supply side policies -- interventionist

supply side policies definition

refers to measures aimed at increasing the long run AS (LRAS) , hence achieving economic growth and growth in potential output

goals of supply side policies

Aims at long run economic growth and employment , without increasing inflation. Avoids a trade off between government macroeconomic aims

when LRAS increases

1. the original equilibrium is at E1 where PL1 intersects Y1

2. implementing SS side policies would shift the LRAS curve to the right from LRAS1 to LRAS2 , resulting in higher level of real output and lowering APL (state from where to where)

interventionist supply side policies

based on the idea that the government plays a fundamental role in actively managing macroeconomic issues. Gov intervenes in the economy to directly increase the productive capacity of the economy.

4 main categories of interventionist supply side policies

1. investment in human capital

2. investment in infrastructure

3. investment in new technology

4. industrial policies

investment in human capital

refers to an increase in govt spending on training , re-training and education , improved access to healthcare services

• goal : improve quality / productivity of labour or reduce structural UE to boost economic growth

investment in human capital RWE

Singapore SkillsFuture Programme – Singapore launched SkillsFuture in 2015 to encourage lifelong learning and allow Singaporeans to develop industry-relevant skills through education. The government provides subsidies to those over the age of 25,  reducing the cost of training. Hence , more workers are willing and able to upskill and reskill , increasing their productivity. Such an improve in quality of labour shifts the LRAS to the right , increasing Singapore’s productive capacity

investment in human capital adv

1. reduce structural UE

2. increase labour productivity

reduce structural UE

• workers acquire industry-related skills , reducing skills mismatch between workers and jobs available

• these workers experience wage premiums of 9% for polythetnic graduates and 11% for ITE graduates , suggesting the employers value the additional skills

• reduces structural UE as workers become more employable in growing industries

Increase labour productivity

• workers develop new skills making them more productive

• output per unit labour increase

• same quantity of labour can produce more G/S

• increase productive capacity and potential economic growth

investment in human capital disadvantage

1. time lag

2. effectiveness depends on response

time lag

• does not increase productivity immediately , workers need time to complete training

• wage benefits were only measured 1-2 years after completion

• making it less effective in addressing immediate economic problems like UE and economic growth

effectiveness depends on responsiveness

• human capital can only increase if workers actually complete and participate the courses

• may be difficult for low skilled or older workers who lack digital skills for programmes

• if some workers are unable to participate in training , the increase in human capital may be smaller than expected

• lesser shift in LRAS , limit effectives of policy

infrastructure definition

refers to large scale physical capital , usually provided by the government , that is necessary for economic activity to take place

investment in infrastructure RWE

Singapore MRT expansion — The Singapore government invested more than 5 billion in expanding its MRT network, including the Thomson-East Coast Line, to improve connectivity between different areas. By reducing travel times and increasing labour mobility, workers can access jobs more easily, increasing productivity and output per unit of labour. Therefore, the economy's productive capacity increases, causing a rightward shift of LRAS.

investment in infrastructure adv

1. more jobs

2. increase labour mobility

3. reduce cost push inflation — reduce transport costs for firms , SRAS shift right

investment in infrastructure disadvantage

1. time lag — Jurong region line started 2023 finish 2028 , delayed benefits of improved mobility and connectivity. Thus , less effective in addressing short term problems like UE and economic growth

investment in new technology

• involves government spending on research and development

• outcome : keep up to date with modern development , develop new production techniques , improve its production methods , raise quality of physical capital , increase productivity of labour workforce

investment in technology RWE

The Singapore government provides financial support through the Productivity Solutions Grant to encourage firms to adopt digital technologies and automation, Around 36,400 companies received PSG support, with an average grant of 6.6k per project. An MTI study found that firms receiving PSG grants experienced a 3.0% increase in productivity. By enabling firms to adopt technology, workers can produce more output in the same amount of time, increasing output per unit of labour and productive capacity, causing a rightward shift of LRAS.

adv of us investment in technology

1. increase international competitiveness and lowers COP

• firms require fewer resources per unit output by adopting automation , decrease COP

• more internationally competitive as firms can set lower prices , increasing demand for exports and increasing export revenue

disadvantage of investment in technology

US manufacturing employment between 2000-2010

• employment fell from just under 20 million in 1980 to 16 million in 2019

• drop of 5 million between 2000 to 2010

• introduction of industrial robotics caused low skilled workers to be displaced , as they took over routine jobs

• without retraining and upskillling these workers remain structurally unemployed