Interventionist solutions on the supply side:

Supply side policies are not the sole domain of neoclassically oriented free-market policies, yet care should be made to distinguish market-based policies from interventionist policies. The 1980s and 1990s saw increasing use of government empowerment to influence the supply side of the economy. Generally speaking, governments intervened on factor markets by trying to enhance the attractiveness and availability of labour, i.e. the supply of labour, which also had the secondary effect of increased demand for labour over time. Typically, governments can intervene on the supply side in the following ways: Governments/community run training and skills projects for labour (industrial training institutes) Extensive government online job and information centres and hiring agencies (Job Centre Plus UK) Grants/subsidies to employers hiring youth, older workers and long-term unemployed (Finland) Various forms of regional incentives aimed at reallocating labour from depressed areas to areas in need of labour, for example free train fare to job interviews and financial help in moving to another region (NREGA) Entrepreneurial incentives such as soft loans and subsidised rent for start-up companies and R&D loans (Grameen Banks) Tax incentives to firms which invest in education/training amongst employees risking redundancy. (European Centre for development of national training)

Basically, any government policy causing an increase in labour market participation increases the labour supply. Figure 3.1 shows how various forms of interventionist supply side policies notably education, (re)training and greater labour mobility increase the aggregate supply of labour Government intervention on the supply side increases the aggregate supply of labour from ASL0 to ASL1.

By increasing the skills base of labour, decreasing the search costs of both employers and job searchers and creating incentives for increased labour mobility, there will be an increase in the aggregate supply of labour, shown in figure 3.1, as the shift in the aggregate supply of labour from ASL0 to ASL1. Assuming that wages adjust relatively quickly, i.e. no downward stickiness of wages, the real wage rate falls to W* and unemployment decreases from U0 - U1 to FE -U* - the natural rate of unemployment (NRU).

Market Solutions:
The market approach to disequilibrium is of course supply side policies. Such neoclassically based policies assume disequilibrium unemployment to be real wage unemployment.

Supply-side policies can be summed up as any policy that increases the propensity of labourers to accept jobs. One can distinguish between policies aimed at removing market imperfections and policies aimed at decreasing the natural rate of unemployment. Removing labour market imperfections: By lowering union power, lowering taxes on labour, and decreasing minimum wages it is possible to reduce the influence of labour market imperfections which diminish the ability of the market to clear. If successful, the real wage rate will conform to labour market forces and lower the wage rate from W0 to W*, see figure 3.2, decreasing total unemployment from U0-U1 to the natural rate of unemployment FE-U* The removal of labour market impurities (minimum wage and union power in wage negotiations) puts downward pressure on real wages (W0 to W*) and the labour market clears at the natural rate of unemployment, FE-U*. Note the distance U0toU2 is voluntary unemployment and that at W*only voluntary or full/natural unemployment exists. The labour market has cleared.

Decreasing the natural rate of unemployment: Other supply-side policies for labour aim to reduce labour market rigidities and increase the supply of labour by increasing the overall propensity of labourers to accept jobs. Assume an economy in labour market equilibrium with a natural rate of unemployment of FE0 to U*0 (see figure 3.3) . By implementing various supply-side measures the aggregate supply for labour increases, i.e. more people in the labour force are willing to supply their labour to the market at all real wage levels. This is shown in the shift in aggregate supply of labour from ASL0 to ASL1, which lowers the natural rate of unemployment from FE0 - U*0 to FE1 to U*1

Such policies commonly referred to as structural reforms often include: Lowering social/unemployment benefits in order to persuade labourers to accept jobs (since lower benefits increase the opportunity cost of remaining unemployed) Lowering income taxes to induce increased labour hours and create an incentive for those in the labour force to accept jobs. Increasing overall labour flexibility by reforming labour market legislation, for example by making it easier to hire/fire labourers and lowering mandatory service pay Using retraining and education schemes to enable workers to decrease time spent between jobs and to improve reallocation of labour from declining industries to growth industries.

The overall aim of market solutions to unemployment is to alleviate supply and demand mismatches, i.e. to improve labour allocation. Proponents of market solutions point to the US and Great Britain as examples of how long-run unemployment rates fell markedly during and after the Reagan and Thatcher reforms of the 1980s. Criticism of supply side policies for labour: Few critics would debate that long term unemployment rates have dropped substantially in the US and Britain during the 1980s and 1990s. Instead, criticism is levied at a number of noticeable weaknesses of supply side policies. Perhaps foremost is the implicit assertion that disequilibrium unemployment is primarily the result of labourers not being willing to accept jobs. Many economists would take issue with the strict categorization of what is to be considered voluntary and/or frictional unemployment; a skilled piano builder can hardly be unwilling or voluntarily unemployed for failing to accept an available job waiting tables.