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Opinion: 'Basic' Business, the Key to New Jersey's Telecom Rebound

Basic industries typically serve national or international markets, creating new wealth and funneling it into a region or state.

James W. Hughes

In the final quarter of the 20th century, New Jersey’s telecom industry, led by AT&T, was one of the primary drivers behind the state's information-age economy.

But AT&T, once the proverbial 800-pound global telecom gorilla, was ultimately diminished by federal court-mandated divesture and deregulation; profound technological changes; and the emergence of large numbers of more nimble national and global competitors. As a result, telecommunications employment contracted markedly between 1990 and 2004. And as AT&T lost its dominance, New Jersey’s role as “telecommunications central” was substantially diminished.

The period from that point on, however, is marked by stabilization and a modest rebound. Today, New Jersey retains its role as a key national telecom player, although not to the extent of the past. This surprising and welcome turnaround is extraordinarily important to the future of the state’s economy.

Joseph J. Seneca

Historically, New Jersey’s telecommunications sector played a powerful role of major wealth creator within the state, because a significant portion of the industry was externally supported. This type of economic activity is also known as export-based or basic and comprises industries that primarily serve large national and international markets.

Basic industries largely export goods and services. They are wealth-creating in the sense that they generate new dollars, originating externally, that flow into the state. These dollars typically support high-paying skilled jobs that, through an economic multiplier effect, support a range of non-basic industries and service jobs.

Non-basic industries depend mostly on local consumer spending or spending by larger basic industries. They rely on recycled dollars -- dollars already resident in the state. They do not create flows of new wealth into the state. Classic economic literature asserts that it is not possible to have a sustained strong state or regional economy if it consists principally of non-basic industries.

AT&T was once the gold standard of the basic industry. At its peak, it had a near monopoly on long-distance phone and communications services for the rest of the country. Approximately 97 percent of AT&T’s revenue came from outside New Jersey, generating a tremendous flow of dollars. This influx supported, among other things, the 2- million-square-foot Bell Labs research complex in Holmdel, completed in 1962; the 2.7-million-square-foot headquarters complex in Basking Ridge, which opened in 1976; and the Networks Operation Center in Bedminster, which opened in 1977 and made it possible to manage the entire AT&T long-distance network from a single location in real time. These buildings hosted legions of high-paying knowledge-based jobs and were potent symbols of New Jersey’s technological prowess.

There also was a historically significant manufacturing component to telecom. Western Electric was the manufacturing arm of AT&T. It operated several factory complexes around the country: all components of the AT&T network and devices attached to it had to be produced by Western Electric.

This monopoly also provided another major basic industry in New Jersey, centered on the Kearny Works. Kearny, in its prime, was one the largest telephone and telecom equipment manufacturers in the world, with most of its products purchased by the local Bell systems in other states.

Built in 1924, Kearny was fully phased out by 1985, as production shifted to Asia. Thus, a quarter of a century ago, the manufacturing component of telecommunications had largely disappeared from New Jersey. But the information-age knowledge-based telecom workforce remained. That, however, began to change as the 1990s unfolded. New Jersey's highly visible -- and still highly lamented -- manufacturing hemorrhage began in earnest after 1969. It took 32 years, until 2001, for manufacturing employment to decline by one half. In other words, manufacturing employment had a half-life of 32 years.

Virtually unnoticed at the time, an employment drop of equal relative magnitude occurred in high-technology telecom, led by the decline of AT&T and Lucent, an independent products and systems business spun off from AT&T in 1996. Employment in wired telecommunications fell from nearly 50,000 jobs in 1995 to approximately 25,000 jobs in 2004 -- a half-life of just nine years!

New Jersey has long accounted for about 3 percent of the nation’s population, and 3 percent of its jobs. In 1995, however, the state still accounted for 6.8 percent of the nation’s wired telecom employment, a unique and powerful concentration. By 2004, the state’s national employment share in wired telecommunications had fallen to 3.5 percent. In 2001, AT&T put up for sale its Basking Ridge headquarters, which sat empty for four years. In 2006, Bell Labs in Holmdel, then owned by Alcatel-Lucent, was sold. The site still remains vacant.

But the telecommunications world did not come to an end in New Jersey.

Verizon purchased the Basking Ridge headquarters in 2005, choosing a New Jersey location over competing out-of-state sites. It now serves as Verizon’s operations center and houses the leadership team of its three business groups. Thus, the former AT&T campus has been reborn and is again functioning as a strong basic industry. This has contributed to the rebound of wired telecommunications employment in New Jersey, from approximately 25,000 employees in 2005 to nearly 31,000 in 2009.

As a result, the state’s share of national employment in this sector has risen from 3.5 percent in 2005 to 4.9 percent in 2009. This is despite AT&T’s acquisition by SBC in 2005. Although it retained the legendary AT&T name, its headquarters is now in Dallas, Texas. But there still is a significant AT&T presence in Bedminster.

Telecom remains a significant foundation of the state’s high-technology economy, despite the dramatic changes of the past 15 years. With significant numbers of small telco firms and the state’s skilled workforce, the future is looking brighter for the telecom industry in New Jersey than it did just several years ago.

James W. Hughes is Dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University.

Joseph J. Seneca is University Professor of Economics at the Bloustein School.

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