Key Terms
Supply-side Policies: Policies that improve the economy’s productive potential and its ability to produce.
Mobility of Labour: The extent to which workers are able or willing to move between different jobs.
Productivity: A measure of efficiency, measuring the ratio of inputs to outputs; the most common measure is labour productivity, which is output per worker.
Mobility of Labour: The extent to which workers are able or willing to move between different jobs.
Productivity: A measure of efficiency, measuring the ratio of inputs to outputs; the most common measure is labour productivity, which is output per worker.
Theory
What are Supply-side Policies?
Supply-side policies aim to improve the productive potential of the economy. This is done by increasing the productivity of factors of production (Land, labour and capital). It is generally accepted that supply-side policies are the key to achieving sustained growth without causing a rise in inflation.
Supply-side policies may include:
Effect of Supply-side Policies
Successful supply-side policies have the effect of shifting the long-run aggregare supply (LRAS) curve outwards. This indicates that there has been an increase in the potential output of economy.
Advantages of Supply-side Policy
1) Economic Growth / Lower Unemployment
By increasing the productive capacity of the economy (Economic Growth), more labour must be employed to produce maximum output. Notice that on the diagram (previous page) an increase real national output (RNO), this indicates an increase in employment.
Furthermore this will reduce depedency on unemployment welfare (Job Seekers Allowance) and increase government revenue through income tax, thus improving the government budget.
2) Reduced Inflationary Pressure
Increases in productivity reduce costs of production. Lower costs feed into lower prices and result in lower rates of inflation. Lower inflation also improves the competitiveness of the currency thus resulting in an increase in exports and a decrease in imports which improves the balance of payments.
3) Macro-economic Stability
Drawing together the two idea's above, supply-side policies do not involve a trade-off between inflation and other macro-economic objectives. Infact all four macro-economic objectives can be achieved using supply-side policy.
By increasing the productive capacity of the economy (Economic Growth), more labour must be employed to produce maximum output. Notice that on the diagram (previous page) an increase real national output (RNO), this indicates an increase in employment.
Furthermore this will reduce depedency on unemployment welfare (Job Seekers Allowance) and increase government revenue through income tax, thus improving the government budget.
2) Reduced Inflationary Pressure
Increases in productivity reduce costs of production. Lower costs feed into lower prices and result in lower rates of inflation. Lower inflation also improves the competitiveness of the currency thus resulting in an increase in exports and a decrease in imports which improves the balance of payments.
3) Macro-economic Stability
Drawing together the two idea's above, supply-side policies do not involve a trade-off between inflation and other macro-economic objectives. Infact all four macro-economic objectives can be achieved using supply-side policy.
Disadvantages of Supply-side Policy
1) Time Lag
Supply-side policies take a long time to work their way through the economy. E.g. Training schemes. Firstly the workforce take time to recognise and seek out new government schemes. Secondly it takes time for the workforce to learn the new skills then apply them in the economy.
2) High Cost
Supply-side policies require huge amounts of government spending.Simply devising new schemes and educational programmes can cost millions. On top of this there is an added cost of administrating the scheme and employing teachers.
3) Increased Inequality
Some specific type of supply-side policy may increase income inequality. For example lower tax rates for certain income groups to encourage entrepreneurialism may increase the income gap between rich and poor.
Supply-side policies take a long time to work their way through the economy. E.g. Training schemes. Firstly the workforce take time to recognise and seek out new government schemes. Secondly it takes time for the workforce to learn the new skills then apply them in the economy.
2) High Cost
Supply-side policies require huge amounts of government spending.Simply devising new schemes and educational programmes can cost millions. On top of this there is an added cost of administrating the scheme and employing teachers.
3) Increased Inequality
Some specific type of supply-side policy may increase income inequality. For example lower tax rates for certain income groups to encourage entrepreneurialism may increase the income gap between rich and poor.