Supply-Side Policies 2

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Reducing the Natural Rate of Unemployment using Supply-Side Policies

The natural rate of unemployment is unaffected by aggregate demand (AD) in an economy. Governments have to use supply-side policies to reduce the natural rate of unemployment.

Reducing structural unemployment

Structural unemployment is usually caused by a mismatch or deficit of skills in an economy.
The most direct solution to this is to provide, subsidise or incentivise education and retraining schemes. This should lead to the workers learning the skills needed to be useful in the current economy and be in position to gain employment.
Workers may be geographically immobile and have the wrong skills for their region. Here, the government could offer incentives to workers or firms to relocate.

Example of reduction in structural unemployment

The UK government has recently devised and encouraged schemes which get those leaving the armed forces into work after they finish serving.
Schemes which give skills needed for work in civilian life have made it much easier for those leaving the forces to find work.

Reducing frictional unemployment

Frictional unemployment is harder to solve because time delays are almost inevitable in the recruitment process as firms try to find the best workers for the job. Solving this may be less of a priority for governments.
Governments can look to improve the flow of information about jobs through job centres and the Internet which makes it easier for those out of work to find suitable jobs.
Governments could make it easier for firms to do background checks on workers or easier to register new workers for tax. This could reduce the amount of time taken to find workers and for them to start new jobs.

Supply-Side Policy vs Supply-Side Improvements

Supply side policies are the actions taken by the government to improve aggregate supply (AS) in the economy. Supply-side improvement refers to the increase in aggregate supply.

Supply-side policies

Supply side policies are the actions taken by the government to improve aggregate supply (AS) in the economy.

Supply-side improvements

Supply-side improvement refers to the increase in aggregate supply.
These improvements could come about as a result of supply-side policies or other factors in the market.

Supply-Side Policies and Unemployment, Inflation and BoP

Supply-side policies are those designed to increase aggregate supply (AS). Examples of supply-side policies include education and training, tax cuts, deregulation.

Unemployment

A number of supply-side policies are designed to improve the ease of hiring employees and make them more productive when in employment.
If labour is more productive then it is more valuable to firms and more workers will be hired. This reduces unemployment.
For example, if the government introduces retraining schemes for the structurally unemployed, then those workers will become more valuable to firms and are more likely to find employment.
If it is easier to hire labour then frictional unemployment will be reduced because it will take workers less time to find a job and start work.

Inflation

Supply-side policies aim to increase aggregate supply in both the short and long run. Supply-side improvements are illustrated by a rightward shift in the SRAS and/or the LRAS curves.
This leads to increased output and a reduced price level, ceteris paribus.
In reality, most countries face some degree of inflationary pressure. Supply-side improvements will usually reduce the upward pressure on prices rather than lead to a falling price level (deflation).

Balance of payments

Supply side improvement leads to increased output and a reduced price level. Cheaper goods and services are more competitive compared to foreign goods and services as a result.
- Households may start consuming domestic goods instead of imports.
- Foreign households may buy more UK exports if they are cheaper and more price competitive.
If the value of exports rises and the value of imports falls, then the current account balance will improve.