and go to the same parties” (Saxenian 1994: 32, quoting Hoefler 1971). This is important, because it sent the signal to employees at the time that ties across firm lines were good, not bad things. But after the 1960s, the Fairchild tie as such necessarily weakened, and one rarely finds references to the importance of particular circles who worked at particular companies. There are no similar stories about close-knit alumni of Apple or HP, for example, and former Intel employees will figure as such in this book only through their lawsuits concerning their departure. Nor, given the changing role of women in the labor market, will “wives” ever have that same role.

Similarly, the few formal organizations that linked engineers and scientists may have received disproportionate attention. I am thinking of the Homebrew Computer Club, founded in 1975, where young computer enthusiasts exchanged hardware and software to help create cheap computers. Its alumni eventually founded over twenty computer companies, including Apple (Saxenian 1994: 34). This is an important chapter in the history of the personal or microcomputer, although Apple was the only important microcomputing manufacturer associated with the Valley until the recent HP-Compaq merger. However, it is a somewhat misleading example of interaction across firm lines, which rarely involves an organization with a name (see chapter 9 for some counterexamples). In any case, the Club is long gone.

Nonhierarchical Management

Few Valley employers published much about their managerial styles during these years, but the exception has been influential. Hewlett-Packard popularized concepts such as top executives’ (including Bill Hewlett and David Packard) “managing by wandering around,” autonomous teams, encouraging active participation from all levels of the organization, breaking up large entities to keep them mobile and responsive (Peters and Waterman 1982; Packard 1995; Wilms 1996; Zell 1997; Shockley-Zalabak and Burmester 2001). HP’s success helped vindicate these unconventional ideas, which served the Valley well in the 1980s, though no longer characterize much Valley industry, including HP itself (Poletti 2001). Lécuyer (2001: 669) attributes the growth of independent teams, autonomous engineers, and financial incentives such as profit sharing, stock ownership, and stock options, to managerial efforts (not merely at HP) to fight organizing efforts by San Francisco unions, as well as to a streak of utopian and socialist yearnings in the microwave (but not semiconductor) community.

Venture Capital

Sometime in the 1970s, venture capital supplanted federal defense spending as the largest source of financing in the Valley. Xerox founded its legendary Palo Alto Research Center (PARC), subsequently the birthplace of so many innovations, in 1970 (Smith and Alexander 1988; Hiltzik 1999).

Consolidation and Slump in Semiconductors (1980–1986)

The institutions described in the previous section (start-ups, labor mobility, ties across firms, inf...

Table of contents

• Cover Page
• Half-Title Page
• Title Page
• Copyright Page
• Table of Contents
• Foreword
• Acknowledgments
• Introduction
• 1 The Development of Silicon Valley's High-Velocity Labor Market
• Part I. The Information Story
• Part II. The Flexibility Story
• Part III. Labor Market Intermediaries: Information and Flexibility
• Part IV. Flexible (and Informational) Compensation
• Part V. Inequality
• Conclusion
• Appendix: Interview Subjects and Table of Cases and Statutes
• References
• Index