3. The important issue is: What determines the “natural rate” - this is what policymakers are concerned about! ŸTo analyze this look at more elaborate supply side model

4. Put price and wage setting behaviour together and find equilibrium or “natural rate of unemployment”

5. Top 5 GrocersPrice of a basket (market share %)of goods (UK=100) 1988199219968/98 UK536064100 Netherlands59596161 Belgium52535662 France42495274 Germany27374165 Spain192325n.a Source : Nielson, Sunday Times

8. Unemployment Benefit Ratios

12. Source : World Competitivve Report

13. The Thatcher Labour Market Reforms I) Reduce Union Power a) Employment Act 1980 abolishes statutory recognition procedures; extends grounds to refuse to join a union, limits picketing b) Employment Act 1982 prohibits actions that force contracts with union employers; weakness closed shop; removes some union immunities c) Employment Act 1984 weakens union immunities, requires pre-strike ballots, strengthens employer power to get injunctions d) Employment Act 1988 removes further union immunities; extends individual rights to work against a union

14. II) Changes welfare state to increase work incentives a) Diverse acts that reduce replacement ratio for unemployment benefits; eliminate benefits for young people b) Restart programme introduced in 1986 required all unemployed to be interviewed about job search every 6 months c) Administrative changes to make it more difficult to obtain benefit III) Reduce government role in labour market a) Private pensions b) Abolish wage councils c) Lower tax rates d) Reduce government employment

15. IV) Enhance self employment and skills a) Enterprise Allowance Scheme b) New training initiatives; Youth Training Scheme; Community Programme; Employment Training Programme Are these reforms the cause of the more flexible labour market and lower unemployment?

16. U.K labour market reforms have encouraged part time workers, less costs for firms hiring and firing workers and placed less restrictions on firms when negotiating wages Unemployment has not fallen in continental Europe, which has not undergone the same degree of labour market reform. Continental Europe still has strong unions and heavy hiring and firing costs for labour From the perspective of our theoretical model these reforms should lower unemployment - reduction in trade union power, removal of minimum wages, lowering of unemployment benefits should all shift wage setting curve to the left UK experience illustrates that supply side reforms take several years before they yield benefits

17. Route Netherlands has taken different from that in the UK In the UK unemployment fallen as a consequence of more liberalised labour markets In Netherlands unemployment fallen due to improvement in coordination of wage negotiations and active labour market spending