Supply Side Policy Themes - Paper 2 Hot Topic!

Summary

This video delves into supply-side policies and their impact on macroeconomic themes, particularly in the UK. It discusses how these policies can enhance potential growth, reduce economic inactivity, lower the natural rate of unemployment, stimulate regional growth, and boost productivity. The script outlines various interventions, including government spending on education, healthcare, infrastructure, and tax reforms, emphasizing the need for targeted approaches to achieve desired economic outcomes.

Takeaways

• 📈 Supply side policies are crucial for macroeconomic exams and are often linked to broader economic themes, including UK-specific and general issues.
• 📉 The UK's potential growth rate has significantly declined post-financial crisis, dropping from around 2.2% to approximately 1% currently.
• 🚨 Factors contributing to the UK's poor potential growth include low productivity, a shrinking workforce due to economic inactivity, poor business investment, inadequate infrastructure, and underperforming public services.
• 💼 Supply side policies aimed at boosting potential growth can involve interventions that shift the long-run supply (LRS) curve to the right, theoretically increasing potential growth.
• 🏥 Government spending on education, training, healthcare, and infrastructure are key supply side policies to reduce economic inactivity and encourage workforce participation.
• 👶 Affordable childcare and reduced income tax or National Insurance can motivate inactive individuals to rejoin the workforce, particularly parents and those with health issues.
• 🏢 Supply side policies can also target the reduction of the natural rate of unemployment by addressing structural, frictional, and seasonal unemployment through various interventions.
• 🌐 Regional growth can be promoted through policies that boost productivity and attract business locations to areas with lower average earnings and opportunities.
• 💹 Productivity is a significant concern in the UK, with current levels 25% below the pre-financial crisis trend, impacting exports, wage growth, and the current account deficit.
• 🌟 Policies to enhance productivity and export competitiveness include investments in education, training, healthcare, and infrastructure, as well as business subsidies, tax incentives, and labor market reforms.

Q & A

What are the two main categories of supply side policies discussed in the script?

The script discusses two main categories of supply side policies: interventionist supply side policies and market-based supply side policies.

How has the UK's annual potential growth rate changed since the financial crisis?

Prior to the financial crisis, the UK's annual potential growth rate was around 2-2.5%, but it fell to around 1.5% from the financial crisis up to COVID times, and currently, it's around 1%.

What factors have contributed to the decline in the UK's potential growth rate?

Factors contributing to the decline in the UK's potential growth rate include poor productivity, a shrinking workforce due to rising economic inactivity, poor business investment, inadequate infrastructure improvements, and underperforming public services.

What is economic inactivity and how has it changed since COVID times?

Economic inactivity consists of people of working age who are not willing, able, or actively seeking work. Since COVID times, the inactivity rate has risen from around 20% to 22.1%, representing around 1 million workers who are not in the workforce.

How can supply side policies be used to reduce economic inactivity?

Supply side policies to reduce economic inactivity include government spending on education and training, healthcare, infrastructure, child care, and tax reforms such as reducing income tax and National Insurance, as well as reducing benefits to motivate the inactive to seek work.

What is the current natural rate of unemployment in the UK and what types of unemployment does it include?

The current natural rate of unemployment in the UK is around 3.5%, which includes structural, frictional, and seasonal unemployment.

How can supply side policies address the issue of regional growth inequality in the UK?

Supply side policies to address regional growth inequality include government spending on education, training, and healthcare to boost productivity, infrastructure spending to improve connectivity and attract businesses, subsidies and tax incentives for business relocation, and the creation of Enterprise zones.

What is the current state of productivity in the UK, and how does it affect the current account deficit?

Productivity in the UK has been low since the financial crisis, with the current productivity being 25% below its pre-crisis trend. This has resulted in uncompetitive exports and a high current account deficit, averaging 4% of GDP over the last 15 years.

What supply side policies can be implemented to improve productivity and competitiveness of UK exports?

Policies to improve productivity and competitiveness include spending on education, training, and healthcare, infrastructure investment, providing subsidies or grants to firms, lowering corporation tax, relaxing immigration controls, labor market reforms, and creating Enterprise zones.

What are the potential challenges in evaluating the effectiveness of supply side policies?

Challenges in evaluating supply side policies include the cost of interventionist policies, time lags before effects are seen, the need for targeted policy interventions, and potential negative stakeholder trade-offs of certain market-based policies.

