The size of the labour force is an important contributor to a country’s potential growth rate.

The difference between the labour supply and the labour force

The labour supply refers to the total number of hours that labour is willing and able to supply at a given wage rate. It can also be defined as the number of workers willing and able to work in a given occupation or industry for a given wage.

The labour force is defined as the number of people either in work or actively seeking paid employment and available to start work.

The whole economy labour supply measures the total number of people able available and willing to participate in paid employment. This comprises the employed labour force plus those registered as unemployed and actively looking for new work.

The total supply of labour available to produce goods and services is a key factor determining how much output an economy can generate. The government wants to expand the UK’s active labour supply through its Welfare to Work policies and also increase the productivity of the work-force to improve international competitiveness. If successful, an increase in the active labour supply and labour productivity will contribute to a faster rate of trend growth in the years ahead and will lead to higher long-term living standards.

Employment in the British economy

Although the last twelve years has seen a sizeable and important increase in employment in the British economy, there remain many millions of people of working age who are deemed to be economically inactive. These people are not actively seeking paid work for one reason or another, but conceivably they might be encouraged to join the labour force and therefore add to the potential stock of workers. Government tax and benefit policies together with other active labour market strategies have the twin aims of firstly providing the right incentives for people to become economically active, and secondly to possess the right skills and experience that will allow them to find gainful and fulfilling employment.

Reasons for economic inactivity: by sex and age, 2005
					Percentages
	16–24	25–34	35–49	50–59/64	All aged 16–59/64
Men
Long-term sick or disabled	5	40	61	52	37
Looking after family or home	1	12	15	4	6
Student	83	24	5	-	30
Retired	0	0	-	30	13
Other	11	24	18	13	14
Women
Long-term sick or disabled	4	9	25	40	20
Looking after family or home	22	71	60	28	44
Student	66	10	4	1	21
Retired	0	0	-	15	4
Other	8	10	11	16	11
Source: Labour Force Survey, Office for National Statistics

Reasons for economic inactivity

Among males, nearly fifty per cent are inactive in the labour market because of long term sickness and disability or because they are in full time education. For females, that percentage falls to less than thirty per cent. The most common reason for inactivity is the demands of looking after family and or a home.

The main policies designed to increase the supply of labour available to the economy are as follows:

• Reforms to the system of direct taxation: In the 1980s, Thatcherite economics focused on cutting income tax rates particularly at the top end and switching away from direct towards indirect taxation. More recently, successive governments have tended to focus more on reductions in the lower rates of income tax and tax allowances for lower-paid workers. The theoretical idea remains broadly the same, that lower direct taxes increase the post-tax reward to working and act as an incentive for more people to join the labour supply. As we have seen in our previous discussion of the income and substitution effects of an increase in the real wage rate, there is no guarantee that tax cuts by themselves will have much of an impact on the whole economy labour supply
• Reforms to the benefits system: The emphasis here has changed in recent years, away from the rather crude idea of cutting the real and relative value of welfare benefits to encourage people into searching for work, towards a reliance on tax credits (for example the Working Families Tax Credit) to give parents with children a greater financial incentives to work.
• Increased investment in education and training: This is designed to boost the human capital of the labour force and increase the occupational mobility of the labour force to meet the changing demands of employers across different industries
• A more relaxed approach to labour immigration: Particularly where there are shortages of workers with specific skills such as consultants and fully trained nurses in the NHS, or shortages of teachers in certain subjects.