Evaluate the impact of the increase in the number of public sector employees on the UK economy (12)

An increase in the number of public sector employees is likely to have two main benefits.

DIAGRAM SHOWING AGGREGATE SUPPLY AND AGGREGATE DEMAND INCREASING, SIMULTANEOUSLY SHOWING AVERAGE PRICES AND REAL OUTPUT INCREASING

Firstly, aggregate demand is likely to increase. AD = C + I + G + (X-M). An increase in any form of employment in the economy will lead to a higher level of disposable income and subsequent increases in consumption (C). Consumption accounts for 60% of GDP, so increases in consumption are likely to create a sizeable increase in aggregate demand and GDP. Additionally, the increase in government spending (G) to finance the increase in public sector jobs will also increase aggregate demand. This is represented by the shift from AD to AD₂ on the diagram.

Secondly, aggregate supply will also shift. As unemployment falls through the increase in public sector employment, aggregate supply will increase as the utilisation of existing resources moves closer to full employment. This also means the output gap, the difference between actual and potential production, will fall. This is represented by the shift from AS to AS₂ on the diagram. 

However, the increase in aggregate demand may not be as significant as first thought. An increase in aggregate demand is explained by an increase in consumption driven by increased disposable income from increased employment via increased government spending. However, if UK workers have a high Marginal Propensity to Save, then an increase in disposable income will be saved rather than spent and the increase in aggregate demand and consumption will not be as significant.