<4.5 SUPPLY-SIDE POLICIES> 

• IMPROVING EDUCATION & TRAINING is designed to increase the skills of workers and hence INCREASE THE QUALITY OF LABOUR RESOURCES and If successful, this would MAKE WORKERS MORE PRODUCTIVE => LOWER COSTS OF PRODUCTION  => GREATER POTENTIAL OUTPUT.

• This lowering of costs, also makes the goods MORE COMPETITIVE ON FOREIGN MARKETS and CAN BOOST EXPORTS.

  • • • LIMITATIONS: Of course the SUBJECTS/SKILLS chosen to be provided are vitally important and must be FOCUSED ON GROWTH AREAS, such as AI, STEM etc... 

INCREASE THE QUANTITY OF LABOUR by...

• 1) REDUCING INCOME TAX RATES => INCREASE THE REWARD FOR WORKING => INCREASE IN THE QUANTITY OF LABOUR.

• 2) REDUCING UNEMPLOYMENT BENEFIT => INCREASE INCENTIVE TO FIND WORK => INCREASE IN QUANTITY OF LABOUR.

  • • • LIMITATIONS: 

        • • Some WORKERS PREFER LEISURE and may respond to lower taxes by WORKING LESS and maintaining their incomes rather than try to earn more. 

          • The policy ASSUMES JOB OPPORTUNITIES EXIST in the first place, if not, then it is ineffective and damaging as less benefits are available for the needy.

INCREASE THE QUANTITY/QUALITY OF CAPITAL by...

• 1) REDUCING PROFITS TAX RATES => INCREASE THE REWARD FOR INVESTING => MORE WILLINGNESS & ABILITY TO REINVEST/EXPAND => INCREASE IN THE QUANTITY/QUALITY OF CAPITAL 

  • • • LIMITATIONS: 

        • • If BUSINESS CONFIDENCE IS LOW, firms will be reluctant to invest these extra profits, as they may fear they won't be able to sell teh extra output.

• DEREGULATION refers to either the REDUCTION or REMOVAL of RULES  & REGULATIONS that HINDER COMPETITION IN THE PRODUCT MARKET that act as BARRERS TO ENTRY. 

  • • INCREASING COMPETITION in PRODUCT markets should lead to efficiency as UNPRODUCTIVE (HIGH COST) PRODUCERS will EXIT, and REALLOCATE their resources to an industry in which they are MORE PRODUCTIVE which LEAVES only the MOST PRODUCTIVE (LOW COST) PRODUCERS in that industry, leading to LOWER PRICES, GREATER QUALITY,  and GREATER OUTPUT.

      • • LIMITATIONS: Removing rules and regulations, however, does not guarantee that a monopoly will not develop. There are arguments for regulating monopolies, given their market power. 

• PRIVATISATION aims to EXPOSE PREVIOUSLY STATE-OWNED and INEFFICIENT INDUSTRIES to COMPETITIVE PRESSURES by SWITCHING THEIR OWNERSHIP TO THE 'PRIVATE' sector.

  • • WITHOUT THE INCENTIVE TO MAXIMISE PROFITS and CUT COSTS as well as HIGH INDUSTRIAL BARRIERS TO ENTRY, public sector industries have LITTLE INCENTIVE TO WORK EFFICIENCTLY, nor COMPETE ON QUALITY unlike in the private sector.

    • If sold to the PRIVATE SECTOR the PRESSURE OF COMPETITION as well as the PROFIT MOTIVE, will INCENTIVISE them to provide HIGH-QUALITY products at LOW PRICES.

    • Thus these firms will be incentivized to INVEST MORE IN PRODUCTIVE CAPACITY and NEW PRODUCTION TECHNOLOGY, boosting potential output.

      • LIMITATIONS: Again, as with deregulation, privatisation will not necessarily ensure greater competition. Especially over time, a monopoly may develop. A private sector firm may be less inclined to take into account social costs and social benefits than a state-owned enterprise and may be more willing to make workers redundant.

• LABOUR MARKET REFORMS are designed to MAKE LABOUR MARKETS MORE EFFECTIVE. The intention is to increase the quality, quantity and flexibility of labour. 

  • • • MAKING 'HIRING' AND 'FIRING' EASIER FOR EMPLOYERS is likely to make it EASIER FOR FIRMS TO ADJUST THEIR SUPPLY TO CHANGING MARKET CONDITIONS, for example when the good is seasonal they can quickly hire workers and then let them go in the off-season WITHOUT ANY HASSLE. 

        • • • There is a risk, however, that firms may not spend as much on training their workers if they think the workers may not be with them for very long.

      • REDUCTION IN TRADE UNION POWER as this will LESSEN THEIR POWER TO NEGOTIATE HIGHER WAGES, thus firms will be able to PAY LOWER WAGES, which will ENCOURAGE THEM TO HIRE MORE STAFF. 

        • • • However being paid less and working more hours may reduce the motivation of workers and make them tired which would be likely to reduce their productivity.

      • ABOLISH THE MINIMUM WAGE, as this will LOWER LABOUR COSTS and ENCOURAGE MORE FIRMS TO HIRE.

• A government may PROVIDE SUBSIDIES subsidies to the firms in particular industries for a number of reasons connected to increasing the performance of markets. 

  • • • • For example, new small firms might be subsidised in order to increase competition in markets. Firms may also be subsidised to encourage them to buy new capital equipment. Of course, consideration would have to be given as to whether this is the best use of government spending and there is the risk that the firms may become dependent on the subsidies.

• In the long run, all the government’s macroeconomic aims have the potential to benefit from supply-side policy. Increasing aggregate supply enables an economy to continue to grow in a non-inflationary way. 

• The figure below shows aggregate supply rising in line with aggregate demand. Such a combination enables GDP and EMPLOYMENT to INCREASE and for INFLATION to remain stable.

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Increasing productive potential and eff iciency can improve an economy’s balance of payments position. Producing better quality, and cheaper, products can increase exports and reduce imports.

In the case of some supply-side policy measures there is a time lag involved. For example, it can take some time before the eff ects of improved education and privatisation are experienced. In addition, some supply-side measures can be expensive.

Increasing the eff ectiveness of macroeconomic policies

Besides using supply-side policy measures in the long run to improve macroeconomic performance, there are a number of other ways through which a government can try to ensure that it achieves all its macroeconomic aims.

One is by using a number of policies. A Nobel Prize winning economist, Jan Tinbergen, suggested that a government needs to use one policy measure for each of its objectives. So, for example, if a government wants to stimulate economic growth and reduce imports, it may provide investment grants to firms and place a tax on imports.

Another way to try to ensure that all of its aims are achieved, is to have as much, and as accurate information, as possible. One vital piece of information is the size of the multiplier eff ect of any increase in aggregate demand. If aggregate demand is raised too much, for example, it will push up the price level. Governments also try to decide and implement their policies relatively quickly. If there is a delay in introducing policies, there is a danger that economic activity undergoes a change and the policy measures may actually harm the economy. For example, a period of high unemployment may lead the government to cut income tax, and to raise aggregate demand and employment. If, however, by the time the measure is introduced, aggregate demand is increasing anyway, it may increase inflationary pressure. 

6-MARK-QUESTIONS:

Analyse how supply-side policy measures could increase productivity.

8-MARK-QUESTIONS:

-Discuss whether supply-side policy measures will reduce inflation.

-Discuss whether a government should subsidise the provision of training. 

-Discuss the impact of government supply side policy measures on government expenditure and on government revenue.