I recently read an article in the Economist about the ‘Productivity Problem’ and how the UK’s productivity is 20% below the average of other nations in the G7. It got me thinking about what solutions there are to fix this problem. Productivity is a measure of the efficiency of factors of production. Supply side policies are policies, which are used in order to increase aggregate supply. These can be used to improve or increase the factors of production, hence increasing the UK’s productivity.
One example of a supply side policy might be to improve education and training, as this will result in workers becoming more productive as they have an improved skill set and will hence provide a higher quality of labour. However, it must be understood that this is not a policy that can have an effect overnight, as there will be an inevitable implementation lag for new training and education schemes to be designed and for these to significantly improve the quality of labour, it may take more than one economic cycle. Furthermore this is a very expensive project for the government so you would have to consider the opportunity cost and whether the government spending could be put to better use like an alternative supply side or even demand side policy.
Another supply side policy that can be implemented by the government could be introducing a reduction in income tax. This would be effective in increasing the quantity of labour as this would act as an incentive for potential workers to get into the labour force, as they will be encouraged by the idea of having to pay less tax. This increase in the quantity of workers will result in productivity in different industries increasing as there will be more workers for the same projects. However this policy will be more effective if there is equal attention into fiscal policies that increase aggregate demand in order to keep the level of capacity utilisation high.
Another policy that could be done by the government is to abolish the minimum wage as this can reduce the cost of production for firms as it is argued that minimum wages fix wages in the labour market above the equilibrium wage rate, which causes excess supply and therefore inefficiency. Getting rid of the minimum wage will bring wages back down to the equilibrium wage rates in the economy, which therefore reduces the cost of production for firms, which makes the labour market more efficient and therefore increases the productive capacity of the UK economy. However, although this may increase the efficiency of the labour market, it may result in the quantity of labour being reduced, as the lower wages will put off workers from accepting the jobs as they may feel that they are not being paid enough.