IAI Actuarial Core Principles · Business Economics · Supply-side policies and their impact on businesses
An Indian government announces a programme of vocational training and skills certification for workers in the manufacturing sector. Which is the most likely long-run effect on firms in that sector?
Vocational training is a supply-side policy that raises labour productivity. This lowers unit labour costs and increases the economy's potential output, shifting long-run aggregate supply to the right, which helps manufacturing firms compete and expand without necessarily raising prices.
- AA rightward shift in long-run aggregate supply as labour productivity rises, lowering unit labour costsCorrect
- BA leftward shift in aggregate demand because workers will save more
- CAn increase in the natural rate of unemployment because training removes workers from jobs
- DA rise in firms' fixed costs with no change in output capacity
- A permanent rise in the general price level because wages must rise
Explanation
Training raises the quality and productivity of labour, which is a supply-side measure. Output per worker rises, unit labour costs fall and potential output increases, shifting long-run aggregate supply to the right. The inflation option is wrong because higher productivity offsets wage growth.
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