Reducing Unemployment – Supply Side
I wrote the nswer to the following question a couple of years ago and have never had it plubished. Please be aware that I was unable to upload the diagrams to the answer of this question.
1. To what extent have supply side policies been responsible for reducing unemployment in the UK
Supply side policies look at improving the expansion of the economy’s production output whether this be increasing the output of labour or the production of good X.
If you look below you’ll see a diagram which illustrates the economy’s total production capacity. Supply side policies implemented by the Government help to shift the Long Run Aggregate Supply Curve to the right, affectively increasing the output of the economy. The Government may wish to do this because the economy is nearing its total output and so is seeing a rise in prices because of scarce resources (Inflation) or perhaps the Government such as in this case is looking to use Supply Side Policies to help deal with employment.
To shift Aggregate Supply the Government may try and use its current policies to try and encourage the output of the economy to grow in order to help unemployment. One of the first policies which the Government may look at is reducing ‘benefits’, this would make current market wage rates look more attractive to people and so would give an incentive for people to come off of benefits and look for work. This would help to increase the supply of labour. The government could also look at reforming their fiscal policy and look at ways to try and cut taxes as again it would be an incentive for more people to work. Just take a look at the diagram below to see the trade off between tax levels and employment.
As well as looking at the monetary and fiscal side of trying to get more people to work the Government could look trying to make the workforce more graphically mobile, this would involve the Government trying to encourage workers to uproot and move to different regions to find work, the Government may do this by investing and building cheaper housing in certain areas. When it comes to recruiting workers, businesses find it rather expensive to recruit people; this could be because of high advertising costs for positions as well as the time and money spent on interviewing. The Government could look at ways to try and reduce costs here by subsidising costs or by giving tax write offs for businesses that recruit people on a national level from different areas.
All we have looked at so far is the Government looking at increasing the supply of labour through incentives in order to try and reduce employment but as well as this it’s argued that by influencing demand is an effective way of dealing with unemployment.
If you take a look below you can see the LRAS curve and how the Government could increase demand and to try and close the output gap of the economy. The output gap is between what the economy is currently producing at and the total output which the economy could produce with existing land, labour and recourses without putting pressure on inflation.
To influence the Aggregate Demand in the economy the Government may try and change some of its existing policies. The first one which they may look at is trying to influence the Bank of England to alter the base rate of interest. If the BoF were to say lower interest rates in the economy then this would have a positive effect. This would now mean that consumers would now have more disposable income to spend on further goods and services because they’ll now pay less back on existing loans etc. It would also mean that people are now more willing to take out new borrowings to spend as well as save less due to getting a lower return. This can lead to a positive multiplier effect as consumers will demand more then businesses must supply more.. you could even get businesses moving into these high demand markets if there are low barriers to entry in order to grab some more profit for themselves. You would that businesses would be expanding themselves to keep up with demand, they are also likely to want to invest more as existing borrowings and new borrowings become cheaper. Not forgetting the most important thing of all as businesses wish to increase output they will also look at employing more people which will again in turn help to reduce unemployment. From this people will become wealthier and will demand more, this could lead to a ‘boom’ in the economy.
T conclude, supply side policies are a very effective way of increasing the supply of labour in economy but although this is happening it doesn’t mean that it will increase unemployment, I mean in the eyes of the Government and their measurement of employment they will no longer be classed as unemployed but even though workers are willing to work it doesn’t mean that businesses actually want or need to employ them. Demand is again effective as it actually looks at getting businesses to actually seek to take more people on to work but again the flaw in this one is that people may not want to work, may see wage inflation as a result as businesses putting up wages to encourage and poach workers from other businesses.
The Government measures unemployment via the claimant count and how many are claiming job seekers allowance. This way of measuring employment has been criticised as this problem isn’t an accurate measurement. The Labour Force Survey has said to be a more accurate measurement of employment as it takes into account people on different types of benefits and people that do not claim benefits and who don’t wish to work at all. There is quite a different between both measurements.
In the past the Government has been accused of ‘cooking the books’ in the way that they fiddle with figures to make them look better than they really are. The clear one is above to do with their measurement of employment and often change their definition in their favour. They also hide people way in different schemes such as the New Deal so that people are taken off of the job seeking allowance and so look to be employed and are actually not, this results in results coming back saying unemployment is down when it may not actually be the case.
So even though that supply side policies and demand policies may be effective in their own ways to only truly benefit from them is to look at implementing policies from both sides to try and combat unemployment. Although even by doing these to reduce unemployment we may actually never know if they are even affective due to the cooking of the books to make it look like employment is actually down.