Outlines

00:00

📈 Supply Side Policies for Boosting UK's Potential Growth

This paragraph discusses the impact of supply side policies on the UK's potential growth, which has been negatively affected since the financial crisis. The speaker outlines the current state of potential growth, highlighting the drop from 2.2% to around 1% annually. Factors contributing to this decline include poor productivity, a shrinking workforce, lack of business investment, and inadequate infrastructure improvements. The paragraph emphasizes the importance of supply side policies in shifting the long-run supply curve to the right, thereby increasing potential growth. Various policies are suggested, such as government spending on education, training, healthcare, infrastructure, and childcare, to address these issues and improve the UK's economic situation.

05:02

👷‍♂️ Tackling Economic Inactivity and Unemployment in the UK

The second paragraph delves into supply side policies aimed at reducing economic inactivity and the natural rate of unemployment in the UK. Economic inactivity rates have risen post-COVID, with around 1 million workers no longer part of the workforce. The speaker identifies the need for policies that address long-term sickness, particularly mental health issues, and the affordability of childcare to encourage parents to rejoin the workforce. The paragraph also covers policies to reduce the natural rate of unemployment, which includes structural, frictional, and seasonal unemployment. Suggestions include government spending on education and training, infrastructure, and healthcare, as well as tax incentives and deregulation to promote job creation and reduce unemployment.

10:03

🌍 Promoting Regional Growth and Productivity in the UK

The final paragraph focuses on supply side policies to address regional inequality and boost productivity in the UK. It highlights the stark differences in average weekly earnings between London and the South versus other regions, pointing to underlying issues such as productivity, education, healthcare, and infrastructure. The speaker discusses the shift of the UK economy towards services and the deindustrialization affecting the North, Midlands, and Wales. Policies to promote regional growth include government spending on education, training, and infrastructure, as well as subsidies, tax incentives, and the creation of enterprise zones to attract businesses and create jobs. The paragraph also addresses the need to improve the UK's productivity and competitiveness to reduce the current account deficit, suggesting similar policy interventions as well as labor market reforms and competition policies.

Keywords

💡Supply Side Policies

Supply side policies are economic strategies aimed at improving the productive capacity of an economy by influencing the supply side of the market, rather than the demand side. In the video, these policies are discussed in the context of boosting potential growth in the UK, with examples including government spending on education, training, and infrastructure to enhance productivity and economic growth.

💡Potential Growth

Potential growth refers to the maximum rate of output that an economy can achieve without causing inflation. The video explains that the UK's potential growth rate has been negatively impacted, falling from around 2-2.5% to about 1%, due to factors like poor productivity and economic inactivity. Supply side policies are suggested as a means to shift the long-run supply curve rightwards, thereby increasing potential growth.

💡Economic Inactivity

Economic inactivity encompasses individuals of working age who are not part of the labor force because they are unwilling or unable to work. The video highlights a rise in economic inactivity rates post-COVID, which is detrimental to potential growth and wage inflation. Policies to reduce this inactivity, such as government spending on education, healthcare, and childcare, are discussed as ways to motivate individuals to rejoin the workforce.

💡Natural Rate of Unemployment

The natural rate of unemployment is the rate of unemployment that exists in an economy when it is at full employment, with all labor market participants able to find work at the prevailing wage level. The video mentions that the UK's natural rate is relatively low, around 3.5%, and discusses how supply side policies can be used to reduce structural and frictional unemployment, which are components of the natural rate.

💡Regional Growth

Regional growth refers to the economic development that occurs in specific geographic areas. The video points out regional disparities in the UK, with London and the South having higher average earnings than other regions. Supply side policies such as education, infrastructure, and business incentives are suggested to promote growth in less prosperous areas and reduce these inequalities.

💡Productivity

Productivity measures the efficiency of production, typically expressed as the ratio of output to input in the production process. The video emphasizes that UK productivity has been poor since the financial crisis, which has implications for potential growth, wage growth, and competitiveness. Policies to improve productivity, such as investments in education and infrastructure, are central to the discussion.

💡Current Account Deficit

The current account deficit is the excess of a country's imports over its exports, representing a net outflow of domestic currency. The video notes that the UK has a significant current account deficit, averaging 4% of GDP, which is partly attributed to low productivity. Supply side policies aimed at boosting productivity and competitiveness are presented as a means to reduce this deficit.

💡Infrastructure Improvements

Infrastructure improvements refer to the development or upgrading of public facilities and systems that serve a country, city, or area. In the video, it is argued that poor infrastructure has contributed to the UK's low potential growth. Investment in infrastructure is presented as a supply side policy that can enhance productivity, reduce economic inactivity, and attract businesses, thereby boosting regional growth.

