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]