Supply-Side Economics - Labour Market Reforms
These policies are designed to improve the quality and quantity of the supply of labour
- They seek to make the British labour market more flexible so (over time) that it is better able to match the labour force to the ever-changing demands placed upon it by employers in expanding sectors thereby reducing the risk of structural unemployment.
- An expansion in the labour supply increases the productive potential of an economy.
- That expansion in the supply of people willing and able to work can come from several sources for example: encouraging older people to stay in the workforce; a relaxed approach to labour migration and measures to get non-working parents to actively look for work.
The UK labour market is one that has to contend with a wide range of problems many of which are related to persistently high rates of unemployment. Some of these weaknesses are mentioned in the graphic below.
Supply side labour market reforms are designed to improve the employment prospects for workers of different ages, in different occupations and industries and in different regions of the country.
Structural Weaknesses in the UK Labour Market
- Labour Immobility
- Work Disincentives
- Skills Gaps
- Long Term Unemployed
- High Youth Unemployment
- High Economic Inactivity
- Limited Apprenticeship Supply
Trade Union Reforms
- Many of the traditional legal protections enjoyed by the trade unions have been taken away – including restrictions on their ability to take industrial action. The result has been a decrease in strike action in virtually every industry and a significant improvement in industrial relations in the UK
- Improved partnerships between trade unions and employers can make a big contribution to raising productivity and improving the flexibility of workers in their jobs
Increased Spending on Education and Training
Economists disagree about the scale of the likely economic and social returns to be earned from higher spending on education – but few of them deny that “investment in education" has the potential to raise the skills within the work force and improve the employment prospects of thousands of unemployed workers.
- The economic returns from extra education spending vary according to the stage of development that a country has achieved
- Government spending on education and training improves workers' human capital
- 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 vital.
- Improved training, especially for those who lose their job in an old industry should improve the occupational mobility of workers. This should help reduce the problem of structural unemployment. One initiative is the launch of University Technical Colleges (UTCs) - UTCs offer 14-19 year olds the opportunity to take a technically-oriented course of study with a special focus on engineering.
- A well-educated workforce acts as a magnet for foreign investment in the economy.
- Improved education increases opportunities which means that incentives can work more effectively
Income Tax Reforms and the Incentive to Work
- Economists who support supply-side policies believe that lower rates of income tax provide a short-term boost to demand, and they improve incentives for people to work longer hours or take a new job – because they get to keep more of the money they earn.
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 labour force.
- Do lower taxes always 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.
Zero hours contracts
Zero-hours contracts do not guarantee a minimum number of hours of employment.
The most recent data in the UK found that just under 700,000 workers said they were on a "zero-hours contract" in their main job between October to December 2014. This represents 2.3% of all people in employment.