questions Flashcards
Analyse the impact of a declining labour force participation rate on the UK economy.
1️⃣ Lower Potential Economic Growth → Declining Productive Capacity → Lower Long-Run GDP
Fewer workers in the economy mean less labour input, reducing the economy’s productive capacity.
This leads to a fall in aggregate supply (LRAS shifts left), reducing long-run GDP growth.
As fewer goods and services are produced, the economy’s growth potential stagnates.
The UK becomes less competitive globally, as productivity growth slows.
📌 Evaluation: The impact depends on productivity – if remaining workers become more productive (e.g., due to automation), growth may still continue.
2️⃣ Higher Dependency Ratio → Increased Pressure on Public Finances → Risk of Higher Taxes or Spending Cuts
A shrinking labour force means fewer taxpayers contributing to government revenue.
At the same time, more people are retiring or not working, increasing welfare and healthcare costs.
The government faces a fiscal burden, needing to either increase taxes or cut spending to cover deficits.
This can lead to lower disposable incomes, weaker consumer spending, and lower economic growth.
📌 Evaluation: If the government borrows to fund welfare spending, national debt may rise, leading to higher future interest payments.
3️⃣ Labour Shortages → Rising Wages & Cost-Push Inflation → Reduced International Competitiveness
A smaller workforce leads to labour shortages in key industries (e.g., healthcare, construction, tech).
Firms respond by offering higher wages to attract workers, increasing business costs.
Higher costs are passed on to consumers as higher prices, leading to cost-push inflation.
UK goods and services become less competitive globally, worsening the trade balance.
📌 Evaluation: Higher wages could increase disposable income, boosting consumer spending in the short run.
4️⃣ Declining Innovation & Productivity Growth → Slower Technological Progress → Less Investment
A reduced labour supply can limit the pool of skilled workers, slowing down innovation and entrepreneurship.
Businesses may invest less in R&D, leading to slower technological advancements.
The UK may struggle to compete with more dynamic economies, like the US or China, in high-growth industries.
Lower business confidence could lead to lower investment, further reducing economic growth.
📌 Evaluation: If firms adopt automation & AI, productivity might rise, offsetting the negative effects.
5️⃣ Changes in Consumer Demand → Shift in Economic Structure → Growth in Certain Sectors
A shrinking workforce, particularly aging demographics, leads to changing consumer preferences.
More demand for healthcare, pensions, and social care, while less demand for education & housing.
Businesses must adapt, potentially causing structural unemployment in declining industries.
Growth shifts towards public services, potentially leading to higher government intervention in the economy.
📌 Evaluation: If immigration policies allow skilled workers to enter, labour shortages could be partially offset.
Explain one reason why UK wage growth has outpaced inflation
1️⃣ Tight Labour Market → Increased Worker Bargaining Power → Higher Wages → Wage Growth Exceeding Inflation
The UK has experienced low unemployment, leading to a tight labour market where firms compete for workers.
Labour shortages in key sectors (e.g., construction, healthcare, tech) mean employers increase wages to attract and retain staff.
Stronger bargaining power allows workers to demand better pay, especially in industries with skill shortages.
As a result, wage growth accelerates beyond inflation, boosting real incomes.
📌 Evaluation: If the workforce increases (e.g., due to migration or automation), this could ease shortages and slow down wage growth.
2️⃣ Post-Pandemic Recovery → Productivity Gains → Firms Can Afford Higher Wages → Inflation Falls Relatively
After the COVID-19 pandemic, businesses invested in technology and efficiency improvements, boosting labour productivity.
Higher productivity allows firms to pay higher wages without raising prices excessively.
Meanwhile, supply chain issues (which previously drove inflation) have eased, lowering cost-push inflationary pressures.
This allows wages to rise faster than inflation, improving real earnings.
📌 Evaluation: If productivity growth slows, wage increases could become unsustainable, leading to renewed inflationary pressures.
3️⃣ Declining Inflation → Price Growth Slows → Even Modest Wage Growth Outpaces Inflation
Inflation surged due to energy price shocks, supply chain disruptions, and monetary expansion, but has since declined.
Falling energy costs and lower global shipping costs have helped slow inflation.
If wages continue rising at a steady rate, while inflation slows, real wages increase.
This results in higher disposable incomes, boosting consumer spending and economic confidence.
📌 Evaluation: A potential risk is that higher wages could reignite demand-pull inflation, especially if firms pass costs onto consumers.
4️⃣ Government Policy (e.g., Minimum Wage Increases) → Higher Wage Floors → Lifts Overall Wage Growth → Outpaces Inflation
The UK government has raised the National Minimum Wage and National Living Wage, directly increasing wages for low-paid workers.
This creates upward pressure on wages across the economy as firms adjust pay structures to maintain wage differentials.
Wage increases in public sector jobs (e.g., NHS, education) also contribute to higher overall wage growth.
Since inflation is falling, these wage rises appear larger in real terms, improving household purchasing power.
📌 Evaluation: If wage increases are not matched by productivity gains, firms may respond with higher prices or job cuts, reversing gains.
5️⃣ Shift in Workforce Composition → More High-Paying Jobs → Averages Wage Growth Up → Exceeds Inflation
The UK labour market has seen a shift towards higher-skilled, higher-paying roles in tech, finance, and professional services.
With fewer low-wage jobs and growth in high-wage sectors, the average wage increases faster than inflation.
AI and automation reduce demand for low-skilled roles, further increasing demand for skilled workers, boosting wages.
This structural change pushes aggregate wage growth above inflation.
📌 Evaluation: If low-paid workers struggle to transition into high-paid sectors, wage growth may be uneven, leading to greater income inequality.
(12 Marks) Assess the impact of rising interest rates on unemployment in the UK.
One impact of rising interest rates is higher cyclical unemployment. The Bank of England’s 5.25% rate increases the cost of borrowing, making loans more expensive for firms. This discourages investment in capital, R&D, and expansion projects, which could have increased productivity and output. With rising costs and weaker investment, firms may cut spending on wages, leading to job losses, particularly in interest-sensitive industries like construction, retail, and finance.
As labour is a derived demand, firms that experience lower consumer spending due to higher mortgage repayments and reduced disposable income will also cut jobs. This could trigger a negative multiplier effect, as rising unemployment further weakens demand, reduces firm revenue, and leads to even more layoffs, increasing the risk of a recession.
However, the extent of job losses depends on labour market regulations. Some workers are protected by fixed-term contracts, severance pay, or union agreements, limiting firms’ ability to lay them off immediately. But, in sectors like the gig economy (Uber, Deliveroo) and retail, where zero-hour contracts are common, unemployment may rise much faster.
Another impact of rising interest rates is higher structural unemployment. As borrowing becomes expensive, firms may turn to automation and AI to replace human workers and cut costs. Government incentives, such as subsidies for digital transformation, may accelerate this shift, making it cheaper to invest in machines than hire workers. Jobs that rely on routine, repetitive tasks (e.g., manufacturing, customer service, logistics) are most at risk.
If workers lack retraining opportunities, they may struggle to find new jobs, causing long-term unemployment (hysteresis). This can lead to a decline in workforce participation, lower tax revenues, and higher government spending on benefits.
However, automation is unlikely to replace all jobs equally. AI struggles with complex decision-making, creativity, and human interaction, meaning roles like lawyers, teachers, and healthcare workers remain safe from automation in the near future.
