It's the wave of the future: The economy thrives, but the employment rate doesn't

Sept. 7, 2006 -- The "jobless recovery" that befuddled observers after the recession in the early 2000s was no fluke. It's actually a pattern that we can expect to continue thanks to technology's uneven impact across sectors of the economy, according to research from a business professor at Washington University in St. Louis. What's more, this new trend in business cycles is as important in making policy decisions as it is about the stability of the country's economy.

"Technology doesn't just land like a giant asteroid and change everything," said Glenn MacDonald, the John M. Olin Distinguished Professor of Economics and Strategy at the Olin School of Business. "It used to be that new technology was broadly impactful. But newer innovations have less of that character, directly impacting some sectors more than others. The Internet, for example has had an incredible direct effect on sectors such as finance and insurance, or retail, but a much more incidental effect on others."

Recovering from a recession doesn't include the entire economy.

New technology brings economic change

With new technology comes the need for companies where the technology is important to retool and reorganize how their business is run. This typically involves reducing output and often cutting back on labor. This translates into that sector of the economy beginning to slow.

"And that has other effects," MacDonald said. "Some individuals either feel the employment reduction directly or develop concern about that possibility, which causes them to restrict spending, which begins to impact other parts of the economy. So the economy slides into recession -- employment is falls, as does output. These are the short term costs of reconfiguring the economy."

At the same time, firms are investing in new technologies. Once they get those technologies in place and running smoothly, they start to grow again, and employment in that sector starts to picks up. But that's only one part of the economy. Typically, the other parts continue to shrink.

"But people are smart. They see that some part of the economy is growing. They see the job opportunities and they think, 'Gee, the other part of the economy looks pretty promising,' so they do the things that are needed to switch sectors, such as searching for a new job, investing in new skills, and so on." MacDonald said. "But output has to grow enough to make the decision to move into a different sector of the economy an attractive one, because, for example, there are some who used to work in that part of the economy that continue to seek work there. That means you're going to see quite a bit of growth in that part of the economy before many actually move towards it."

"Investment in new skills and moving across sectors takes time. Even as output starts to grow, it will take a while for people to pulled into that part of the economy," MacDonald said.

In other words, output may grow, but the unemployment rate does not budge for an extended period of time. This results in the jobless recovery.

Jobless recovery's broader influence

"One reason it's important to understand how a jobless recovery happened is that it's going to happen again," MacDonald said. "The policy implications are far-reaching, including education, government unemployment insurance, poverty, and globalization."

"The kind of unemployment insurance that was effective during previous recessions will now not work nearly as well," MacDonald said.

Because of this new economic pattern, education becomes even more important for people—particularly, general education. There is already much less on-the-job training and much more formal education. People know they are going to cycle through many jobs, and probably careers—unlike 50 years ago when someone stayed in the same career, and even the same job, nearly all their lives.

"The unevenness in the way technology hits appears to be accelerating for unknown reasons; for proof just compare the last two recessions. If this trend continues it will cause businesses to adjust, and people to change employment unfamiliar ways, even impacting related phenomena such as outsourcing. Technology bring great benefits to the economy, but the associated investments are not free, and businesses and individuals will pay these costs as they make the adjustments needed to capitalize on new technology."