💡Fiscal Policy

Fiscal policy involves the use of government revenue collection (taxes) and spending to influence the economy. The video mentions an upcoming video on fiscal policy themes, suggesting that fiscal policy, including government spending and taxation, plays a crucial role in implementing supply side policies aimed at boosting economic growth and addressing issues like economic inactivity.

💡Monetary Policy

Monetary policy refers to the actions of a central bank, such as the Bank of England, aimed at controlling the money supply to influence interest rates and stabilize the economy. The video teaser for an upcoming video on monetary policy themes implies that, while not the focus of the current video, monetary policy is another tool that can be used in conjunction with supply side policies to achieve macroeconomic goals.

Highlights

Supply side policies are crucial for macroeconomic exams, often linked to major themes.

Supply side policies can be divided into interventionist and market-based approaches.

Post-financial crisis, UK's annual potential growth rates dropped significantly.

Productivity, workforce size, business investment, and infrastructure are key factors affecting potential growth.

Economic inactivity in the UK has risen post-COVID, affecting potential growth and wage inflation.

Government spending on education and training can improve skills and motivate workforce re-entry.

Investment in healthcare addresses long-term sickness, a major cause of economic inactivity.

Infrastructure spending can reduce geographical immobility and attract businesses, creating jobs.

Affordable childcare can encourage parents, particularly mothers, to rejoin the workforce.

Reducing income tax and National Insurance can incentivize the economically inactive to seek employment.

Supply side policies can target the natural rate of unemployment through education, infrastructure, and labor market reforms.

Regional growth in the UK is hindered by productivity and infrastructure inequalities.

Enterprise zones with unique business benefits can encourage business relocation and job creation.

Productivity in the UK has been low post-financial crisis, impacting exports and the current account deficit.

Education, healthcare, and infrastructure spending can directly boost productivity and export competitiveness.

Subsidies, grants, and tax incentives can encourage business investment and relocation, improving regional economies.

Supply side policies must be evaluated for cost-effectiveness, time lags, and potential negative trade-offs.

Policy interventions should be targeted to areas of need to achieve the desired economic impacts.

Transcripts

hi everybody we know that supply side

policies are a major Hot Topic area for

macro exams this year but know that when

these essays come up they're often

linked to Major themes maybe UK themes

maybe more General themes you have to be

ready regardless of what the question

asks you to do this question will help

you massively in that regard make sure

you've watched my video on UK stats a

lot of that context will be underlying

in this video but also know I'm going to

release a fiscal policy themes video and

a monetary policy themes video so the

entire set you need to have watched

prior to your macro exams let's dive

straight in you can see what I've done

I've listed all the supply side policies

on the left broken down into

interventionist supply side policies but

also market-based supply side policies

in their various groups I'll keep

referring back to these as we look at

various themes so let's start by looking

at supply side policies to boost

potential growth in the UK specifically

potential growth has taken a battering

in the UK ever since the financial CR

crisis prior to the financial crisis our

annual potential growth rates were

around 22% that is the rate of growth

the economy can take without it being

inflationary and for an economy as large

as rich as advanced as the UK that's a

very healthy rate but then from the

financial crisis up to covid times that

rate fell to around 1 and a half% as

we're talking now potential growth

annually is around 1% some organizations

can you believe are putting it even

lower than that which is poultry awful

for an economy as large as the UK and

reasons for that well over the last kind

of 15 years or so we've had very very

poor productivity we've had a shrinking

Workforce because of rising economic

inactivity we've had poor business

investment we've had poor infrastructure

improvements in transport and

non-transport avenues like utility

infrastructure hasn't improved very much

but also we've had very underperforming

public services all reasons why

potential growth has taken this battery

so what supply side policies can we use

to improve it will any of them because

supply side policies if they work by

boosting lrs shifting it to the right

well that in theory will increase

potential growth so you can talk about

any of them here absolutely fine but now

we have some nice background as to how

bad potential growth is in the UK right

now let's go to supply side policies to

reduce economic inactivity know what

this is economic inactivity consists of

those people of a working age who are

either not willing to work they're maybe

not physically able to work or they're

not seeking work so technically they're

not counted as unemployed they're not

meeting all the criteria to be

unemployed and thus they are not

officially part of the

workforce this figure has risen since Co

times this figure inactivity rates used

to be around 20% now it's risen to

22.1% a figure that's very concerning to

policy makers know that that is around 1

million workers who are now not in the

workforce that used to be in the

workforce prior to covid now a lot of

those people are older workers who have

not returned to the workforce since

covid but also there has been a worrying

Rising Trend in sickness long-term

sickness in the UK in particular mental

health issues like anxiety and stress

issues driving this figure up and hiring

inactivity is very very bad news it

harms potential growth yes uh but also

it drives very stubborn wage growth

that's contributed to higher rates of

inflation in the UK as well it's also

contributed to Major labor shortages in

various Industries in the UK so it is a

concern a lot of policy recently has

been used to try and bring this figure

down let's think what supply side

policies can do that well government

spending on Education and Training if

the major reason why workers are not

looking for work they're not seeking

work is because they don't have the

right skills they know to take job

vacancies that exist in the economy then

providing Education and Training to

allow workers to gain the skills they

need by motivate them back to looking

for work back into the workforce

government spending on Healthcare to

deal with with long-term sickness to

deal with those who are not physically

able to work can help in particular

given the the worrying trend of mental

health issues in the UK um preventing

people accessing work spending on Mental

Health Services to encourage those

people back into work to make them feel

that they are able to enter the

workforce with help spending on

infrastructure can mean that workers

don't need to necessarily relocate to

take jobs they can commute to where jobs

are maybe motivating them back into the

workforce if that was a reason why they

weren't willing to work government

spending on Child Care is massive yeah

imagine um if Child Care is unaffordable

and that's a major reason why parents

are not willing to return to the

workforce after having kids that will be

an awful thing well that's where we are

in the UK Child Care is so unaffordable

it's a big reason why maybe one parent

doesn't return back to the workforce

after they've had kids so spending on

child care to improve access to services

to make it more affordable can then

encourage those parents back to to the

workforce once they've had kids we've

seen policies recently in the UK enacted

by the government making Child Care Free

um for parents who have got very young

kids for a certain number of hours in

the week that's one example of how you

can do it also reducing income tax

reducing National Insurance know that

national insurance is Simply another

income tax in the UK can help encourage

the inactive back into the workforce

knowing if they get into work more of

their income will will be disposable but

also reducing benefits so if the

inactive are living on benefits they're

relying on benefits it's a bit of a

force way take away that safety net and

basically force them back into the

workforce back into looking for work at

least now supplier side policies to

reduce the natural rate of unemployment

this isn't I wouldn't say massive theme

in the UK our natural rate of

unemployment is quite low at around 3

and a half% know that this is made up of

three different types of unemployment

structural frictional and seasonal

unemployment it occurs when the labor

markets at equilibrium yes there is

still unemployment at that position

structural frictional and seasonal

unemployment so as I said in the UK it's

quite low but just generally if you got

a question about supply side policies to

help reduce the natural rates of

unemployment what would you talk about

well knowing what the types are makes it

easy to pinpoint policies to improve it

so for example government spending on

Education and Training can help deal

with the occupational immobility side of

structural unemployment government

spending on infrastructure can help

reduce geographical immobilities of

Labor underneath structural unemployment

but also can widen search radius for

those who are searching for better jobs

and hopefully reduced search times

reducing frictional unemployment

reducing income tax and National

Insurance will motivate the structurally

unemployed and the frictional unemployed

to do what they need to do to get into

work quicker knowing they can earn more

disposable income quicker that way

reducing benefits so if the structurally

unemployed and the frictionally

unemployed are Rel ring on benefits

taking away that safety net will make

them do whatever they need to do to get

into work quicker but also we can talk

about reducing the strength of trade

unions yes who fight for very strong

