2.6.3 Supply-side Poilicies

• Time Lags


  The time it takes for one change
• Ease of Entry


  The ease with which a firm can enter a market to profit thus increasing competition and creating jobs
• Geographical Immobility


  Barriers to people moving from one area to another to find work.
• Occupational Immobility


  Workers having the wrong skills for available job vacancies. This can be overcome by giving labour transferable skills.
• Pro-market Supply-side policies 


  Policies focus on reducing the size of the state and extending the role of market forces in allocating scarce resources.
• Interventionist Supply-Side Policies 


  When a government believes that active intervention in markets can help achieve increased productive capacity and competitiveness.
• Relocation Subsidy


  Paying workers to find a home near their workplace
• Market Orientated Supply-side Policies

  -Privatisation

  -Deregulation

  -Increase immigration

  -Deregulate financial markets

  -Flexible labour markets

  -Remove red tape

  -Free-trade agreements

  -Reduce welfare benefits
• Interventionist Supply-side Policies


  -Public expenditure

  -Education

  -Vocational training

  -Housing supply

  -Health spending
• Deregulation


  Allowing more firms to enter the market forces firms to be more productive/ efficient, increasing output and leading to lower prices and better quality for consumers. However, some industries are natural monopolies so deregulation leads to exploitation of consumers.
• Reducing Tax


  Incentivises people to work harder so the labour supply increases and productivity rises and firms may use retained profits for investment. However, firms may pay the extra profit to shareholders and if the income effect is stronger than the substitution effect there will be no change in the labour supply.
• Flexible Labour Markets


  Making it easier to hire and fire workers, abolishing redundancy pay, removing maximum working weeks, reducing trade union power and enabling zero-hour contracts. Increases efficiency and reduces real wage unemployment, but uncertainty makes workers demotivated.
• Reduce Welfare Benefits


  Lower benefits like JSA incentivise the unemployed to find work and lower means-tested benefits like Universal Credit encourage people to work harder.
• Means-tested Benefits

  Benefits for those below a certain income threshold i.e. Universal Credit
• Deregulate Financial Markets


  Building societies were allowed to become for-profit banks which increases competition and may lead to lower borrowing costs for consumers and firms
• Increase Free Trade

  Fewer protectionist measures increase trade so firms are incentivised to invest more and trade agreements allowed for cheap, frictionless deals which improves productivity
• Removal of Red Tape

  Removing planning restrictions allows firms to expand and invest as the costs of bureaucracy are eliminated
• Encourage Immigration


  Free movement of labour allows for labour shortages and skills gaps to be filled which allows firms to increase their productive capacity as there are enough workers to operate capital thus they can keep up with demand.
• Increased Education and Vocational Training


  Reduces the skills gap which increases productivity and corrects market failure so LRAS increases, however, the government lacks perfect knowledge and may subsidise the wrong types of training.
• Improved Transport and Infrastructure


  Reduce congestion, transport costs and geographical immobility which increases productivity so firms are encouraged to invest, but can be difficult in crowded areas like London
• Housing Supply

  More affordable housing reduces geographical immobility which helps to eliminate labour shortages
• Healthcare Spending

  Firms incur high costs from lost productivity due to illness so by increasing the accessibility of healthcare, taxing unhealthy goods and campaigning against things like alcohol or tobacco people are healthier and more productive
• Limitations of Supply-side Policies


  -Limit of the government

  -Recession

  -Time

  -Potential to be counter-productive
• Potential to be Counter-Productive

  Some policies may have unintended consequences e.g. reducing trade union power may reduce costs for firms, but uncertainty causes workers to be demotivated and productivity stagnates
• Recession

  Recessions are caused by a lack of AD so supply-side policies will have no effect
• Limit of the Government


  Growth in productivity is largely dependent on the private sector choosing to invest or fund R&D for innovation so there is a limit to effectiveness of government intervention