Evaluate policies which a government in a developed country might pursue to increase the size and productivity of its working population. 15 marks

The government could increase the size of its working population through supply side policies such as spending on education and training. If more people are educated and trained, then there will be a reduction in structural unemployment and people will have the skills that are needed to be more productive. this will shift LRAS to the right. On the other hand, the government may spend on education and training but the opportunity cost of training the workforce may be expenditure and investment on healthcare. Furthermore, there may be a time lag involved, it takes time to educate and train individuals, especially if they are going for professions in the financial sector or legal sector.

The government could use expansionary fiscal policy whereby, they can reduce income and corporation tax and increase government expenditure. If income tax reduces, then there will be an increase in consumption which will incentivise more firms to increase production and expand. As a result, they may hire more workers and shift LRAS to the right. In addition, a reduction in corporation tax would increase profits for firms and that profit could be reinvested in research and development or infrastructure which will require firms to hire people to build them. This will also shift LRAS to the right. However, the government would have a lower budget if they reduce taxation and there will come a point where they will have to adopt austerity measures which may have an adverse effect on the low income families and could also increase the national debt if they choose to still spend. Moreover, it depends on the magnitude of the reduction of taxation. If taxes are reduced by a small amount, then firms may not see the benefit in employing more workers or increasing wages.