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 unit labour costs fall relative to foreign competitors, so UK firms can lower the prices of their exports.
unit labour costs · price competitiveness
unit labour costs · price competitiveness
Assumes: Firms pass lower costs on in lower prices.
But: Firms may keep the lower costs as higher profit, leaving export prices unchanged.
3
In addition, a more skilled workforce lets firms improve quality and innovate, raising non-price competitiveness in high-skill exports such as professional services, pharmaceuticals and aerospace.
non-price competitiveness
non-price competitiveness
Assumes: Skills are what hold back these industries.
But: Innovation also depends on investment, research funding and access to finance, so skills alone may not raise quality.
4
Consequently, foreign buyers switch towards UK goods and services, so export volumes rise.
exports · international competitiveness
exports · international competitiveness
Best link to attack
Assumes: Foreign demand responds to the price and quality of UK exports.
Assumes: Foreign demand responds to the price and quality of UK exports.
But: Exports also depend on income growth in trading partners, the exchange rate and trade barriers, which can outweigh skill gains, as the new barriers to trade with the EU after Brexit showed.
5
Therefore, export earnings rise relative to spending on imports, so the trade balance improves.
trade balance
trade balance
Assumes: Import spending does not rise as much.
But: Higher productivity raises incomes, and part of the extra income is spent on imports.
End
The trade balance improves as UK goods and services become more competitive.
Evaluation chain
- E1However, the rise in exports depends on demand abroad as well as on UK competitiveness.
- E2If trading partners are in recession, the pound appreciates, or trade barriers rise, foreign buyers buy fewer UK goods and services whatever their quality.
- E3As a result, the gains in competitiveness from better skills are offset, and exports rise much less than expected.
- E4So education and training improve the trade balance only slowly and modestly, and other factors can easily outweigh them.
The skills take years to build, so the effect on exports is long term.
Can you say this chain from memory?
Members can hide the links, test themselves and track which chains they have mastered.
Practise this chainMembers can hide the links, test themselves and track which chains they have mastered.
Questions this answers
- Assess the extent to which supply-side policies can reduce a current account deficit.
- Discuss the factors that determine a country's international competitiveness.
- Evaluate the view that improving skills is the best way to raise exports.
Diagram
No standard diagram. Unit labour cost comparisons with competitors, or the share of high-skill services in UK exports, make good evidence.
Reverse and related
Weak skills → low productivity → unit labour costs rise relative to rivals → exports less competitive → trade balance worsens.