May 21, 2012

"A Fast Infusion Of Jobs"

Patrick Laverty

One thing has stuck out to me recently in a couple articles I've read. One article is a couple years old and the other appeared just this past weekend and I think they both make logical mistakes. They both talk about getting Rhode Islanders back to work, yet both are also in fields that I wonder how many new hires are being plucked from the unemployment lines and how many are being taken either from other companies or moved from one project to another.

During the past week, in trying to figure out all this 38 Studios stuff, Ted Nesi sent me an article he wrote in 2010 when the deal was first being done. One part that stuck out to me was this:

Robert Stolzman, a lawyer for the EDC, said last week. "We wanted a fast infusion of jobs in Rhode Island." The number of unemployed Rhode Islanders was 67,500 in August and the jobless rate was 11.8 percent, the R.I. Department of Labor and Training said Friday.
However, these aren't the type that someone routinely can pick up after filling out a simple application:
Each of those jobs must pay at least $67,500 a year plus benefits under state law.
That's no small salary here in RI, even for a game developer. I have to believe that in order to really qualify for that kind of salary, we're dealing with some fairly well-qualified individuals. One thing that I'd like to see in 38 Studios' hiring data (but I'm 99.9% certain will never see the light of day) is how many of their hires were plucked from the Rhode Island unemployment lines. Isn't Mr. Stolzman at least implying the point of the EDC's deal with 38 Studios is to hire unemployed Rhode Islanders? When you have tens of thousands of people out of work, hiring up to about 300 people isn't going to put much of a dent in the unemployment numbers, but if you aren't pulling people off the unemployment lines, it sure isn't going to help those numbers either. How many of the new hires were pulled away from other local companies or even people who relocated from other parts of the country? Wouldn't that be good information to have to see that the intent of this deal with the state was being followed?

Then this weekend in another Op Ed to the Providence Journal, David Cicilline wrote:

In addition, the House Republican budget calls for deep cuts in highway funding, reducing transportation spending by at least 25 percent over 10 years. It slashes much-needed infrastructure investments that would put thousands of Rhode Islanders back to work.
I have no doubt that there are unemployed construction workers. Some of my neighbors are in the construction industry, I hear their stories all the time. However, if there was more funding given to highway projects, what are the odds that it would be given to the unemployed? Or would it be given to one of the usual, big-name construction companies that we always see by the side of the road? Would they be taking people off the unemployment line too or would they simply finish one job and move their people on to the next job? Just like when PolitiFact gave Sheldon Whitehouse a "False" rating for fudging his numbers when it came to putting people back to work, I see much of Cicilline's rhetoric in the same way. If we started handing out highway contracts, how many people would it pull off the unemployment lines and not just how many people would be employed. In spite of Senator Whitehouse's math, one guy working a job this week and working a job next week is still just one job.

To me, getting people back to work is and should be the number one issue going forward. When people are working, lots of other problems seem to disappear (a pessimist might say it merely hides the structural issues). Getting people off the actual employment lines should be the top priority for everyone running for and already in office.

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"Each of those jobs must pay at least $67,500 a year plus benefits under state law."

According to reports, the average salary at 38 Studios is actually $83k plus benefits, which is insanity for a video game start-up. Nobody should be wondering how they burned through so much money so quickly: out-of-control headcount and compensation. My initial 5-10 year bankruptcy estimate for the company was far too conservative in retrospect - it assumed they would make the most of their reserves. My new estimate is 2-3 years, and that's assuming the state bails them out with credits or loans at every turn.

Posted by: Dan at May 22, 2012 7:49 AM

Dan, I don't put much weight in an average in a case like that. They could have everyone in the company making the $67k but one person making a half million and that's going to skew the numbers. So in this instance, I'm not sure that the "average" tells us much.

That being said and hearing about other gaming companies, nearly 400 people does sound like a lot for the stage they were at, but that's the deal that they made with the EDC and those are the terms that the EDC hung on them.

Posted by: Patrick at May 22, 2012 8:22 AM

Patrick is hitting on an important point of the whole political obsession with 'creating jobs' that we've all been swept-up in. I have a LOT of unemployed or underemployed friends; people ranging from high school grads to those with advanced degrees. Not once have any of them even considered applying for a job doing something like shoveling asphalt for the state.

