Macroeconomics

1. Discuss the effectiveness of supply-side policies in reducing unemployment. (15)

Unemployment is an economic situation when people are willing and able to

search for a job but cannot find one. Achieving low unemployment is one of the
important macroeconomic objectives for most governments. Supply-side policies are
government policies that aim at positively affecting the production side of an economy,
by enhancing the quality and quantity of factors of production. While market-based
supply-side policies aim to minimize government intervention, interventionist supply-
side policies involve direct government actions such as provision of capital goods and
services. Supply-side policies are often used to reduce unemployment; however, it may
not be the best way in reducing unemployment in terms of effectiveness.

Diagram 1 is the PPC curves of the South Korean economy, showing the effect of
supply side policies. Supposing that the PPC curve in 2020 is PPC1, the implementation
of supply-side policies will shift PPC1 outwards to PPC2 in 2025 and moving point 1 to
point 2. Hence, South Korean economy would be producing an increased capacity of
both consumer goods and capital goods, indicating that more labor forces may be
involved in producing such goods. Likewise, supply-side policies are effective in
ameliorating unemployment in the long run, thereby achieving sustainable economic
growth.
 Supposing that the unemployment level in South Korea in 2020 rose due to firms
cutting production costs by terminating employees, the government may use market-
based supply side policies such as reducing the national minimum wage. This reduces
the cost of labor; hence South Korean firms would be able to hire more workers and
produce more output. The government may also lower unemployment benefits to
incentivize and make the unemployed to be more willing to search for a job. However,
this may result in making the unemployed more vulnerable to poverty if they cannot
find work, in which they may end up being unwilling to do so, hence unemployment
level may remain the same or even deteriorate in the short run. This causes an increase
in the income inequality level between high income earners and low-to-no income
earners in the long run.
The government may also use interventionist supply side policies such as
provision of free education to the unemployed. The provision of free education as merit
goods would enable the unemployed to require necessary skills and productivity,
therefore making firms more likely to employ them. However, there are drawbacks of
interventionist supply-side policies, such as occurrence of government opportunity
costs; governments would have insufficient amount of budget to educate the
unemployed and provide subsidies to sustainable firms with high potential
simultaneously. This may even lead to government budget deficit, increasing its public
debt and increasing unemployment even more. It may also take a long time for
interventionist supply side policies to take effect within the economy, meaning that the
employment would not improve in the short run.
As mentioned above, supply-side policies are only effective in reducing
unemployment in the long run, and it may even cause opportunity cost and government
deficit in the short run due to such large costs involved for implementation. Thus, the
South Korean government can use expansionary fiscal policies and monetary policies to
reduce the unemployment level. For instance, the South Korean government can
increase government expenditure by proceeding infrastructure development projects,
which would increase public jobs, or lower income and corporate taxes to encourage
consumer and business confidence. However, this would result in a crowding out effect,
meaning that the increase in government spending resulting in budget deficit and
increased borrowing. Hence interest rates and loans may rise, affecting consumption
and investment negatively, also having negative impacts on unemployment. Likewise,
increasing the money supply and lowering interest rates through expansionary
monetary policies may lower unemployment due to increased levels of consumption
and investment in the short run due to no crowding out effect. Nonetheless, inflation
may occur due to the sudden increase in demand, heightening the general price level,
which makes firms reduce costs by terminating employees in the long term.

In conclusion, supply-side policies are effective in reducing unemployment levels

only in the long run, due to excessive government costs and time lags. Hence,
governments could use expansionary fiscal and monetary policies in the short run, to
improve the national employment level.