Showing posts with label Supply-side. Show all posts
Showing posts with label Supply-side. Show all posts
Supply-side Policies in the UK
Evidence of governments who have used supply-side measures to reduce unemployment and a discussion of what effects those measures have had
The UK has used various supply side policies to try and reduce unemployment. For a general overview on supply side policies in the UK
The policies particularly useful for reducing unemployment include:
- Benefits index linked. Unemployment benefits have increased slower than wages making benefits less attractive. The aim is to increase the incentive for the unemployed to take a job. However, this policy doesn’t create jobs, only reduces incentive to stay on benefits. In practise, the biggest disincentive for people working is if they receive a variety of benefits (unemployment, income support and if going to work leads to higher costs (e.g. transport and child care)
- Reduced power of trades unions. T.unions in the UK are less powerful than in 70s and 80s. This is partly due to Thatcher reforms, but also long term structural economic change reducing power of unions. Arguably this reduces real wage unemployment as unions can’t bargain for wages above the equilibrium. However, interesting that since increasing the increase in the national minimum wage has not caused any real wage unemployment
- The new deal – a combination of better information and training for the unemployed. Also workers have to accept job if offered after 6 months.
- More flexible labour markets. (e.g. you could make it easier to hire and fire workers, abolish maximum working week (48 hours).
- Lower income tax on high earners. Mrs Thatcher reduced highest rate of marginal income tax from 83% to 40%, though this has since increased to 50%.
Evaluation
- Difficult to know whether the fall in unemployment (1993-2007) is due to supply side policies or long period of economic growth.
- Government statistics suggest unemployment is lower than it actually is
- More flexible labour markets have created more temporary and short term employment.
12 Supply-side Policies
1. Privatisation.
This involves selling state owned assets to the private sector. It is argued that the private sector is more efficient in running business because they have a profit motive to reduce costs and develop better services.
See more on Privatisation
2. Deregulation
This involves reducing barriers to entry in order to make the market more competitive. For example BT used to be a Monopoly but now telecommunications is quite competitive. Competition tends to lead to lower prices and better quality of goods / service.
3. Reducing Income Taxes.
It is argued that lower taxes (income and corporation) increase the incentives for people to work harder, leading to more output.
However this is not necessarily true, lower taxes do not always increase work incentives (e.g. if income effect outweighs substitution effect)
However this is not necessarily true, lower taxes do not always increase work incentives (e.g. if income effect outweighs substitution effect)
4. Increased education and training
Better education can improve labour productivity and increase AS.
Often there is under-provision of education in a free market, leading to market failure. Therefore the govt may need to subsidise suitable education and training schemes.
However govt intervention will cost money, requiring higher taxes, It will take time to have effect and govt may subsidise the wrong types of training
Often there is under-provision of education in a free market, leading to market failure. Therefore the govt may need to subsidise suitable education and training schemes.
However govt intervention will cost money, requiring higher taxes, It will take time to have effect and govt may subsidise the wrong types of training
5. Reducing the power of Trades Unions
This should
a) increase efficiency of firms e.g. less time lost to strikes
b) reduce unemployment ( if labour markets are competitive)
b) reduce unemployment ( if labour markets are competitive)
6. Reducing State Welfare Benefits
This
may encourage unemployed to take jobs.
may encourage unemployed to take jobs.
7. Providing better information about jobs
This may also help reduce frictional unemployment
This may also help reduce frictional unemployment
8. Deregulate financial markets to allow more competition and lower
borrowing costs for consumers and firms.
borrowing costs for consumers and firms.
9. Lower Tariff barriers this will increase trade
10. Removing unnecessary red tape and bureaucracy which add to a firms costs
11. Improving Transport and infrastructure.
Due to market failure this is likely to need govt intervention to improve transport and reduce congestion. This will help reduce firms costs.
Due to market failure this is likely to need govt intervention to improve transport and reduce congestion. This will help reduce firms costs.
12 Deregulate Labour Markets
This is said to be an important objective for the EU to increase competitiveness. E.g. Make it easier to hire and fire worker
Supply-side Policies
Definition of Supply Side Economics
Supply Side economics is the branch of economics that considers how to improve the productive capacity of the economy. It tends to be associated with Monetarist, free market economics. These economists tend to emphasise the benefits of making markets, such as labour markets more flexible. However, some supply side policies can involve government intervention to overcome market failure
Supply Side Policies are government attempts to increase productivity and shift Aggregate Supply (AS) to the right.
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