Supply-Side Policies
- Supply side policies are policies designed to increase aggregate supply by improving the efficiency of labour and product markets
- They are never designed to reduce AS, whereas fiscal and monetary can be designed to reduce AD
- If supply side policy is successful, it can increase the productive potential of the economy, prevent inflation, reduce structural and frictional unemployment, and increase the country’s trade position.
- Supply side policies try to lower firms’ costs of production and increase the efficiency of the markets
- This again contrasts with fiscal and monetary, as instead of trying to change macroeconomic performance by influencing the whole of the economy, SSPs try to improve the performance of particular markets.
- Some SSPs seek to reduce government intervention, to enable markets to work more efficiently (e.g. privatisation and deregulation)
- Others increase government intervention in order to correct market failure (e.g. education and training)
Examples of Supply-Side Policies
- Education and training
- Government encouragement to increase education and training should raise the occupational mobility of labour (more flexible labour market) and labour productivity (increase of AS due to increased potential output)
- Government assistance to new firms
- New firms provide employment, develop entrepreneurial skills, and introduce new ideas
- A government can provide grants and reduce taxes for them, making them more common
- Reduction in direct taxes
- Cutting corporation tax will leave firms with more money to invest, which should increase the productive capacity of the economy
- Cutting income tax would encourage existing workers to work longer hours, stay in the labour force longer, and encourage the unemployed to find work.
- However, the substitution and income effect come into play, as if a worker can now earn the same amount of money they were before but by working less hours
- NMW
- Reduction in unemployment benefits
- This may force the unemployed to seek work
- If they do find work, the productive capacity of the economy won’t increase, but the negative output gap would be narrowed
- However, cutting unemployment benefits could increase unemployment, as they have less money to spend, so consumption decreases, and firms are likely to cut back on workers, etc.
- Reduction in other benefits
- Anything that causes an economically inactive person to enter the workforce will increase the economy’s productive capacity
- Reduction in trade union power
- This may increase the efficiency of labour markets if trade unions reduce employment by pushing wage rates above the equilibrium level – increasing a firm’s costs.
- However, trade unions may act as a counter-balance to the market imperfection of powerful employers, and it may also be cheaper for a firm to communicate with a union that it would to communicate with workers individually
- In this case, the reducing a union’s power may actually raise a firm’s costs and raise unemployment.
- Privatisation
- Deregulation