According to Ventura R. (2018), the workforce is an individuals group, working in an industry or company. Several workers and the level of education are believed to enhance economic growth by increasing labor productivity. In terms of the workers’ quantity, there are several ways in which it can influence economic growth. First of all, it may amend potential output and productivity, which in turn can lead to a complementary rise in a country’s exports. Since exports are enhanced, the government will have more profit, causing the economy to grow (Martin, 2018). Secondly, the recruitment of more workers in industries means that fewer people will be unemployed. More precisely, a higher employment rate shows that the economy of a country improves. When more people become employed, they will have greater income and spending. In other words, as employees’ earnings will grow, they will be able to meet their financial obligations sooner, which means benefits to businesses and the government. Besides, all these factors may increase GDP and Aggregate Demand, which will positively impact economic growth (Federal Reserve Bank of Dallas, 2013).
Moving on to the educated workforce, its main impact is related to human capital. It means that the knowledge, skills, and experience of workers can enhance labor force quality. Recruitment of qualified workers also indicates innovation, new perspectives, and ideas. The more qualified the workers, the more considerable their impact on labor productivity and level of output, because they will be able properly to perform jobs, requiring literacy, the use of contemporary technologies, and a variety of skills such as critical thinking and others. Hiring such employees also helps to reduce training costs. In this way, educated workers may improve economic growth. (Hanushek, Jamison, and Woessmann, 2010). Moreover, an educated workforce helps to lower the unemployment rate and increase real GDP and wages. For instance, the Global Partnership for Education (2019) claims that a qualified labor force raises average annual GDP approximately by 0.37% and education increases workers’ earnings by around 10%. Countries’ economy with a greater proportion of the educated labor force grows faster compared to that of a country with a lower rate.
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Additionally, the production possibility frontier can shift upward due to the size of the workforce and educated workers can shift it even more. These two factors can result production capacity increase in the economy (Ehrenberg and Smith, 2009).
Inflation can be defined as a constant price change of goods and services over a certain period (Romer, 2012). It is argued that sometimes inflation can be low, which means that prices increase gradually. According to the Bank of England (n/d), low inflation has a significant influence on the UK, and the inflation target of CPI is considered to be 2%. Burda M. and Wyplosz Ch. (2009) state that there are many reasons why it could be the government’s important aim. Firstly, low inflation boosts the employment rate. The prices of goods and services can be consumer affordable with inflation being relatively lower. Therefore, AD will increase and businesses will employ more workers to grow their production. Moreover, if inflation decreases, exports and economic competitiveness of the UK in the long-term will improve and imports will conversely diminish, leading to prevention of current account deficit, higher GDP, and economic growth (ibid). Thirdly, it can encourage British industries to make capital investments and long-term decisions. Stable inflation can raise consumers’ confidence, spending, and aggregate demand due to less uncertainty and confusion regarding the future. Additionally, borrowing and general costs may be reduced and people could take loans. Although, for this to occur, interest rates must also be low. Last, but not least it might help the UK to prevent ‘boom and bust economic cycles’. More specifically, if inflation is lower, the government may avoid rapid economic expansions or economic contractions, which hurt the government economy. For instance, during the late 1980s, the UK experienced an unsustainable economic boom, which thus led to a recession in the early 1990s. During this period, the economy of the UK expanded rapidly but led to higher current account deficit and inflatiAfterwardards, inflation had reached 9.5% by 1990, and policies to solve this issue caused the recession. Consequently, falling inflation may contribute to avoiding such problems (Pettinger, 2016).
On the contrary, if inflation is high, it may also cause some problems. The first drawback of growing inflation is uncertainty, which negatively affects investments. It discourages firms from making investments because generating returns from investments requires a long time. High inflation can make investment decisions unprofitable and slow down economic growth in the long run (Barclays, 2017). The second disadvantage is related to living standards. High inflation can have a regressive effect on consumers, that is, real incomes decline when nominal wages are lower than inflation. For example, from 2008 to 2014, the UK experienced high inflation with incomes rising slower than prices, which triggered a deterioration in living standards. Besides, high inflation reduces purchasing power. As inflation goes up, wages adversely go down and money loses its value, people will be able to buy a few products, spending more money. Additionally, consumer spending fall may cause a decline in businesses’ sales and profits because of less consumer income for making purchases (Lerven, 2017). Another risk is that the economy may become uncompetitive in the international market. Exports of the UK may have less competitiveness, when inflation is relatively high, leading to a current account deficit, lower aggregate demand, and economic growth. The impact of inflation can be even problematic if a country has a fixed exchange rate.
- Burda M. and Wyplosz Ch. (2009) Macroeconomics. 5th ed. New York: Oxford University Press
- Blanchard O. (2011) Macroeconomics. 5th ed. Boston: Pearson Education Inc.
- Achour S. and Connelly A. (2018) Why low unemployment might not lead to higher inflation? Available at: https://www.marketplace.org/2018/02/21/economy/what-we-can-learn-januarys-fed-meeting-1 [Last Accessed: 23 March 2019]
- Karageorge E. (2018) What is up with low inflation? Available at: https://www.bls.gov/opub/mlr/2018/beyond-bls/pdf/whats-up-with-low-inflation.pdf [Last Accessed: 23 March 2019]
- https://www.economicshelp.org/blog/357/inflation/effects-of-a-falling-inflation-rate/
- http://www.banrep.gov.co/en/node/22747
- https://swiftmoney.com/blog/what-does-low-inflation-actually-mean-for-a-countries-economy/
- https://www.investopedia.com/financial-edge/0212/inflation-and-economic-recovery.aspx
- http://www.sanandres.esc.edu.ar/secondary/economics%20packs/macroeconomics/page_80.htm
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