Supply side Economics in the UK

c) 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.

See also: