Subject: Economics
Level: A Level
Exam Boards: All

Labour Markets

In general terms, economists who believe that the natural rate of unemployment can be reduced argue that government policies should seek to make labour markets more competitive and flexible.

Product market supply side policies

All of the policies in the product market are designed to increase competition, and so efficiency. If the productivity of an industry improves, then it will be able to produce more with a given amount of resources, shifting the LRAS curve to the right. All of the following policies are, in some way or another, trying to increase the level of competition in product markets.

  1. Privatisation e.g. 1980s telecommunications, electricity, gas, British Airways
  2. Deregulation e.g. bus industry
  3. Membership of the WTO
  4. Help for businesses

Labour market supply side policies

The following policies are all designed to improve the quality and quantity of labour. Increased numbers will obviously increase the productive potential of an economy. Increased quality will improve the productivity of labour. If a given amount of labour increases its productivity, then they will produce more with a given set of resources, and so the productive potential of the economy will again improve. As with the product market policies, successful labour market supply side policies will shift the LRAS curve to the right.

  1. Legislation against trade unions
  2. Education and training
  3. Income tax rates
  4. Unemployment benefits

wage labour force graph

Supply-side objectives

Key concepts to focus on are incentives, enterprise, technology, mobility, flexibility and efficiency.

  1. Improve incentives to look for work and invest in people’s skills
  2. Increase labour and capital productivity
  3. Increase occupational and geographical mobility of labour to help reduce the rate of unemployment
  4. Increase investment and research and development spending
  5. Promoting more competition and stimulate a faster pace of invention and innovation to improve competitiveness
  6. Provide a platform for sustained non-inflationary growth
  7. Encourage the start-up and expansion of new businesses / enterprises especially those with export potential
  8. Improve the trend rate of growth of real GDP

The governments of the 1980s reduced these high marginal income tax rates to encourage more people to work hard. The final big drop was in the Budget of 1988, when the top marginal rate fell from 60% to 40% where it remains today.

  • Unemployment benefits
  • Education and training
  • Legislation against trade unions

price level vs gdp real gdp price level output


In recent years, growth rates in the UK have been low and unemployment has risen. For example, in 2012 output was still below its peak of 2008 and unemployment had risen from 6.4% from 7.8%.

  1. Explain why economic growth is a key objective of UK Government economic policy. [15 marks]
  2. Evaluate the view that a reduction in UK unemployment is best achieved through the use of supply-side policies. [25 marks]

Select an option from the dropdown.

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