hiring and firing regulation or more

generally just deregulating hiring and

firing within the labor market if it's

easier to hire in firew workers firms

are more likely going to uh be willing

to hire lower skilled workers those who

are occupationally immobile knowing that

it's not a big risk to do so hopefully

paying them a low wage initially

training them up to be then a very

productive member of their Workforce

knowing that if the worker doesn't

respond well to the training they can

sack them very easily they can fire them

very easily what that does then it helps

to keep a lid on occupational immobility

of Labor and thus structural

unemployment it's a novel way to keep

structural unemployment rates quite low

and thus keep the natural rate of

unemployment low so slightly different

way of looking at reducing the natural

rate of unemployment there let's

continue what about regional growth grow

there is regional inequality in the UK

these figures make it very clear we're

looking at average weekly earnings so in

London and in the surrounding areas the

South basically average weekly earnings

are more than 700 was in the rest of the

country Wales north and the mid we're

talking around 500 average weekly

earnings so quite Stark inequality at

the heart of that is inequalities in

productivity in education and healthare

outcomes inequalities with public

transport and with key infrastructures

but also at the heart of this is the

changing structure of the UK economy how

the UK economies now moved to a very

dominant Services based growth path a

lot of those Industries are located in

the South whereas in the North in the

Midlands and in Wales used to be very

mining heavy manufacturing heavy we've

seen de industrialization within those

Industries and workers who used to work

in those Industries have been left

behind another key driver of inequality

so what kind of supply side policies can

be used to promote regional growth there

are two ways of looking at this one is a

way to basically boost productivity and

try and increase the incomes of workers

in those areas but another way to look

at it is policies that encourage

business location to these areas that

then create jobs and incomes that way so

for example government spending on

Education and Training but also spending

on Healthcare can drive up productivity

and hopefully allow these workers in

these areas to access high quality jobs

that are high income earning government

spending on infrastructure can also help

in two ways it can allow workers in

these areas Maybe to commute to areas

where wages are higher incomes are

higher but also good infrastructure can

attract businesses to locate in these

areas and create jobs that way we can

take uh subsidies too as a big way to

encourage business relocation and job

creation whether it's subsidies whether

it's grants whether it's tax credits all

can do that then we can look at tax

incentives for businesses lower

corporation tax can help lower vat can

help maybe lower tariff um lower tariffs

can also help encourage business

location if those are the tax policies

in place in areas where you know

governments want jobs to be created and

incomes to rise but also we can look

more nov at deregulation can do the same

thing and also the creation of

Enterprise zones these are areas of the

country where there are unique business

benefits maybe tax incentives maybe it's

subsidies and grants that businesses can

uh access maybe it's better

infrastructures uh maybe it's

deregulation uh whatever it is there are

incentives that are there for the

business to encourage them to locate to

encourage them to operate there and of

course the creation of Enterprise zones

if businesses react to these uh

incentives can create jobs and higher

incomes for workers in those regions and

lastly supply side policies to boost

productivity to improve the

competitiveness of our exports and thus

to bring down a current account deficit

know that productivity in the UK has

been absolutely abysmal again since the

financial crisis so our productivity at

the moment is 25% below its

pre-financial crisis trend TR our

average annual productivity growth rates

since the financial crisis have been

0.4% that is less than half the rate of

the richest 25 countries in the world so

productivity is shocking um and it's

horrible news for potential growth rates

and job creation we know that but also

it's bad news for wage growth it's bad

news for firms and their cost of

production and it's a major reason why

then exports can be uncompetitive in a

country driving up our current account

deficit and that's where we are in the

UK from my UK stats video we know over

the last 15 years our current account

deficit has averaged 4% of GDP one of

the highest current account deficits in

the world a driving factor of that is

horribly low labor productivity so what

policies can be used to drive up

productivity and to improve

competitiveness of exports well of

course spending on Education and

Training and Healthcare can directly

boost productivity and then make exports

more competitive so can spending on

infrastructure that means workers get to

work on time uh that goods and services

reach their destination on on time can

all help boost productivity but also

spending on infrastructure can boost

productive efficiency and lower long run

cost of production for firms improving

export competitiveness that way

subsidies to firms or grants to firms

that encourage greater investment can

boost productivity and Export

competitiveness so can lower corporation

tax that promotes uh business investment

that can boost productivity and

competitiveness that way relaxing

immigration control so if we get

immigration coming in workers of of a

working age who come in and boost

productivity that can help to improve

competitiveness and drive up

productivity by reducing minimum wages

or reducing the strength of trade unions

labor market reforms here we know that

both of these on their own drive up

long-term cost burdens for firms so by

reducing them uh you can help to

alleviate those long-term cost pressures

which can then boost export

competitiveness but also any of these

competition policies that drive up

competition and boost productive

efficiency can then lower costs and

maybe then make exports more competitive

in the process as can the creation of

Enterprise zones that boost efficiency

and investment to evaluate all of these

policies is the easy side of course we

can worry about how expensive these

policies are in particular your

interventionist supply side policies

your tax reform Market based supply side

policies you can worry about time lags

involved how there's no guarantee

they're going to work like Theory

suggests there are negative stakeholder

trade-offs of certain market-based

supply side policies and also the need

for these policies to be targeted it's

very easy to say spend more on Education

and Training or healthare or

infrastructure but we need to Target

policy interventions to exactly areas of

need in the country if we're going to

get the desired impacts that theory

suggests so that's the easy side to

evaluate these policies well and that's

it folks there you have it supply side

policies but linked to Major themes kind

of awkward questions if you get them

potentially but now you know how to

answer them while what supply side

policies to choose as I said at the

start make sure you stay tuned for a

fiscal policy video coming and a

monetary policy video coming as well

watch the entire set then you're ready

with any kind of macro policy question

that comes your way this year so thank

you so much for watching this video

can't wait to see you again very soon

[Music]