Supply Side Policies Flashcards
Supply side policies
- tax cuts
- deregulation
- education and training
- infrastructure
Purpose of supply side policies
- to increase incentives
- to promote competition
- to reform the labour market
- to improve the skills and quality of the labour force
- to improve infrastructure
market-based
Allow free market to eliminate imbalances
Interventionist
Rely on the government intervening in the market
Market based policies
To increase incentives
- reducing income and corporation tax to encourage spending
To promote competition:
- deregulating or privatising the public sector, firms can compete in a competitive market -improve economic efficiency
To reform the labour market
- reducing NMW will allow free market forces to allocate wages.
- Reducing trade union power makes employing workers less restrictive and it increases mobility of labour.
Interventionists policies
To promote competition:
- A stricter government competition policy could help reduce monopoly power of some firms, ensuring smaller firms can compete
To reform the labour market:
- Governments could try to improve the geographical mobility of labour by subsiding the relocation of workers
To improve skills and quality of the labour force:
- subsidise training or spend more on education. Lowers cost for firms since they can train fewer workers
- increase healthcare spending -> helps to improve quality of the labour force
To improve infrastructure:
- governments could spend more on infrastructure, improving roads and schools for example
Supply side market evaluation
Strengths:
- only policy that can deal with structural unemployment, bad use the labour market can be directly impede with education and training
Weaknesses:
- Demand side policies better at dealing with cyclical unemployment, since they can reduce the size of a negative output gap and shift AD to the right
- time lags
- Reducing tax rates, for example, could lead to a more unequal distribution of wealth
