2.6.3 Supply-side policies

SUPPLY-SIDE POLICIES

• gov policies aimed at increasing productive potential of economy and moving supply curve to right

MARKET BASED POLICIES

• policies which are designed to remove anything that prevents free market system working efficiently, causing lower output and higher prices

• barriers include those which reduce willingness of workers to take jobs or lead to inefficient production, high prices or a lack of risk-taking

INTERVENTIONIST BASED POLICIES

• policies designed to correct market failure

POLICIES

• increase incentives

• promote competition

• reform labour market

• improve skills and quality of labour force

• improve infrastructure

INCREASE INCENTIVES

• increasing incentive, will increase size of workforce, so more g and s would be produced

• METHODS:

  • reduction in benefits will increase OC of being out of work so people will work (why gov introduced Universal Credit , which helps to ease transition into and out of work)

  • reduction in benefits and subsidising workers may prevent poverty/unemployment trap, where low income workers end up in same or lower position after a new job because of benefits received

  • could encourage parts of the workforce back to work, e.g. women offered free childcare

  • reducing taxes on firms would increase incentives to employ

  • reduction of min wage would increase incentive for firms to employ

INCREASE INCENTIVES- EVAL

• many people argue small change in any tax will have little impact on people’s incentive to work

• reductions of tax on high income earners and reducing benefits will lead to more income inequality

• reduction of tax will mean govs have less revenue so have to decrease spending or borrow more

PROMOTE COMPETITION

• privatisation- selling nationalised companies to private sectors

• deregulation- reducing restriction on businesses which restrict entry to the market, makes firms more competitive

• competition policy (e.g. CMA) used to prevent monopolies in market

• competition necessary to make firms efficient as they have to offer a cheaper or better service

PROMOTE COMPETITION- EVAL

• deregulation and privatisation may lead to a poorer quality service

• could cause env issues if deregulation is seen in env regulations

REFORM LABOUR MARKET

• will reduce unemployment- means that more g and s can be produced

• METHODS:

  • increase retirement age-more working

  • labour market could become more flexible to make it more efficient as it can respond to external changes

  • weakening of unions- trade unions push up wages which can lead to firms laying off some workers and reducing production- limits AS

  • making it easier to change jobs, through higher mobility of labour: improved info about job vacancies and improved geographical mobility

  • to improve geographical mobility, gov has to improve house affordability

  • decrease min wage to prevent real-wage inflexibility unemployment

REFORM LABOUR MARKET- EVAL

• trade unions already very weak so reducing their power further may have little effect

• reducing benefits will lower AD-less profit, less employment + increased income inequality

• making labour force more flexible will lead to low pay for some, which will increase income inequality and may reduce AD

IMPROVE SKILLS AND QUALITY OF LABOUR FORCE

• means that workers are more efficient so can produce more g and s and be more skilled so can develop new tech etc.

• METHODS:

  • increase spending on education and training to create a more educated workforce who will be more efficient and able to do more skilled jobs

  • could be in terms of academic education, or improving quality of on job training, such as apprenticeships

  • gov working w/ trade unions and firms to improve the skills of long term unemployed

  • increase in high skilled migrants would also improve quality of workforce

IMPROVE SKILLS AND QUALITY OF LABOUR FORCE- EVAL

• improving education may have no effect if it’s in irrelevant skills to workforce

• increasing education will create an OC

• time lag of effects of increased education

IMPROVE INFRASTRUCTURE

• METHODS:

  • could be done through offering tax incentives or subsidies on investment

  • Investment in UK is just 17% of GDP compared to 35% in South Korea- to improve this, gov planned to reduce corporation tax to 18% in 2020

  • gov could spend money to improve infrastructure-e.g. building new roads, HS2 and CrossRail

  • will mean new tech will be developed and more will be invested in buying new tech- improvement in efficiency

IMPROVE INFRASTRUCTURE- EVAL

• offering tax breaks/subsidies will effect gov budget- lose tax revenue or create OC

• some businesses may not actually invest this money and instead used it as a method of tax evasion

• not all investment will be successful in improving supply as it may not achieve its aim or it may not be aimed at increasing supply

SS POLICY- KEYNESIAN DIAGRAM

SS POLICY- CLASSICAL DIAGRAM

STRENGTHS

• able to both increase output and decrease prices- no inflation

• lead to long term economic growth, rather than small changes in economic growth following changes in AD

• can be directed at increasing exports which will improve balance of payments

• allow 2 diff approaches: market based and interventionist

  • means that both free market and interventionist economists will accept it

WEAKNESSES

• Keynesian LRAS curve shows that they have no impact when LRAS is elastic, so demand-side policies needed to fix problem in short run

• not all SS policies increase supply and others cause conflicts- issues vary depending on which policies used

• often, gov has to spend more money or decrease taxes- will decrease revenue and lead to budget deficit

• actions may also have undesirable impacts on AD and could cause higher inflation

• time lag on effect on output