4.2.5.2 How do Supply Side Policies reduce unemployment and inflation

reduce structural and frictional unemployment by improving efficiency and flexibility in labour and product markets

how does SSPs reduce unemployment?

education/training, labour market reforms, tax cuts

what methods do SSPs use to reduce unemployment?

reducing benefits or weakening unions=> increase incentives to work=> less voluntary unemployment.

labour market reforms may include

time lag, cyclical unemployment, equity issue, effectiveness depends on context

Why may SSPs not work?

during a recession, demand deficiency dominates => SSPs can’t solve that.

Why may cyclical unemployment cause SSPs not to work?

Labour market flexibility(e.g. weaker unions, less benefits)=> low-paid/insecure jobs, not necessarily reduce unemployment

Equity issues of SSPs

if AD is low, firms won’t hire regardless of lower taxes or training initiatives.

why is the effectiveness of SSPs dependent on context

long run, immediately, economic, time frame, implementation

Supply-side policies can reduce certain types of unemployment in the ____ ___ but not always or ________. Their success depends on _________ conditions, _____ _____, and _____________

increase productive potential → lower cost-push inflation pressures and allow non-inflationary growth

How do SSPs reduce inflation

depends on cause of inflation, time lags, short-run effects, complementarity

Why may SSPs be unable to reduce inflation?

demand-pull, cost-push

SSPs may be unable to reduce inflation: depends on cause of inflation

demand-pull

If inflation is ________ ____(from excess demand), SSPs don’t directly reduce it in the short run

cost-push

If inflation is ____ ____(e.g. oil prices rising), SSPs don’t offset that immediately.

reducing welfare or deregulating labour markets may increase inequality or wage pressure=> inflation could even rise temporarily

Why may SSPs be unable to reduce inflation?: short-run effects

may also need demand-side stability, e.g. monetary policy

Why may SSPs be unable to reduce inflation?: complementary

long run, efficiency, productivity, short run, external, demand

While SSPs can help reduce inflation in the ____ ___ by improving ______ and _________, they do not always do so — especially in the ____ ___ or when inflation stems from ______ shocks or excess _______