To What Extent Can Supply Side Policies reduce Unemployment?
Supply side policies are government attempts to improve productivity and efficiency in the economy.
See: Supply side policies
Suggested Supply Side Policies to Reduce Unemployment
- Better job information to help reduce frictional unemployment.
- Training for unemployed to help present better CVs and give themselves confidence in job interviews.
- Lower unemployment benefits to increase the incentive to get a job. It is argued generous unemployment benefits create an unemployment trap, where those on benefits would get only a small increase in after tax income if they decided to work.
- Reduced Power of Trades Unions. Trades unions can cause real wage / classical unemployment (where wages are pushed above the equilibrium. If you reduce the power of unions, wages will fall to equilibrium levels leading to less unemployment. Also reducing minimum wages should have similar effect. However, this could leave workers without protection against monopsonist employers leading to lower wages.
- Increased labour market flexibility. e.g. make it easier to hire and fire workers; this should encourage firms to set up and hire workers in the first place. However, this may make workers more fearful of losing their jobs. It may also lead to shorter term contracts and increase inequality.
- Better education and training. This provides skills which will help the long-term unemployed to retrain and find jobs in a fast changing labour market. This can help reduce structural unemployment. However, it depends whether the government can provide skills that employers really need; there is no guarantee that government spending will be able to solve the skills gap.
- Employment subsidies. The government could give firms subsidies for taking on long term unemployed. This could give the long term unemployed a new chance. However, it will be costly and there is a danger firms could make current workers redundant to benefit from the employment subsidies.
Supply Side Policies to Increase Employment.
A single mother may not wish to enter the labour market because of prohibitive child care costs. She would not be counted as unemployed because she is not actively seeking work. However, if there was a reduction in the cost of providing child care, then there may be a greater incentive to enter the labour market and take work.
Demand Deficient Unemployment
Supply side policies will not reduce unemployment caused by a fall in aggregate demand (demand-deficient unemployment) They can only reduce long term structural unemployment.(natural rate of unemployment)