Economists disagree about the scale of the economic and social returns from higher spending on education - but few deny that "investment in education" has the potential to raise the total stock of skills within the work force and improve the employment prospects of thousands of unemployed workers. The economic returns from extra education spending can vary according to the stage of economic development that a country has achieved. However this has most recently been proven in 1999, when research from the London School of Economics found that putting more money into education has a direct impact on improving economic performance. The report from the university's Centre for Economic Performance suggested that developing countries which increase education spending and achieve a higher-qualified workforce can expect "handsome dividends: for workers, firms and the state" Government spending on education and training improves workers' human capital. They become better quality workers. Their productivity improves and so the LRAS curve shifts to the right.
Economies that have invested heavily in education are those that are well set for the future. Most economists agree, with the move away from industries that required manual skills to those that need mental skills, that investment in education, and the retraining of previously manual workers, is absolutely vital. It should also be noted that improved training, especially for those who lose their job in an old industry should improve the occupational mobility of workers in the economy. This should help to reduce the problem of structural unemployment. A well-educated workforce acts as a magnet for foreign investment in the economy, which adds to the aggregate demand of the economy helping to further shift the aggregate demand of the economy raising the average price and GDP. The international competitiveness of British firms in domestic and overseas markets, from improved productivity, businesses can develop a competitive advantage in markets where there is intense price and non-price competition from overseas suppliers, hence further maintaining the aggregate demand shift.
The Irish economy is a great example of how supply side reforms designed to increase the qualifications and skills of the labour force, together with favourable tax rates for companies and workers - has encouraged a huge flow of inward investment from overseas (in particular from the United States). The Chancellor of the Exchequer Gordon Brown announced in his July 2000 Comprehensive Spending Review that the education budget over the next four years would increase by an annual average of 6.6%. This will lead to an increasing share of national income taken up by education spending.
Higher labour and capital productivity can provide the economy with a number of advantages over time. Improvements in labour and capital productivity allow businesses to produce output at a lower average cost, these cost savings might be passed onto consumers in the form of lower prices, encouraging an expansion of demand, higher output and possibly an increase in employment. These following efficiency gains resulting in rising productivity are a source of larger profits for companies. These profits might be re-invested through higher capital investment or research and development. These profits in addition to capital investment can be transferred to workers to promote higher wages, so that the improvements in labour productivity and the real wages paid increase. Millions of employees in the modern labour market have some element of performance-related pay in their overall earnings package.
It is clear that the capacity of the economy to produce goods and services depends on the stock of factor resources available plus the productivity of those factors, therefore the greater the investment in education can yield a higher productivity in labour. The Treasury recently published a study of the determinants of long-run growth for the UK. The trend growth for real GDP of 2.5% per year is based on an assumption of 2% year on year improvements in productivity. (The remainder of the growth comes from increasing levels of employment) If the British economy can raise the rate of growth of productivity then the sustainable growth of national output can also pick up. This has implications for living standards, unemployment and tax revenues and government spending.
Long run aggregate supply is determined by the productive resources available to meet demand and also by the productivity of factor inputs (labour, land and capital). Changes in technology also affect the potential level of national output in the long run, and hence add to the shift in the possibility production frontier of the UK economy. In the short run, producers respond to higher demand (and prices) by bringing more inputs into the production process and increasing the utilization of their existing inputs. Supply does respond to change in price in the short run - we move up or down the short run aggregate supply curve, proportionate to the price change depending on the price elasticity of supply.
In the long run we assume that supply is independent of the price the productive potential of an economy is driven by improvements in productivity such as the rise in labour productivity through investment in secondary education.
