ChainWhat it assumes · how to break it
Start
The government increases spending on education and training, for example funding apprenticeships and adult skills courses.
1
As a result, workers gain skills, so labour productivity rises.
human capital · labour productivity
human capital · labour productivity
Assumes: The training matches what employers need.
But: Courses can be poorly matched to the skills firms are short of, so productivity rises little.
2
This means skills shortages ease, so firms can fill vacancies without bidding up wages.
skills shortages · wage pressure
skills shortages · wage pressure
Assumes: The shortages are in the skills the training provides.
But: Shortages may be in particular regions or specialist fields that general courses do not reach.
3
Consequently, output per worker rises faster than wages, so unit labour costs fall and SRAS shifts right, easing cost-push pressure.
unit labour costs · SRAS
unit labour costs · SRAS
Assumes: Wages rise less than productivity.
But: If workers bargain for pay rises that match their higher productivity, unit labour costs do not fall.
4
In addition, LRAS shifts right, so AD can grow without causing demand-pull inflation.
LRAS · non-inflationary growth
LRAS · non-inflationary growth
Best link to attack
Assumes: Productive capacity grows at least as fast as AD.
Assumes: Productive capacity grows at least as fast as AD.
But: The spending raises AD at once, but the extra capacity arrives only years later, once people finish training and find jobs that use their skills.
End
Inflationary pressure falls: the economy can grow faster without prices rising, so inflation stays closer to target.
Evaluation chain
- E1However, the effect on inflation depends on timing, because the spending raises AD long before it raises capacity.
- E2Because training takes years, and workers then have to find jobs that use their new skills, LRAS shifts right only slowly.
- E3As a result, in the short run the extra government spending adds to AD, and if the economy is close to full capacity this adds to demand-pull pressure.
- E4So education and training reduce inflationary pressure in the long run, but may slightly raise it in the short run.
The spending adds to AD immediately; the gain in capacity takes years.
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Questions this answers
- Assess the impact of supply-side policies on the rate of inflation.
- Discuss whether spending on education and training can achieve non-inflationary growth.
- Explain how an increase in labour productivity might reduce inflationary pressure.
Diagram
AD/AS: LRAS shifts right. As AD also rises, real output grows while the price level stays stable or rises less than it otherwise would.
Reverse and related
Cuts to training → skills shortages and bottlenecks → wages and prices rise sooner as AD grows.