Q&A: Is roadbuilding an effective way of reducing unemployment?

Q&A: To what extent would a major road building project by the government be an effective way for the government to tackle unemployment?

Road to recovery or bridge to nowhere?

Road-building projects would count as capital investment spending and (if financed by borrowing) a net injection of demand into the circular flow of income and spending. The question mentions a major programme hinting at projects that together could amount to many millions of pounds.

The question also invites the student to focus on whether this is an effective way to tackle unemployment and so a good answer will go back to the main causes of people being out of work and address how a spending programme might tackle this.

Arguments in favour of an injection of transport capital spending

1. Direct injection of extra demand into the economy – adding to gross Domestic Product and creating extra work for people in building and construction plus many other jobs linked to new road building (e.g. surveying, landscaping) – the fiscal stimulus would be quick-acting with thousands of immediate ‘shovel-ready’ jobs to be taken up

2. The construction industry has been hit hard by the downturn and there are many workers available immediately to start work

3. Expectation of a strong ‘fiscal multiplier effect’ where an initial boost to demand creates a larger final increase in national income. E.g. extra wage income for those employed is recycled in the local economy, higher revenues and profits for supply-chain businesses

4. Possible rise in capital spending by road-building businesses (i.e. a positive accelerator effect)

5. Construction firms will be making higher profits and therefore better able to maintain spending on worker training – improving the skills of their employees

6. Higher output creates new jobs – reduces cyclical unemployment

7. Improved road networks will enable goods to reach overseas markets faster and at lower costs. This will spur economic growth as exports increase – creating additional employment

Many countries recognise the importance of investment in transport not just as a boost to AD but also in creating the conditions for a higher trend growth rate and increased international competitiveness – an example is Russia

“In Russia, a seven year programme worth $570bn (£400bn) to upgrade and expand the country’s transportation infrastructure has recently been announced. The programme will include roads, railways, ports and airports. This is the largest infrastructure programme Russia has seen since the collapse of the Soviet Union.”

The answer might include an AD-AS diagram to show the effects of increased investment

Some evaluation points:

1. Skills shortages and spare capacity– the effectiveness of the investment might depend on whether the UK road building industry has sufficient skilled workers and spare capacity to successfully bid for and deliver the contracts to build new roads. If there are persistent skills gaps perhaps due to structural unemployment, wages will be bid higher and firms may have to depend on net inward migration.

2. Government spending on capital projects will help raise AD but needs to be supported by other policies to improve the human capital of the workforce and improve their job prospects

3. No one can be sure about the likely size of the fiscal multiplier effect – for example the propensity to consume domestically produced goods and services of the people and businesses employed to build the new roads

4. The medium term effects of increased government borrowing to fund major roads – might interest rates and taxation have to edge higher – putting a squeeze on the economy?

5. There might be more effective policies in the medium term – for example spending the same money to fund student enrolment at college or university so that they build up their skills?\

6. Long time lags on transport investment projects - see the comment below on the impact of planning objections and delays