supply-side policies for the labour market
The following policies are all designed to improve the quality and quantity of the supply of labour available to the economy. An expansion in the UK's total labour supply increases the productive potential of an economy. Increased quality will improve the productivity (efficiency) of labour.
As with the product market policies, successful labour market supply side policies will shift the LRAS curve to the right. The same effect can also be illustrated by an outward shift in an economy's production possibility frontier.
Trade Union Reforms
Some of the legal protections enjoyed by the trade unions have been taken away - including restrictions on their ability to take industrial action and enter into restrictive practices agreements with employers. The result has been an increase in the flexibility of the labour market, a decrease in strike action in virtually every industry and (in the long term) a significant improvement in industrial relations in the United Kingdom.
Increased Spending on Education and Training
Economists disagree about the scale of the economic and social returns from higher spending on education - but few deny that "investment in education" has the potential to raise the total stock of skills within the work force and improve the employment prospects of thousands of unemployed workers.
The economic returns from extra education spending can vary according to the stage of economic development that a country has achieved. In 1999, research from the London School of Economics found that putting more money into education has a direct impact on improving economic performance.
The report from the university's Centre for Economic Performance suggested that developing countries which increase education spending and achieve a higher-qualified workforce can expect "handsome dividends: for workers, firms and the state" Government spending on education and training improves workers' human capital. They become better quality workers. Their productivity improves and so the LRAS curve shifts to the right.
Economies that have invested heavily in education are those that are well set for the future. Most economists agree, with the move away from industries that required manual skills to those that need mental skills, that investment in education, and the retraining of previously manual workers, is absolutely vital.
It should also be noted that improved training, especially for those who lose their job in an old industry should improve the occupational mobility of workers in the economy. This should help to reduce the problem of structural unemployment. A well-educated workforce acts as a magnet for foreign investment in the economy.
The Irish economy is a great example of how supply side reforms designed to increase the qualifications and skills of the labour force, together with favourable tax rates for companies and workers - has encouraged a huge flow of inward investment from overseas (in particular from the United States).
The Chancellor of the Exchequer Gordon Brown announced in his July 2000 Comprehensive Spending Review that the education budget over the next four years would increase by an annual average of 6.6%. This will lead to an increasing share of national income taken up by education spending.
Income Tax and the Incentive to Work
Income tax is paid directly from earned income. Many economists who support supply-side policies believe that lower rates of tax not only provide a short term boost to demand - but they also improve incentives for people to work longer hours or take a new job - because they get to keep a higher percentage of the money they earn.
In the 1980s the Conservative government cut income tax rates across the board - but the greatest tax reductions were handed out to higher income groups. The highest marginal rate of tax was reduced from 80% in 1979 to 60% by 1987 and then 40% in 1988. The top rate of tax has remained at this level since then. The basic rate of tax has come down more gradually from 33% in 1979 to 22% today.
Attention has focused in recent years on lower income households. In the mid 1990s, a lower starting rate of tax of 10% was introduced and the band of income on which this is paid has been widened in recent Budgets. Cutting tax rates for lower paid workers may help to reduce the extent of the unemployment trap - where people calculate that they may be no better off from working than if they stay outside the employed labour force.
Do lower taxes really help to increase the active labour supply in the economy?
It seems obvious that lower taxes should boost the incentive to work because tax cuts increase the reward from a job. But some people may choose to work the same number of hours and simply take a rise in their post-tax income! Millions of other workers have little choice over the hours that they work.
Reform of the Benefits System
Lower taxes and benefit reforms are seen to go hand in hand in a bid to sharpen the incentives to take paid work. In recent years the government has altered the benefit system in several ways:
A reduction in the value of unemployment benefits compared with average wages of people in work
The introduction of the Working Families Tax Credit (WFTC) - a tax credit that is paid through the weekly wage packet to families on low incomes with at least one person in employment
The National Minimum Wage
The introduction of a national minimum wage seeks to boost the incentive for people to actively search for work. Over 2 million people in traditionally low paid jobs have seen their pay levels affected directly since the minimum wage was launched. In March 2001 the Government announced an increase in the adult pay floor from £3.70 per hour to £4.10.
Of course there is an ongoing debate about the supply-side effects of the minimum wage. Although it should improve incentives to find work, in some industries a higher wage bill causes an increase in production costs and may have an adverse effect on output and employment
Welfare to Work
Welfare to Work is the current Labour government's flagship programme for getting people off state benefits and into work. The programme includes the New Deal - a £4 billion + scheme targeted at increasing the employment prospects for the long-term unemployed.
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