IGCSE Economics – Supply‑side Policy: Education and Training
Government and the Macro‑economy – Supply‑side Policy
Education and Training
Education and training are key supply‑side measures aimed at improving the quality and quantity of a country’s labour force. By raising human capital, governments seek to increase productivity, shift the long‑run aggregate supply (LRAS) curve to the right and promote sustainable economic growth.
Objectives
Increase the skill level of workers.
Reduce structural unemployment caused by skill mismatches.
Boost labour productivity and potential output.
Encourage innovation and the adoption of new technologies.
Improve the competitiveness of domestic firms in international markets.
Types of Measures
Formal education – investment in primary, secondary and tertiary schools, universities and vocational colleges.
Apprenticeships and on‑the‑job training – programmes that combine work experience with classroom learning.
Adult education and lifelong learning – courses for adults to acquire new skills or upgrade existing ones.
Subsidies and tax incentives – financial support for firms that provide training or for individuals who enrol in approved courses.
Public‑private partnerships – collaboration between government, industry and educational institutions to design curricula that meet labour market needs.
How Education and Training Affect the Economy
Channel
Short‑run effect
Long‑run effect
Labour productivity
Modest increase as workers acquire new skills.
Significant rise; LRAS shifts right.
Unemployment
Possible temporary rise if workers leave jobs for training.
Structural unemployment falls as skill mismatches are reduced.
Potential output (Y*)
No immediate change.
Higher \$Y^*\$ due to a larger, more skilled workforce.
Wage levels
May rise for newly qualified workers.
Wage growth aligns with productivity gains.
Advantages
Creates a more adaptable workforce capable of meeting changing industry demands.
Reduces reliance on imported labour and foreign expertise.
Can stimulate innovation, leading to higher‑value exports.
Improves social mobility and reduces income inequality over time.
Disadvantages / Limitations
High fiscal cost; benefits may take many years to materialise.
Risk of “skill oversupply” if training does not match market demand.
Quality of education varies; poor implementation can waste resources.
Immediate impact on unemployment is limited; other policies may be needed concurrently.
Evaluation Checklist
Is the programme targeted at sectors with the greatest productivity gaps?
Are there mechanisms to monitor and adjust curricula in response to labour‑market feedback?
Does the funding model (e.g., subsidies, tax credits) provide sufficient incentives without creating fiscal strain?
How are outcomes measured – test scores, employment rates, wage growth?
Are complementary policies (e.g., tax reforms, infrastructure investment) in place to maximise the impact?
Illustrative Example
Country X introduced a $2 billion “Skills for the Future” programme, which included:
Free vocational courses for 200,000 adults.
Subsidised apprenticeships in high‑tech manufacturing.
Tax credits for firms that invest in employee training.
After five years, the manufacturing sector’s productivity grew by 3 %, and structural unemployment fell from 6 % to 4 %.
Suggested diagram: LRAS shifting right due to improved education and training, with a short‑run upward pressure on price level and output.
Key Formulae
Potential output can be expressed as:
\$\$
Y^{*}=A \cdot F(K, L_{eff})
\$\$
where \$A\$ is total factor productivity, \$K\$ is capital stock, and \$L{eff}\$ is the effective labour input (quantity of labour adjusted for skill level). Education and training aim to raise \$L{eff}\$ and \$A\$.