Evaluate Whether Supply Side Policies Alone Should Be Used To Reduce Unemployment

Evaluate whether supply side policies alone should be used to reduce unemployment

PreU Econ / 25 marks

Supply side policies (SSP) are essentially discretionary policies implemented by government that seek to improve the quantity and or the quality of the factors of production. In this context we are referring to the quality of the factors of production with a view to reducing UK unemployment.

There are two main directions for supply-side policies: firstly, market-based policies which seek to increase the intensity of competition and the contestability of markets, and secondly, interventionist policies which are government driven that relate to spending (mainly) on infrastructure and the quality of human capital (labour) in its widest sense. It will be argued that interventionist SSP have a vital role to play in reducing unemployment although its effectiveness will depend on the level of unemployment. Low levels of unemployment such as exists presently in the UK (at 3.9%) means SSP may be less effective, whilst high levels of unemployment as seen in the UK in the Great Depression or the 1970s, mean that SSP will be more useful, but that they will need to be combined with fiscal policy (demand management) to reduce unemployment most rapidly and effectively.

SSP, through increasing the quality and quantity of the factors of production seek to push the LRAS to the right meaning that more can be produced at any given price level. (Insert dia here and briefly explain).Total factor productivity rises because of improvements in capital, technology, skills and thus overall productivity. Furthermore gains in both allocative and productive efficiency will be apparent (and dynamic efficiency also over time), as will improved UK competitiveness.

If we consider specifically SSP to reduce unemployment, government can work in several ways. The most obvious SSP is that of improving education and skills. Recent reforms have seen the school leaving age (or need to be in training) raised to 18 to raise school leavers basic skills. Focus too on core skills especially maths and English - in schools, as well as the introduction of T-levels as vocational qualifications responding to employers requests, will lower the mismatch between school leavers skills and the requirements of business, thus reducing unemployment. In this sense it could be argued that SSP relating to the quality of labour will be sufficient alone to reduce unemployment.

Another labour-based SSP to lower unemployment can be reforms to the welfare (state support) system to both incentivise and push the unemployed into work. Reducing entitlements and making access to welfare tougher (eg Job Seeker s Allowance) should increase the numbers in work. The use of family tax credits and similar can support employment further. Moreover, reforms to working practices more generally, such as lowering the ability of Trade Unions to disrupt business activity, was an SSP implemented widely in the 1980s which, it can be argued, increased business activity and encouraged more employment. On this basis it can be argued that SSP have an important role to play in reducing unemployment but that whether they can and should be used alone is more open to question.

The fact that the labour based SSP as outlined are implemented by government means that they must be paid for by government. This means tax revenue must in some way be required for this spending such that SSP and fiscal policy are inter-connected. Thus SSP are not being used alone and have to be worked in conjunction with fiscal policy. Secondly, as SSP tend to take quite some time to be effective (years in some cases such as primary/secondary education), it might be argued that they are slow to reduce unemployment and that in times of relatively high employment (as mentioned earlier), it will be necessary to implement more active demand-management through expansionary fiscal policy to boost AD to create the necessary demand to lower unemployment. Spending on say large infrastructure projects could be an example of this. Thus SSP alone might be insufficient in this context to reduce unemployment and that fiscal policy should be the key focus.

Additionally, with UK unemployment levels so low at 3.9% (2019), it might be argued that this is so close to full employment that SSP to reduce unemployment further may be ineffective and that this is the wrong policy target. Instead SSP should be seeking to improve productivity and skills through careful interventions rather than a broad, less focused approach based on reducing unemployment.

Lastly, monetary policy as another demand-based approach, might be considered but in the UK (as in the EU) monetary policy is in normal circumstances used for inflation targeting and would be less suited for demand manipulation such as to lower unemployment so this route can be discounted in the framework of this question.

Detractors of SSP will refer to their harshness (if welfare is reduced) to their time lags, and to their costs (opportunity and financial) all of which are considerations relative to their use in attempting to reduce unemployment and that government might prioritise other objectives (such as the environment).

In conclusion it can be argued that interventionist SSP have an important role to play in reducing unemployment through the enhancement of skills and the reductions of incentives that might discourage work. Nonetheless, it has been argued that it really depends on the level of unemployment in discussion. Low levels of unemployment mean SSP can be used alone if very precisely focused on improving skills and productivity, but that SSP alone would be an inadequate response to high levels of unemployment and that fiscal policy is more apt. The very fact that all interventionist SSP require government to implement and pay for them means that SSP and fiscal policy are inherently linked such that the basic premise of the question is flawed in this sense.