Education, training and the skills of the workforce

Overview

Apprenticeships and vocational training raise productive potential, spending on education raise long-run aggregate supply and improved skills reduce structural unemployment.

What you need to know

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Questions from this subtopic

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1. 1

   Why do firms tend to invest less in training their workers than is socially desirable?

   Model answer

   Training in transferable skills raises a worker’s value to every employer, so a firm that pays for it risks the worker being recruited by a rival that pays a slightly higher wage and bears none of the training cost. Because each firm knows this, firms tend to concentrate their training on narrow, firm-specific skills and to fund less transferable training than is efficient, which is a free-rider problem. It is compounded by credit constraints, since young workers usually cannot borrow against their future earnings to fund their own training, which is the justification for public funding, training subsidies and apprenticeship levies.

2. 2

   How do apprenticeships and vocational training raise productive potential?

   Model answer

   They combine paid employment with structured instruction, so young people acquire recognised, transferable skills while producing output, and employers get workers trained to the standards their industry actually needs rather than to an abstract curriculum. This reduces the mismatch between the skills of the unemployed and the requirements of vacancies, lowering structural unemployment. Because trained workers produce more per hour, average labour productivity rises and long-run aggregate supply shifts right, although the effect appears only after several years.

3. 3

   How does spending on education raise long-run aggregate supply, and what is the main practical difficulty with it?

   Model answer

   Spending on schools, colleges and universities raises the stock of human capital, that is the knowledge, skills and health embodied in the workforce, and a more skilled worker produces more output per hour and adapts more readily to new technology. Over time this raises the economy’s capacity, shifting long-run aggregate supply right, and it also raises the return on physical capital because skilled workers use equipment better. The practical difficulty is the lag: a child entering primary school today will not affect the workforce for well over a decade, so no government can point to the results within its own term, and the spending has to be sustained across changes of administration.

4. 4

   How do improved skills reduce structural unemployment?

   Model answer

   Structural unemployment arises when the skills of those out of work do not match the requirements of the vacancies that exist, often because an industry has declined while another has grown. Training and retraining equip workers to fill those vacancies, so the mismatch narrows and people move from unemployment into work without any increase in aggregate demand being necessary. Because more of the labour force can be employed without bidding up wages in shortage occupations, the economy can operate at a higher level of output without inflation, which is a rightward shift of long-run aggregate supply.

5. 5

   Analyse the effect of a substantial improvement in the skill level of the workforce on unemployment and on the aggregate supply curve.

   Model answer

   Better skills allow workers to fill vacancies that were previously beyond them, so the mismatch between the unemployed and the jobs available narrows and structural unemployment falls, and workers also become more able to switch occupations when their industry declines. Each worker produces more output per hour, so at any given wage the cost per unit of output falls and firms are willing to supply more. On a diagram with the general price level on the vertical axis and real national output on the horizontal, both short-run and long-run aggregate supply shift right, so with aggregate demand unchanged real output rises and the general price level falls.

6. 6

   Why do some economists argue that better information about vacancies is itself a supply-side policy?

   Model answer

   Some unemployment exists simply because it takes time for workers and employers to find one another, and workers may not know which occupations are expanding or what qualifications they require. Public employment services, online matching, and clear labour market information shorten the search, so people spend less time between jobs and are more likely to end up in a role that suits their abilities. Reducing this frictional element raises the proportion of the labour force actually employed at any moment, which raises sustainable output without any extra spending on training.

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