What is jobless growth?

BY HANS WAGNER Updated May 29, 2018

The prospect of a jobless growth economy has ramifications for everyone. An economy
that is growing without showing concomitant growth in the number 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 for some, 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. An expanding economy 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 who 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 those first entering the work force.

Jobs and Economic Growth

Economies experience cyclical as well as structural changes as 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.

Employment Cycles
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 become rehired in their field or increases their
chances of finding similar work at a different company.

In a cyclical recovery, the core industries of the economy remain viable, and even
strong, and are thus able to recover relatively quickly without undergoing
significant changes in their basic operations. As a result, employment rebounds,
even though it lags the recovery levels of the economy as a whole. Eventually, the
economic growth drives unemployment levels down.

Sunset Industries
Economies experiencing 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
marketplace 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. With the jobs
previously available now gone, these workers must find work in other industries,
where their skills are not as valuable.

Sunrise Industries
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.

Lost Kingdom of the Horse

Consider the dawn of the 20th century, when automobiles replaced the horse and
buggy. The companies that made buggies encountered a structural shift away from
their products. The people who made buggies were no longer employable, and needed
to acquire new, more sophisticated skills 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.

More Cuts
In a structural recovery, many companies change the nature of their operations to
remain competitive. Some depend on productivity improvements via technology, and
some companies simply move jobs to lower-cost countries in order to remain
competitive. Once again, the unemployed people who formerly held jobs with these
companies find it very difficult to find new work. (Read about controversies of
outsourcing to low-cost countries in The Globalization Debate)

Retraining
Employees in shrinking industries must acquire new skills and undergo additional
training to become employable. Acquiring these new skills takes time, as does the
process of adapting to changing industries. 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, while increasing 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 the existence of 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 by
industry. Then, a more detailed study can be done on the promising companies within
that sector.