20) Supply Side Policies Flashcards
What is the supply side policies for the labour market focussing on improving
⚫️flexibility of the labour market
⚫️aim to increase productivity
⚫️shifting AS curve to the right
What does supply side policies mean
⚫️aim to increase potential output of the economy
➡️and shift AS and PPF to the right in the long run
➡️by increasing quantity
➡️or improving quality
➡️of factors of production
How does the supply side policy increase productivity
⚫️education and training
⚫️cut income tax rates
⚫️cut benefits
⚫️working family tax credits
⚫️employment legislation
How does education and training improve flexibility and productivity of the labour market
⚫️the new deal scheme
➡️takes benefit away
➡️unless people undertake a programme of
➡️work experience and retraining
⚫️extra resources into schools
➡️develop skills of young people
➡️increasing productivity in long term
⚫️nursery care for young children
➡️allows parent to return to work
➡️increasing output in the economy
How is cutting income tax rate improve flexibility and productivity of the labour market
⚫️low income tax rates
➡️help to incentivise workers to work longer hours
➡️if they can keep more of what they earn
➡️reduces incentives to stay on benefits
How is cutting benefits improve flexibility and productivity of the labour market
⚫️motivates unemployed to find a job
➡️works well with cutting income tax
How does the working families tax credits improve flexibility and productivity of the labour market
⚫️tops up the income with low paid workers
➡️with tax credits
⚫️helps remove poverty trap
➡️which is when u can be better off not working
➡️as pay rise can reduce benefits and increase tax paid
How is employment legislation improve flexibility and productivity of the labour market
⚫️allow firms to hire and fire workers easily
⚫️if difficult for firms to fire unproductive workers
➡️may stop hem hiring in the first place
⚫️countries with flexible labour market
➡️have lower rates of unemployment
➡️workers have fewer rights
How can trade union legalisation improve flexibility on labour marker for supply side policies
➡️used with employment legislation
⚫️include laws to reduce power of trade union
➡️weaker union allow firms
➡️make worker work harder
➡️for less pay
What does the supply side policies for the capital market focus on improving
⚫️flexibility of the capital market
➡️by encouraging firms to increase investment ➡️and expand AS
How does the supply side policy encourage firm to invest more
⚫️reduce cooperation tax
⚫️nationalised industries
⚫️tax incentives for research and development
How does reducing corporation tax help supply side polices to encourage firms to increase investment
⚫️firm keeps more of their profits
➡️which can be used to fund investment in capital goods
How does nationalised industries help supply side polices to encourage firms to increase investment
⚫️many national industries where privatised in the 1980s
➡British telecom
➡British airways
➡️water companies like thames water
⚫️companies are now highly profitable
➡️but when nationalised
➡️they made large losses
How is tax incentives for research and development help supply side polices to encourage firms to increase investment
⚫️helps reduce competitiveness of UK goods and services
⚫️uk spends less per worker
➡️on research and development
➡️than its competitors
➡️e.g Germany and USA
How is supply side policy effective
⚫️increases long run productive potential of the economy
⚫️raise competition of the domestic industries to foreign industries
⚫️remove bottlenecks
How is an increase in the long run productive potential of the economy effective for supply side policy
⚫️draw diagram:
➡️increase in AS
Describe it: ⚫actual output increases real GDP ➡️potential output increased ➡️from yfe to yfe1 ⚫️price level decreased ➡️meaning decrease in inflation
How is raising competition of the domestic industry in relation to the foreign industry effective for the supply side policy
⚫️domestically produced goods
➡️become cheaper and better quality
➡️can improve the current account of the balance of payments
How is removing bottlenecks to prevent the economy from growing faster effective for supply side policy
⚫️if economy is on equilibrium at the full employment level of output
➡️cannot experiance further growth
➡️without rhe AS shift to the right
⚫️is AS does not increase any further
➡️any increase in AD
➡️will purely be inflationary
⚫️draw diagram
What are the limitation of supply side policies
⚫️time lags between policy being implemented and the outcome of policy in the economy
⚫️expensive
⚫️increase in inequality
How is long time lags between the policy implemented and the outcome of the policy on the economy not too effective for the supply side policy
⚫️e.g ⚫️investing in primary school education ➡️will not improve work productivity ➡️until children enter work force ➡️which could be in 15 years
How can supply side policy be expensive
⚫️e.g
➡️spending on education
➡️may lead to increase in government spending
➡️funded by either an increase in tax or borrowing
➡️this could add to the national debt
⚫️lead to opportunity cost ➡️spendings in another sector of the economy ➡️e.g. Transport ➡️may have to be cut ➡️to fund the education spending
How can supply side police lead to an increase in inequality
⚫️making labour market flexible
➡️often unpleasant on workers
E.g
➡️reducing the power of trade unions
➡️could lead to more exploitation of workers
E.g.
➡️reducing minimum wage
➡️can hit the poorest section of the worker
What short term problem will the supply side policy cause
⚫️spending on infrastructure
➡️creates initial AD due to government spending
➡️may be inflationary in short term
➡unit AS shifts right
⚫️illustrate this point using ASAD analysis