According to the liberal narrative, all we need is for about half the currently unemployed to do is get jobs and they'll 'jump-start' the economy. I don't think that holds true in the current climate. If the unemployed were to magically get middle-class jobs, they'd ramp up their consumption, of course, but mostly for stuff made overseas. Everyone I know is already housed, and I don't see many young people jumping into the housing market even when they do find themselves good jobs.

Posted by: mangeek at May 22, 2012 8:44 AM

"I don't put much weight in an average in a case like that. They could have everyone in the company making the $67k but one person making a half million and that's going to skew the numbers."

That's technically true. I would *hope* that the calculation method would take account of that and exclude outliers like the CEO or the fantasy author they blew $1 million on, although since this is the EDC we're talking about, maybe I shouldn't have so much faith. But the fact that it's an average is even more troubling in some ways because we know they're going to have a significant number of low-pay employees, such as game testers, so that means the developer salaries they're paying are probably astronomical - on par with what established, wildly successful companies are paying some of their heavy talent. This would be consistent with Schilling's foolish aim to immediately jump to the top of the industry with public investment and run with the big dogs without doing any of the hard work creating valuable IP or building up the company's reputation first.

On the jobs creation issue, every study of the stimulus hiring I've seen indicates that most of the "created jobs" were created at the expense of existing jobs, meaning somebody left their current job to get one of the higher-paying "stimulus" jobs. Less than half came from unemployment. Government job training programs, which the progressive central planners are always touting, have abysmal success records, when they are even evaluated at all. A lot of the participants have been through multiple jobs programs already and never actually land in a permanent position. I similarly don't think that any of these $100k+ developers at 38 Studios were sitting around on unemployment before Schilling came along. They most likely just jumped on the public-money band wagon to get an artificially created pay raise by leaving their current job. You never hear about how many small local companies lost valuable employees or went out of business to these publicly fueled leviathans. That is the "unseen" here.

Posted by: Dan at May 22, 2012 9:14 AM

"they're going to have a significant number of low-pay employees"

I'm not sure what you consider to be "low-pay" but if they company wants the hiring to count against their quota, it has to be at least that $67,000 number. I don't consider that low paying by any means. And the reports we heard was that they had 288 jobs counting toward their quota. If they do have people making less than $67,000, then they don't count toward the EDC's requirements, unless those terms were changed.

Posted by: Patrick at May 22, 2012 9:29 AM

"the developer salaries they're paying are probably astronomical - on par with what established, wildly successful companies are paying"

Most other companies use existing game engines (the brains behind the game's graphics, physics, and gameplay). Amalur was built from the ground-up, which means that you NEED a lot of top-tier programmers.

They could have created a few smaller revenue streams by working with and licensing other engines first, keeping their own for the flagship product.

Sure, you can hire a 'developer' for $60K, but not one who can write a physics engine from scratch. Those guys get paid BIG money.

Posted by: mangeek at May 22, 2012 10:26 AM

Well, I'm not going to pretend to know everything about the industry or these kinds of business decisions, but an $83k average salary sounds very high for a start-up game development company. I've run that number by a few of my programmer friends and they expressed the same sentiment. Mangeek's point supports my argument that maybe all of the incentives and business decisons aren't so healthy in this situation. Taxpayers shouldn't *have* to be examining such practices by private companies in the first place.

By low salary positions, I was referring to game testers, who are well-known to make slightly above minimum wage. My point is only that inflated headcount and compensation would be consistent with the perverse incentives in these "stimulus" situations to grow as quickly as possible and attract top talent on a bubble of public funds without making the responsible business decisions and putting in all the hard work that legitimate companies do for long-term sustainability.

Posted by: Dan at May 22, 2012 10:38 AM

Mangeek - There is no way on this planet that survey is accurate. QA game testers make nowhere near $50k average. Those are widely known to horrible, bottom-of-the-barrel positions with insane turnover for which $10/hour would be considered competitive.

There is even a webcomic created by the Penny Arcade guys about how low skill and degrading those positions are:

Posted by: Dan at May 22, 2012 10:59 AM

The tech industry is really hard to measure. It's not like we have standardized titles or pay grades. I'll bet most video game companies have 'in-house QA staff' who make that kind of money on payroll, and armies of people who work on-contract for $9/hr.

As for what I'm seeing with developers right now, I have some friends with skill-sets that would be appropriate for gaming, they make a lot more than the average 'I can do Java' crowd.

Posted by: mangeek at May 22, 2012 11:43 AM
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