The Economics of the Tech Talent Shortage

The tech talent shortage is the persistent gap between the number of skilled technology workers employers want and the number available. Demand has grown fast, supply has adjusted slowly, and the result has been high salaries, long-running vacancies and a range of institutions that match employers with workers.

Why Demand for Tech Workers Keeps Rising

The demand for labour is a derived demand: firms hire workers not for their own sake but for the output they help produce. As businesses in banking, retail, healthcare and logistics have digitised, demand for software, data systems and cyber security has risen, and demand for the people who build them has followed.

For this reason, tech jobs can be found throughout the economy, not just in technology companies. Supermarkets that deliver groceries online or insurers that use technology to process claims also require developers and data engineers, just like software startups do.

Why the Tech Skills Shortage Keeps Salaries High

A perfectly competitive market would result in higher wages drawing in workers until the market is at equilibrium. However, because of the time taken to train engineers, the supply of skilled technology workers is inelastic in the short run. It will take many years to train a new engineer, and there are specialisms within this field, including machine learning and cloud security, which require practical experience that can only be developed while working in the industry.

This time lag produces a familiar pattern. Wages rise sharply, giving workers who already hold scarce skills an economic rent: earnings above what would be needed to keep them in the occupation. Over time, higher pay draws more people into training, supply becomes more elastic and wage growth should slow. Whether this adjustment has fully happened is debated, partly because new specialisms keep emerging as older skills become common.

Why Tech Hiring Takes So Long: Search Frictions

Even where suitable workers exist, finding them is costly. Search and matching theory, developed by Peter Diamond, Dale Mortensen and Christopher Pissarides, who shared the 2010 Nobel Prize in Economics, explains why unemployment and unfilled vacancies can exist side by side.

Both sides face search costs. Employers spend money advertising, screening and interviewing, while workers spend time finding vacancies and assessing offers. This information failure means that a worker may not know that a suitable role exists.

These frictions are especially high in tech because skills vary so widely. Two developers with the same job title may have entirely different expertise, which makes screening expensive and raises the value of intermediaries. Specialist recruiters advertising technology jobs reduce search costs on both sides by pre-assessing candidates and matching them with suitable roles.

Signalling Skills in the Tech Job Market 

Michael Spence's signalling theory explains how workers prove ability that employers cannot observe directly. A signal, such as a degree, is effective when it is costlier for less productive workers to obtain than for more productive ones.

In technology, a university diploma has lost some of its significance as an indicator of competency. Instead, many companies use other methods, such as vendor certifications, publicly available code repositories and work simulations, which may correlate better with an employee's ability to perform on the job. This indicates that when established signals lose their significance, new signals are developed by the marketplace.

Remote Work, Monopsony Power and Tech Salaries 

According to the theory of compensating wage differentials, workers are willing to accept lower compensation in exchange for desirable features of their jobs and demand higher compensation for jobs that lack those features. Flexible work arrangements are considered one of these desirable features; therefore, companies that provide the option for remote work have the ability to recruit high-quality employees with slightly lower salaries than traditional employers.

Remote work also affects employer power. Where one or two large firms dominate a regional labour market, they may hold monopsony power, allowing them to pay below the competitive wage. By letting workers sell their labour to employers elsewhere, remote work makes the labour supply facing each firm more elastic and reduces that power. Employers gain too, as hiring beyond their local area widens the pool of candidates without raising wages.

How Governments Can Close the Tech Skills Gap

There are many choices available for policymakers. An investment in education and training shifts the long-run supply curve outward. Immigration provides an opportunity to increase the overall amount of available workers even faster than investing in education and training, although immigration is a politically controversial subject. However, providing apprenticeships and subsidised retraining allows the movement of workers from declining industries to growing industries, thereby reducing structural unemployment.

Each option involves trade-offs, and none works instantly. Supporters of faster action argue that shortages hold back productivity and growth, while others warn that rapid expansion of training risks producing skills that are outdated by the time students qualify. Either way, when supply adjusts slowly and matching is costly, the gap between available workers and unfilled roles can last for years.