2.6.3 - supply side policies

what do supply-side policies aim to do

shift the LRAS

by improving the quality/quantity of FoPs

5 main ways of achieving this

SLIIC:

improving the Skills + quality of the labour force
reform the Labour market
increase Incentives
improve Infrastructure
promote Competition

two types of supply side policy

market based

interventionist

market based supply side policies…

…aim to remove obstructions in the free market that hold back increases to the LRAS

interventionist supply side policies…

…require direct government intervention to increase Y_(FE)

usually used to correct market failure

improving the skills + quality of the labour force potential policies

no market based

INTERVENTIONIST:

• more gov spending on education

• more gov spending on healthcare (higher productivity)

• more gov spending on retraining

reforming the labour market potential policies

MARKET-BASED:

• less trade union power - can decrease wages

• scrap minimum wage - lower costs of production

• scrap child labour laws - more fops

INTERVENTIONIST:

• more gov spending on occupational mobility (training, education, etc)

increasing incentives potential supply-side policies

MARKET BASED:

• income/corporation tax decrease

• lower/scrap benefits - incentivised to work

no interventionist

what is the unemployment trap

little financial incentive for someone to start working:

• loss of benefits

• income tax

actually makes them worse off

this is what we are tryna combat with the market based ‘incentives’ policies

improving infrastructure potential supply side policies

no market based

INTERVENTIONIST:

• more gov spending/subsides for infrastructure

promoting competition potential supply side policies

MARKET BASED:

• privatisation - more firms enter the market

• deregulation/trade liberalisation (less bureaucracy)

INTERVENTIONIST:

• more gov spending on innovation

• subsidies to firms - promotes international competition

what diagram to use to show supply side policies?

EITHER classical or keynsian

strengths of supply side policies

increase economy rate of growth

reduce average price levels

reduce unemployment

increase net exports

increase standards of living

weaknesses of supply-side policy

lower wages = more inequality

expensive to implement

time lags btw expenditure and impact

long-term - changes in government means changes in policies so it doesn’t work as well as they planned