2.6 SUPPLY SIDE POLICIES Flashcards
1- Increasing Incentives ( into work or to work harder)
- Reducing taxes on income
- Reducing welfare benefits
- Subsidizing workers on low incomes ( in the UK universal credit)
- Reducing taxes on profits
- Encouraging R and D
The Two Traps Of Incentives
Poverty Trap - people earn more by getting better jobs but there is a small gain as this increase leads to less welfare benefits and higher taxes.
Unemployment Trap - An individual is worse off getting a job.
2 - Promoting Competition (PDCI)
People Dont Cause it
Markets can fail due to a lack of competition. Businesses can exploit customers and charge higher prices. There will be less output and and less incentive for innovation. The government can tackle this by:
Privatization - The sale of government organizations or assets to the Private Sector.
Deregulation - Removing government controls from markets.
Competition Policy - Reduce monoplies making price fixing illegal.
Industrial Policy - Promote firms that causes economic growth.
3 - Reforming the labour market - Flexibility
Types Of Flex = GEIFWTMM
God Easily Invents Flexibility Within The Massive Market
LABOUR MARKET FLEXIBILITY = The degree to which demand and supply in a labour market respond to external changes and return to a new equilibrium.
TYPES OF FLEXIBILITY
G = Geographical = the willingness of workers or firms to relocate to take advantage of a better labour market.
E = External Numerical = the ability of firms to adjust their workforce according to their needs.
I = Internal Numerical = the ability of firms to adjust the working hours of staff to their needs.
F = Functional = the ability to redeploy multi skilled workers.
W = Wage = the ability to adjust wages up and down based on demand and supply.
T = Trade Unions = the purpose of a trade union is to organize workers into one bargaining power that sells the labour of its members rather than the employees competing against each other.
M = Migration = there has been significant net migration into the UK of working age people over the past few years increases the size of the work force. This supply pushes down inflationary pressures.
M = Minimum Wage = The National Minimum Wage (NMW) sets a minimum wage. Free market economists believe it should be decided by the market.
4 - Education
EDUCATION - In the UK it is state funded, the higher level of general education of a population then the higher its productivity. The government can invest via higher wages, teacher training, capital investment etc.
INTERVENTIONIST APPROACH - Government set curriculum, training methods and targets.
MARKET BASED APPROACH - Allow schools to set own curriculum.
TRAINING - Can be a market failure, employers don’t factor in the external benefits to the economy of better trained workers because they may leave.
5 Improving Infrastructure
- Longer journey times for moving goods around the country cause inefficacy.
- Lack of good buildings for schools and hospitals.
6 Encouraging Growth Of Small and Medium Sized Enterprises
Small + Medium sized enterprises tend to provide the mjority of employment in most countries.
Start ups and new enterprises can grow into longer employers and therefore Governments are keen to support them.
This may be by providing support or training or reducing the amount of regulation for small businesses, providing cheaper loans or tax breaks.
Strengths Of These Policies
- Unlike demand side policies, supply side policies can both increase output and decrease price.
- Supply - side policies have two different approaches. Interventionist or market based. This means that both economists and interventionist economists will accept to use them.
Weaknesses Of These Policies
- They are longer term policies and lead to a long term economic growth.
- However, the Keynesian LRAS curve shows that they have no impact when LRAS is elastic, so demand side policies are needed to fix the problem in the short run.
- Often government spending is high so this can lead to a budget deficit increase.
The Short Run Phillips Curve
Phillips published a paper in 1958 showing a statistical relationship between the unemployment rate and growth in wages between 1861 and 1957.
Firms pass on higher wages on to consumers via higher prices.
