Aggregate Supply (AS) (Edexcel A Level Economics A)

Apart from literacy and numeracy skills in young workers, examine one reason for the trend in productivity in the UK, over the period shown in Figure 4.  

Figure 4: UK index of output per hour worked, base year 2016 = 100

The price of crude oil has risen by 23% in the last year, the price of steel has risen by 9% and prices of rare-earth metals have risen by 16%. Some economists argue that these price rises are less significant to the economy than improvements in the education levels of the workforce.

With reference to the example above, explain how an improvement in education can increase the potential output of the economy

Extract D

The productivity puzzle in the UK

Since the onset of the 2007–2008 financial crisis, labour productivity growth in the UK has been exceptionally weak. Despite some modest improvements in 2013, whole-economy output per hour remains around 16% below the level implied by its pre-crisis trend. Even taking into account possible measurement issues and changes in the size of the service sector, this shortfall is large and is often referred to as the ‘productivity puzzle’.

Measures of productivity can be used to inform estimates of an economy’s ability to grow without generating excessive inflationary pressure, which makes understanding recent movements important for the conduct of monetary policy. During the initial phases of the recession, companies appear to have acted flexibly by holding on to labour and lowering levels of capacity utilisation in response to weak demand conditions. But the protracted weakness in productivity and the strength in employment growth over the past two years suggest that other factors are likely to be having a more persistent impact on the level of productivity. These factors are reduced investment in both physical and intangible capital, such as innovation and training, and failings in the labour market such as immobility of labour and under-employment of skilled workers. Some economists explain this by using the concept of an output gap.

(Source: adapted from http://www.bankofengland.co.uk/publications/ Documents/quarterlybulletin/2014/qb14q201.pdf)

With reference to Extract D, explain the meaning of ' productivity’ and how it can affect the long run aggregate supply of a country 

Evaluate the microeconomic and macroeconomic effects of a significant rise in labour productivity. Refer to a market of your choice in your answer (25)

The recent UK court decision involving Uber drivers has broader implications for the gig economy, which is a term used to describe jobs that involve short-term contracts, self-employment, or zero-hour contracts. While this ruling specifically affects Uber, it has significant implications for a large group of workers and overall productivity.

In March 2021, the UK Supreme Court ruled that Uber drivers should be classified as "workers" rather than self-employed. This new status grants them rights and protections, including the national minimum wage and paid annual leave. Although Uber drivers now have these benefits, they still exhibit many characteristics of self-employed individuals.

The gig economy extends beyond digital platforms like Uber and includes people working on zero-hour contracts, short-term contracts, or as solo self-employed individuals. This category makes up about a quarter of the UK workforce. Many gig workers lack control over their work hours, which favours employers who benefit from flexibility. The number of self-employed and solo self-employed workers has risen significantly since the financial crisis.

While some gig workers appreciate the flexibility offered by digital platforms, not all workers have a choice. Some, particularly young men with low educational qualifications, are self-employed out of necessity due to a lack of other employment options.

The dominance of digital platforms and some employers limits workers' job choices. This one-sided flexibility in the labour market has led to low productivity, as low-income and insecure workers lack the means and motivation to invest in their skills and equipment. This situation has broader consequences, such as reduced tax revenue, as many gig workers do not earn enough to pay taxes like VAT. Additionally, most of these workers lack pensions and savings, which could strain the welfare state in the long term.

Enforcing labour market regulations is crucial to protect workers' rights, but this has been lacking in many cases. While recent judgments have affirmed workers' rights, enforcing these decisions is necessary to improve productivity and ensure fair treatment in the UK job market.

The price of crude oil has risen by 23% in the last year, the price of steel has risen by 9% and prices of rare-earth metals have risen by 16%. Some economists argue that these price rises are less significant to the economy than improvements in the education levels of the workforce.

Evaluate the likely impact of an increase in raw material prices for the global economy (25)