Supply-side economists believe that governments should not intervene in the workings of the free market. They argue that the government is responsible for creating the environments in which free markets can operate efficiently, by removing the barriers which exist to the perfect working of markets. Supply-side measures are a powerful way of influencing both output and the level of employment.

Since 1979, the UK government has been committed to implementing supply side policies aimed at improving the workings of free markets. A wide range of measures have been introduced.

The reduction in the power of the trade unions was an important supply-side policy. Industrial relations had long been considered a problem in the UK. Under the Under Margaret Thatcher, the power of the trade unions was drastically curtailed.

Classical economists argue that the higher the marginal rate of tax, particularly taxes on income and wealth, the less incentive there is to work. The government has reduced marginal tax rates, and this should increase workers’ willingness to work.

The government has also reduced welfare payments for the unemployed. This is intended to encourage the unemployed to take jobs. They will also spend less time looking for jobs, and will accept low paid work.

Reform of labour legislation has been another policy that has been pursued. Labour legislation, and various other regulation in the workplace, imposes costs upon employers. Reducing the rights of workers will encourage firms to employ more people.

Education and vocational training have been recognised as an important supply-side policy. Training increases the productivity of the labour force. The government has introduced a national curriculum for schools, and also reformed vocational training with the establishment of NVQs and GNVQs. There has also been a large expansion in the number of people entering higher education.

The introduction of personal pensions can also be considered as a supply-side policy. Whereas previously workers could be penalised for changing jobs, the pensions rights associated with personal pensions enable them to move from job to job without being penalised.

Changes in housing policy can affect the mobility of labour. The government has reformed rent controls, and this should have lead to a greater amount of rented accommodation becoming available.

Supply-side economists would suggest that the government should encourage expansion of the private sector, and therefore should create an environment in which businesses can flourish. For example, there has been deregulation of the capital and money markets, which has made them more competitive. There have also been incentives given for saving, which is used to finance investment by firms. Share ownership has also been promoted. The government has also placed particular importance of the development of an enterprise culture and given help to small businesses.

The forces of competition are argued to increase both productive and allocative efficiency. Privatisation and deregulation of industry should give an incentive for enterprises to be efficient. The government has also abolished subsidies of inefficient industries, and encouraged free trade. The maintenance of a strong pound was seen as a way of forcing British companies to be competitive.

Keynesian economists dismiss many of these supply-side arguments as being too simplistic. Keynesians argue that the disincentive effect of taxation is not bone out by empirical evidence. The substantial increases in the tax allowances in the 1980s led to less than 0.5 per cent extra hours of labour supply. The cut in the basic rate of income tax has had no detectable effect at all. The massive cut in the marginal tax rate of top earners had a small effect in stimulating extra hours of work by the rich. The existence of unemployment benefit does increase unemployment, but not to any great extent. Entrepreneurs are important in an economy, but it is important to remember that small businesses account for only a small fraction of national output, national employment and national investment. Reducing workers’ rights may well lead not to extra employment, but to greater profits and greater earnings of the owners of capital.

Many of the supply-side policies pursued by the Conservative government of the 1980s led to direct job losses within the economy. For instance, privatisation has led to a shake out of jobs in the privatised industries as a result of increased productive efficiency. Some economists have said, however, that the rapid fall in unemployment in 1993 and 1994 as the economy came out of recession was the direct result of the supply-side measures pursued by the government. Suppy-side measures are also cited as the main impetus behind the fall in the natural rate of unemployment in the 1990s. Supply-side measures are sometimes believed to be the only effective way of reducing unemployment.