P ARO REGISTRADO SEGÚN SECTORES ECONÓMICOS

1 Introduction

You saw in Topic 1, National Income, that there is a conflict of view about what determines the level of national income and employment.

• The Keynesian view is that the level of aggregate demand is the main factor.

• The opposing view is that the supply side of the economy is more important. Followers of supply-side policies believe that unless potential output (i.e. supply) can be increased, any increase in demand will result in inflation or balance-of-

payments problems. They believe that government should target policy towards either increasing resources or improving their efficiency.

Most economists now accept that to achieve economic growth and increased employment both aggregate demand and aggregate supply need to be raised.

2 Supply-side policies

Supply-side policies are mainly microeconomic measures designed to improve competition in product markets (where goods and services are bought and sold) and those that aim to improve the working of labour markets.

2.1 Supply-side policies and product markets. The main thrust of these is to increase competition in the belief that competition between producers increases their efficiency and improves incentives.

These policies have included:

• Privatisation. This was the main policy on the product market side in the 1980s and 1990s. The privatisation of various large former state-run industries was designed to break up state monopolies to create more competition.

• Deregulation. This involved government reducing its control and regulation of private industry, e.g. in bus transport, air travel, parcel delivery, telecommunications, gas and electricity supply. These industries had been protected from competition by government barring new entrants. The aim of deregulation was to open up these markets to greater competition leading to greater cost efficiency and wider choice for consumers.

• Commitment to free trade. The UK Government has signed up to trade agreements made by the World Trade Organisation (WTO), and the UK is a full member of the European Single Market. Free trade promotes competition.

• Reduction in corporation tax. High rates of corporation tax reduce incentives to make profit. Lower tax rates encourage firms to invest in capital, so making them more efficient. • Strict control of inflation. Inflation creates uncertainty about

the profitability of investment and therefore acts as a disincentive to introducing new or replacement capital. 2.2 Supply-side policies for the labour market. A perfect labour

market is one that can quickly clear surpluses or shortages. This is

called a flexible labour market. An imperfect or inflexible labour

market is one where it is slow for the market to adjust, e.g. difficult

for employers to shed labour or reduce wage rates at a time of falling demand, or where it is difficult to recruit when demand is

Supply-side policies are designed to improve the quality and

quantity of the labour. An expansion of the labour supply increases the productive potential of the economy. Increased quality will improve the productivity of labour.

Trade union reforms

Many legal protections enjoyed by the trade unions have been taken away – including the right to take industrial action and enter into restrictive practices agreements with employers, e.g.

demarcation. The result has been an increase in the flexibility of the labour market, a decrease in strike action and an improvement in industrial relations.

Increased spending on education

The UK Government has increased spending on education as a percentage of GDP. There has been an expansion in the number of students at university. The aim is a well-educated workforce

capable of working in the new highly productive technological or ‘knowledge-based’ industries. A well-educated workforce also acts as a magnet for foreign investment in the economy.

Increased spending on training

The ‘New Deal (Welfare to Work)’ Programme is designed to make the unemployed without skills more employable – it consists of a subsidy to employers to recruit and train those unemployed under 25 and the long-term unemployed.

Improved incentives to work

This can be achieved by the following methods:

• Reducing income tax. Income tax is paid directly from earned

income. Many economists believe that lower rates of tax

improve incentives for people to work longer hours or take on more responsibility 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 biggest reductions were given to higher income groups. 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 since then the band of income on which this is paid has widened. This is designed to reduce the unemployment trap – where people calculate that they may be better off unemployed than working.

• Adopting a ‘make work pay’ policy – the gap between

unemployment benefit and the lowest rates of pay has been allowed to widen by linking unemployment benefit to the rate of inflation rather than to the growth of earnings. (Earnings grow faster than prices.) Eligibility for Job Seekers Allowance has also been tightened up by claimants having to prove that they are actively seeking work.

• The introduction of the minimum wage has helped to encourage the unemployed into jobs which previously were considered to pay wages not worth working for.