Supply Side policies
AS Economics
Managing the economy
Managing
the economy
Fiscal policy
Monetary
policy
Supply side
policy
Supply Side Policies
• Aimed to increase the country’s AS and shift
the LRAS to the right
• Combined with AD policies, they aim to meet
government macroeconomic targets
• Supply side policies can be private or public
sector, e.g. improvements in productivity in
the private sector
Price Level
LRAS1
LRAS2
Supply side policies aimed
at shifting LRAS to the
right
RO
Supply Side Policies
1. Labour market measures – improving education
and training, reducing trade union powers, profitrelated and performance related pay,
encouraging more flexible pension arrangements
2. Tax reforms – reducing the tax burden and
replacing direct with indirect taxes
3. Welfare reform – reducing state benefits to
encourage employment rather than benefits and
reducing the unemployment trap
Supply Side Policies (2)
4. Industrial and competition policy – privatisation,
deregulation, contracting out
5. Financial and capital market measures –
deregulating financial markets, greater competition
amongst banks and building societies, encouraging
saving and share ownership, promoting
entrepreneurship
•
Overall, supply side can be categorised into policies
focused on the labour market or product market
What factors affect supply?
• Supply side policies seek to increase long run
aggregate supply and so increase the
productive potential of the economy.
• They aim to do this by increasing the quantity
and quality of resources
2 main approaches to SS policy
• Free market approach (new classical) – by
raising work incentives, removing restrictions
on firms and increasing competitive pressures
• Interventionist approach (Keynesian) – seeks
to shift the LRAS curve to the right through
government intervention in markets to correct
market failure
Work debate
• How has the government encouraged people
into work?
• How could this be extended?
Free market SS policies
• Reducing direct taxes e.g. income and
corporation tax – encourages increases in
quality and quantity of labour and capital.
Lower tax encourages more working and
training to gain higher paid jobs. Should
encourage those out of work to seek work if it
is beneficial to them. Corporation tax
reduction will increase the funds that firms
have available to spend on R&D and new
capital, thereby increasing LRAS.
Free market SS policies
• Cutting benefits – if benefits are cut, together
with a decrease in income tax, then this
should encourage more people to move into
the job market, by making it more financially
attractive to work
• Paying benefits for ‘job seeking’. Some people
argue that tying benefits to actually seeking
employment will in turn lead to more people
joining the labour market
Free market SS policies
• Reforming trade unions – some unions act as a
monopoly to the management, a de facto
monopsony, could also be achieved if the
union represents all workers. This can push
wage rates about the equilibrium level.
• Free market economists argue that union
power should be reduced to stop people being
priced out of the market (Thatcher in 1980s)
Free market SS policies
• Privatisation – big in the 1980s when the
government privatised industries. Free
market economists believe that firms work
better in the private sector and more
competition leads to increased supply.
• Deregulation – removing laws and regulations
to restrict competition
• Competition policy – to make markets more
economically efficient
Interventionist supply side policies
• Education and training – greater quantity and
quality of education should raise labour
productivity and mobility. If the government
does not intervene in education then not
enough resources will be used and it will be
underused and underprovided (merit good
with positive externalities)
Interventionist supply side policies
• Investment grants – profit incentive by firms
might mean that in the short term firms do
not invest. These grants aim to increase the
quantity and quality of investment
• Regional policy – aims to regenerate areas of
deprivation and increase infrastructure,
schools, hospitals and housing where there is
a shortage
Effectiveness of SS policies
• If a country becomes capable of producing at
a lower costs then the BOP position should
improve
• Trend growth rate should rise
• Unemployment should be lower as labour is
more flexible
• Increasing productive capacity should also
reduce the risk of inflation – the output can
rise without causing a rise in the price level
Effectiveness of SS policies
•
•
•
•
Can be influenced by other factors;
Takes time to have effect (education)
Expensive (education, training, healthcare?)
Workers and producers may respond in an
unintended ways e.g. Firms > more dividends
than investment, workers> reduce hours after
income tax is cut
• No guarantee they will work: Education – does
not always lead to higher standards; privatisation
does not always lead to increased competition