The prospect of a jobless growth economy has ramifications for everyone. An economy that is experiencing growth without an expansion of jobs challenges investors, employees and industries to adapt to the new economic order. When growth is coupled with high unemployment, it means that the economy is experiencing structural changes. This structural shift offers opportunities to some and difficult choices for others. (Learn how to find a good measure for unemployment in The Unemployment Rate: Get Real)
What Is a Jobless Growth Economy?
As the population of a country grows, people need work in order to support their families and themselves. Economic growth is necessary to employ all those who seek work. Without sufficient economic growth, people looking for work will be unable to find it. In any economic condition, it is the individual workers possessing employable skills that will find work first. If the supply of jobs is plentiful, then more opportunities open up for those with less attractive skill sets.
In a jobless growth economy, unemployment remains stubbornly high even as the economy grows. This tends to happen when a relatively large number of people have lost their jobs and the ensuing recovery is insufficient to absorb the unemployed, under-employed and new members entering the work force.
Jobs and Economic Growth
Economies experience cyclical as well as structural changes when they recover from a recession. In a cyclical economy, employment growth and decline follows the expansion and contraction of the economy. A structural change, however, displaces many unemployed workers as their companies are unable to recover fully.
In cyclical economies, the GDP of the country contracts as companies lay off workers to bring costs in line with revenues. Unemployment climbs, contributing to the economic contraction. At some point, the economy stabilizes and begins to expand again. When it does, companies rehire their laid off workers. This rehiring process reduces the level of unemployment. In this case, the skills and training of the workers fit the needs of the companies. This rebound in activity in established industries helps laid off workers get rehired in their field or increases their chances of finding similar work at a different company.
The core industries of the economy remain strong and viable in a cyclical recovery, so they are able to recover relatively quickly without undergoing significant changes in the basic operation. As a result, employment recovers even though it lags the recovery of the economy. Eventually, the economic growth drives the unemployment level down.
Economies that experience high unemployment even as their gross domestic product (GDP) expands are encountering structural changes in their economy rather than a cyclical recovery. Many of the existing companies are unable to recover fully in a recession caused by structural changes. These companies are no longer able to compete in the market place as demand for their products or services falls. This can be due to new goods or services becoming available at a lower cost. In other cases, entirely new products may replace a company's niche product or service. Since these companies are unable to recover, they do not rehire their former workers. Without the jobs that were normally available, these workers must find work in other industries where their skills are not as valuable.
New industries usually recover more quickly and grow faster because they often benefit from a structural shift in the economy. Along the way, they need workers with different skill sets and training. These workers usually require superior skills, along with more education and training. That said, the growing companies may hire people with minimal skills to support a service function.
My Kingdom for a Horse
Consider the dawn of the 20th century when automobiles replaced the horse and buggy. The companies that made buggies encountered the structural shift away from their products. The people who made buggies were no longer employable and needed to acquire new skills that were more sophisticated in order to assemble complicated automobiles with engines and drive trains. Workers who began in the auto industry were more skilled than cart makers, making it hard for former buggy workers to get a start. (Read about the man who brought automobiles to the masses in Henry Ford: Industry Mogul And Industrial Innovator)
New industries create new employment opportunities for those individuals with the necessary training, education and skill sets. These companies tend to lead with innovation, creating new products or services. They also depend on research and development to create hard-to-replicate, higher value products.
In a structural recovery, many companies change the nature of their operations to remain competitive. Some depend on productivity improvements through technology, and some companies simply move jobs to lower cost countries so they can remain competitive. Once again, the unemployed people who formerly held these jobs find it very difficult to find new work. (Read about controversies of outsourcing to low-cost countries in The Globalization Debate)
Employees in industries that are shrinking must acquire new skills and undergo additional training to become employable. Acquiring these new skills and the process of adapting to changing industries takes time. This adjustment period is one of the reasons unemployment can increase even though the economy is showing signs of stability or even growth. Technology and productivity improvements change the nature of employment and increase the time it takes to retrain employees.
Structural change in an economy results in a large number of workers who are unable to find work. A large number of unemployed or underemployed people holds the growth of the economy back, as it takes a number of years before these individuals gain the skills they need to be employed at a similar level.(Read Six Steps To Successfully Switching Financial Careers for tips on a smooth career transition)
The Bottom Line
A jobless growth economy indicates changes to the fundamental basis of work for everyone. Some workers will do well, as they have the skills and training that growing industries require. Others face long-term unemployment or underemployment, and will be unable to find work until they obtain new skills.
Investors who recognize the structural changes in the economy will benefit if they align their investment portfolios with the economy's growth opportunities. Finding sectors that are growing can be as simple as following the employment numbers according to industry. Then a more detailed study can be done on the promising companies within that sector.
For related reading, take a look at Industries That Thrive On Recession.