Sunday, August 17, 2008

Supply Side Policies In UK Context (Unit 3)

Supply side policies are attempt to manipulate the movement of AS curve by increasing the productive capacity of the economy.


How to increase AS?

(1). Reducing or dismantling minimum wage. If there is a minimum wage set above the equilibrium wage rate, then unemployment will be created. Minimum wages prevent some workers who would be prepared to work for lower pay from getting jobs. Hence some economists argue, by abolishing minimum wage, AS can be increased

(2). Relaxation of immigration rules. Net migration into UK will affect both AD & AS. It affects AS in the way of greater number of labour & thus output in the economy. It will also affect AD in the way of greater spending into the economy & more tax collection for government

(3). Encouraging FDI. Increase in the number of foreign firms especially from Japan is good to local economy as they often bring along new technology & better management. Other than creating new jobs, both these can help to improve UK’s productive capacity. Furthermore UK has always been lagging behind its major rival like US, France & Germany in terms of capital spending

(4). Improving education system & training. Courses taught in universities must be relevant to industrial needs & new courses must be introduced to teach modern skills. Also more training centres should be established. By doing so, UK will have more well-trained workforce with high productivity. This will shift AS to the right & higher real output can be attained

(5). Privatisation & deregulation. When firms go private, there will be incentive to increase efficiency & cut costs as now there is profit motive. This will result in higher productivity & lower prices. State owned firms which were privatised like British Gas, British Telecom, British Airways, British Steel, British Leyland etc. Privatisation was largely carried out during the era of Margaret Thatcher

(6). Tax reduction. This will affect both AD & AS. Here, when there is a cut in income tax, working individuals will be more inclined to work hard & increase their productivity as their disposable income increased. For firms, lower corporation tax will be a great incentive for them to increase their investment spending onto new production techniques which may lead to increase in productivity & output. As such AS will shift right

(7). Labor union reforms. This is important to curb the power of trade union to call for strikes, bargain for high wages & any action that can disrupt the operation of a company. Measures introduced were like 50% votes needed before a strike, firms can fine their workers if they cause losses to firms etc. As such, weaker labour unions will always encourage more employment & therefore higher output in economy

(8). Reduction in unemployment benefits. By doing so, there will be a great disincentive for unemployed people to stay idle. They will be forced to look for job. Increase in employment will mean more output in the economy


(1). Most firms in UK have been privatised & as such there is not much space for further privatisation. Meanwhile labour union has been under control. As such UK government should consistently focus on education & training as supply side maneuver

(2). Tax reduction may not be helpful in boosting individuals & firms productivity if the reduction is minimal. Furthermore more new tax been introduced along the way such as landfill tax in 1994, climate change levy etc which had somehow affected the operation of firms. However one can argue that lower tax will benefit government more as there is lesser incentive to evade it

(3). Supply side policies are more effective in countering stagflation & raising the real output in economy. Unlike both monetary & fiscal policy, output can be increased without the concern for higher inflation

(4). Weaker labor union does have its downside. Some firms may take advantage by paying lower-than-market wages & this will lead to greater inequality

(5). However, immigrants can also lead to worsening structural unemployment in UK economy. Not all of them are highly skilled labours & there could also be problem like communication in English. On the demand side, they may not even help to increase overall spending into the economy as most of them will send money back to their families in home country

(6). Reducing or even abolishing minimum wage maybe advantageous to some minority of unemployed people. Rest assured most people in working market with decent wages rely heavily on it. Without it, they will be pushed into greater inequality & purchasing power eroded by inflation

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