Supply Side Policies

What is a supply side policiy?

Any policy that increases the productive capacity of the economy leading to an outward shift in LRAS

What do supply side policies involve?

Factors of production

What two things can supply side policies change to the factors of production?

Quality and quantity

What are the two approaches of supply side policies?

• Market orientated - make markets work better

• State intervention - overcome market failures

What is one major problem with supply side policies?

Time lags to work through economy

What are 3 examples of UK supply side policy?

• HS2

• Minimum staffing levels - reduce TU power

• Corp tax kept at 19% instead of 25%

What are 4 main supply side problems with the UK economy?

• Deep regional economic divide

• Structural trade deficit

• High rates of youth unemployment/inactivity

• Persistent productivity gap

What is the difference between production and productivity?

• Production - value of output of goods/ services

• Productivity -efficiency of factors of production

How is productivity measured?

Output per person employed

What are two problems with capital goods that are slowing Uk productivity?

• Low rate of new capital investment

• Slowing rates of innovation

What are 3 basic macroeconomic problems reducing productivity?

• Low market competititon

• Low aggregate demand

• High spare capacity

What is the main problem with labour productivity in the Uk?

Persistent skills shortages in key industries

What are 3 benefits of increased productivity for firms?

• Lower unit costs - lower prices

• Higher profits - reinvested

• Higher wages - keeps productive labour

What are 3 benefits of increased productivity n the macro economy?

• Economic growth

• Less frictional and structural unemployment

• Improved competitiveness - better trade balance

What can the economy deal with better if they have higher productivity?

External shocks

What are the 4 I’s (aims of supply side policies)

• Innovation - to improve competitiveness

• Incentives - to look for work

• Investment - in education and capital

• Infrastructure development

What does PERM stand for - 5 other aims of supply side policies?

• Productivity - labour and capital

• Enterprise - start ups

• Research

• Mobility of labour - geographical and occupational to reduce unemployment

What increases along side LRAS from supply side policies?

SRAS

Why is this the case?

Lower unit costs

What does increased LRAS allow for without causing inflation?

AD to rise

What are the 6 forms of supply side policies? (LICHII)

• Labour market flexibility

• Incentivisation to work

• Competition policies (deregulation, privatisation)

• Human Capital - education training

• Innovation support

• Infrastructure and technology investment

What is labour market flexibility?

The speed and ability of a workforce and economy to adapt to changing market conditions, business cycles, and production demands

What does flexible wages and employment allow the market to do?

Clear rapidly eliminating excess supply or demand

Wat does this keep the economy working at?

Potential output (equilibrium)

How does labour market flexibility correct a boom (above LRAS)?

• Workers are doing overtime (above potential output)

• Inflation caused by increased AD

• Flexible market allows workers to get higher wages due to inflation and overtime

• Firms unit costs increase so SRAS shifts to the left back down to LRAS equilibrium output

How does Labour market flexibility correct a recession (below LRAS)?

• AD falls - profits fall - workers laid off to reduce costs- increased labour supply

• Labour market flexibility allows firms to hire workers at lower affordable prices

• SRAS shifts outwards reducing price and stimulating AD

• Growth leads to equilibrium at LRAS

What government intervention can prevent correction of recessions?

High minimum wages

What does labour market flexibility also attract?

Foreign inward investment

What can be improved to increase labour market flexibility?

Occupational Mobility

What is occupational immobility?

the inability of workers to switch between different types of jobs or industrie

What is a policy to improve occupational mobility?

Provision of skills training and education to develop skills required by the market

What types of unemployment does occupational mobility reduce?

• Frictional - skills are transferable and adaptable

• Structural - reduction in skills gap

What is another way labour market flexibility can be improved?

Improving geographical immobility

What is geographical immobility?

The inability of labour to move into jobs where there is demand in other locations

What is a policy that promotes geographical mobility

Investment in transport technology to make long distance commutes feasible

What regulations can be reduced to improve labour market flexibility?

Firing and hiring regulations

How does this increase flexibility and therefore productivity?

