What is the New Economy?

The New Economy refers to the shift from a production-based to a knowledge-based economy in the United States and similar nations during the second half of the twentieth century. In the Old Economy, market growth was primarily spurred by improvements in manufacturing efficiency. In the New Economy, growth tends to be based on the rate that new technology can be utilized to improve a service. The future prospects for the New Economy are not well understood by economists, and many competing theories offer different predictions.

In the United States, the economy in 1950 was organized around production with 60% of jobs being unskilled. Unskilled labor is mainly manual labor that does not require educational degrees or specialized knowledge. The market of this time was primarily national—-low taxes, cheap land, and good transportation infrastructure made it profitable to sell goods within U.S. borders. Manufacturing companies focused on improving the efficiency of production by making gains in incremental reductions of cost. Annual productivity and wage growth averaged around 3% at this time.

By the first half of the 1990s, this growth rate fell to less than 1.25% in the U.S. This slow decline in manufacturing growth has been attributed to the availability of cheaper labor overseas, depletion of natural resources, and demands for higher standard of living from American workers. Developing countries were able to make products cheaper than American industries could, and this caused many consumers to stop buying from domestic businesses.

Today, a competitive advantage for a business is usually based on advances in education and training of workers. In the year 2000, only 15% of American jobs could use unskilled labor. Wages for unskilled laborers have been dropping in recent decades, especially for those without a high school diploma. Education is considered the key to individual success in the New Economy.

In the New Economy, the work process is no longer static. Technology can be used to alter the organization of businesses and the economy itself. Many jobs are oriented at generating information rather than production of material goods. This can be seen in the high number of white-collar office jobs in developed countries today.

Communities typically try to attract businesses differently in the New Economy. In addition to good physical infrastructure, access to key information networks is valued. Incentives for higher education are commonly offered. Involvement in the global economy is now considered necessary in many business sectors as well.