Assess the view that providing subsidies for education and retraining is the most effective way to promote inclusive growth in an economy.
Developing countries such as China have significantly reduced poverty by driving economic growth through industrialisation. However, governments worldwide have come to recognise that such growth often comes with trade-offs, particularly in the form of rising income inequality and environmental degradation.
b. Assess the view that providing subsidies for education and retraining is the most effective way to promote inclusive growth in an economy. [15]
Introduction
Inclusive growth refers to economic expansion that benefits all segments of society, ensuring that income inequality is reduced while maintaining sustainable long-term economic progress. One commonly proposed policy to achieve inclusive growth is subsidising education and workers' retraining, which enhances human capital, improves productivity, and increases income-earning potential for low-skilled workers. However, alternative policies such as fiscal redistribution and minimum wage legislation also aim to address income disparities and economic inclusivity. While education and retraining offer long-term benefits, they face implementation challenges and delayed results, making it necessary to evaluate their effectiveness compared to other redistributive policies.
How Subsidising Education and Workers’ Retraining Promotes Inclusive Growth
Subsidising education and retraining allows low-income and low-skilled workers to acquire higher qualifications and new skills, increasing their employability and wage-earning potential.
Improvement in Productivity and Economic Growth
Education and retraining programs enhance worker skills and productivity, leading to a rightward shift in long-run aggregate supply (LRAS).
As productivity increases, firms experience lower production costs, improving competitiveness and contributing to higher economic growth.
Reduction in Income Inequality
Higher skill levels allow low-income workers to access better-paying jobs, reducing the wage gap between high-skilled and low-skilled workers.
This leads to higher disposable income for lower-income groups, improving living standards and social mobility.
Example: In Singapore, the Infocomm Media Development Authority (iMDA) provides a 70% subsidy under the Tech Immersion and Placement Programme (TIPP), allowing workers from non-tech backgrounds, such as taxi drivers, to transition into high-paying roles like full-stack developers.
Challenges and Limitations:
Mindset and adaptability barriers: Older workers may resist retraining, preferring to remain in familiar roles rather than pursuing new skill sets.
Difficulty in course selection: The government may struggle to identify relevant training programs, leading to wastage of public funds on ineffective courses.
Long time lag: Unlike immediate income support policies, education and retraining take years to yield economic benefits, making them less effective for short-term relief.
Opportunity costs: Employers may be reluctant to release workers for training, while employees may hesitate to pursue education if it results in temporary income loss.
Despite these limitations, education and retraining remain an effective long-term strategy for achieving sustainable and inclusive economic growth.
Alternative Policies to Achieve Inclusive Growth
1. Fiscal Redistribution (Progressive Taxation and Transfer Payments)
Governments can increase personal income tax rates for high-income earners while redistributing wealth through social benefits, reducing income inequality more immediately than education subsidies.
Progressive Taxation:
Higher-income groups contribute a larger share of taxes, allowing for the redistribution of resources to low-income households.
Example: In Singapore, income tax rates were raised from 22% to 23% for earnings between $500,000 and $1 million, and from 22% to 24% for incomes above $1 million.
Transfer Payments:
Low-income earners receive cash assistance, Medisave top-ups, and utility rebates, increasing their spending power.
Since low-income individuals have a higher marginal propensity to consume (MPC), redistribution leads to higher consumption (C) → increase in AD → multiplied increase in real national income (NY) → higher economic growth.
Challenges and Limitations:
Risk of capital flight and brain drain: High tax rates may discourage high-income earners from remaining in the country, potentially reducing the supply of skilled labour and investment.
Limited long-term impact: While redistribution narrows income disparities in the short term, it does not improve worker productivity or future employability, making it less sustainable compared to education subsidies.
2. Minimum Wage Legislation
A minimum wage establishes a legal wage floor, ensuring that low-income workers earn a fair wage, thereby reducing income inequality and improving living standards.
Higher wages → increased purchasing power → better quality of life for low-income workers.
If workers are more motivated and productive, businesses may experience higher efficiency and innovation, contributing to economic growth.
Challenges and Limitations:
Unemployment risk: If the minimum wage is set above equilibrium wage, firms may hire fewer workers, leading to higher unemployment among low-skilled workers.
Inflationary pressures: Higher wages may lead to increased production costs, prompting businesses to raise prices, contributing to inflation.
Effectiveness depends on productivity improvements: Some economists argue that higher wages may not necessarily improve worker productivity, making minimum wages a contentious policy for achieving inclusive growth.
Conclusion
While subsidising education and workers’ retraining is one of the most effective long-term strategies for achieving inclusive growth, it is not the only viable policy. Education and retraining allow low-income workers to improve skills, secure higher wages, and contribute to long-term economic growth. However, the time lag, financial costs, and adaptability challenges make it less effective for immediate income redistribution.
Alternative policies such as fiscal redistribution can reduce income inequality in the short term, while minimum wage legislation can enhance worker earnings. However, both carry economic trade-offs, such as potential capital flight, inflationary pressures, and job losses.
Given these trade-offs, the most appropriate approach is a combination of policies:
Education subsidies for long-term skill development
Progressive taxation and transfer payments for short-term income support
Carefully set minimum wages to enhance worker earnings without distorting labour markets
By adopting a balanced policy mix, governments can achieve sustainable, inclusive growth that reduces income inequality while maintaining economic stability.
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