• Firms can fire inefficient workers and hire new productive staff

• In a recession firms can cut costs with easier firing and therefore reduce prices

What type of contract can increase productivity?

Short term contracts

How does this increase productivity and also market flexibility?

• Incentivises employees to work harder so they dont get sacked

• Firms can match labour to demand by firing workers

What are zero hour contracts?

Contracts that do not guarantee a minimum number of working hours each week

What is the H in LICHII?

Human Capital

What is human capital?

A measurement of individual’s assets (health, skills, personalities) that enable them to work and produce economic value

How can human capital be increased?

Improving the quality and affordability of education and training

What policy can increase the affordability of education?

Reducing university tuition fees

What 2 policies can improve the quality of education?

• Investment in STEM subjects

• Subsidies for apprenticeship schemes (practicality)

How can a highly skilled workforce increase LRAS?

• More production of higher value goods that require more high levelled skills

• Structural improvement

What is the 2nd I in LICHII?

Innovation support and incentivisation

What is innovation?

Putting a new idea or approach into action

What are the two types of innovation?

• Product innovation

• Process innovation

Which type increases quality of output?

Product innovation

What type increases output per worker (productivity)?

Process innovation

What policy can be used to boost research leading to new technology?

Subsidies to research firms and firms in technology / green sectors

What can incentivise firms to innovate?

Improving ease of obtaining patents to make inventions profitable

What is the 3rd I in LICHII?

Investment in infrastructure/ technology

What are the two forms of investment that can boost productivity?

• Government

• Private sector

How can the government lower unit costs of doing business?

Investment in infrastructure

What are 2 examples of policies to improve infrastructure and boost productivity?

• Investment in telecommunications to improve access to markets

• Investment in transport networks to speed movement of goods

How can the size and quality of capital be increased?

Increased business investment

What are 2 ways the government can encourage business investment?

• Lower corporation tax

• Lower interest rates

What does the C in LICHII stand for?

Competition

What are two ways competition can be increased?

Privatisation and deregulation

How does increased competition increase LRAS?

• Drives efficiency and innovation: It forces firms to eliminate waste, lower production costs, and invest in research and development to survive against rivals.

• Reallocates resources effectively: Inefficient firms are driven out of business, freeing up land, labour, and capital to flow toward more productive, high-growth companies.

What is privatisation?

Selling off state owned enterprises and industries to the private sector such as the selling of utilities such as water gas etc

What is x inefficiency?

When a business operates with higher average costs than necessary to produce a given level of output

How does privatisation reduce this?

Introduction of profit motive

How does deregulation allow for more competition?

Encourages start ups that don’t have legal teams to deal with regulation as costs are lowered

What can be done to increase competition?

Reducing trade union power

What do trade unions not allow firms to do?

Lower costs to the market clearing price

How does this reduce competition?

Harder for new businesses to start up in the market as wages are too high

What are two other ways Trade Unions increase production costs for firms?

• Increased health and safety standards

• Strike action

What is the first I in LICHII?

Incentivising work

How can contracts be changed to incentivise productivity?

Performance related pay

What is it called when people don’t bother to find work as they are already comfortable?

Unemployment trap

What is the most obvious way of reducing the unemployment trap?

Reducing benefits

What are the two ways income can be increased for low income earners (firs jobs)?

• Increasing national minimum wage

• Increasing income tax threshold

What is the main evaluation point on supply side policies?

Time lags

What policy has the biggest time lag?

Human capital investment

What is a problem with subsidising firms to increase capital investment / innovation?

• May increase x inefficiency if firms are cost inefficient

• Reduces need to innovate

What are 3 problems with reducing trade union power to increase productivity?

• Reduced standards - reduced moral - reduced productivity

• Lower wage disincentives people to work harder

• Less cooperation through TUs between workers and managers on how to improve firm performance

What is an evaluation of short term contracts?

Workers may not invest effort into the job

What are two limiting factors on the effectiveness of supply side policies in general?

• High spare capacity - investment wont increase due to subsidies (already have unused resources)

• Low multiplier - firms may save extra subsidy cash and infrastructure investment may not lead to more growth