4.4.3 Supply-side policies

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    Supply-side policies are all measures that can increase the total productivity capacity of the economy. They aim to improve the long run productive potential of the economy. They do this by aiming to promote competition and reform the labour market.

     

    There are two types of policy, those which involve government intervention in the market (interventionist) and those that limit the intervention of the government and allow the free market to eliminate imbalances (market-based) by using the market forces and supply and demand.

     

    MARKET-BASED POLICIES

    To increase incentives:

    • Reducing income and corporation tax to encourage spending and investment which could increase the long run productive potential. This improves the underlying trend of economic growth.

     

    To promote competition:

    • By deregulating or privatising the public sector, firms can compete in a competitive market therefore improving economic efficiency.

    To reform the labour market:

    • Reducing the National Minimum Wage (NMW) will allow free market forces to allocate wages and the labour market should clear. Reducing trade union power makes employing workers less restrictive and increases mobility of labour.

     

    INTERVENTIONIST POLICIES

    To promote competition:

    • Stricter government competition policy could help reduce monopoly power of firms and ensure that smaller firms can compete as well.

    To reform the labour market:

    • Government could try and improve geographical mobility of labour by subsidising the relocation of workers and improving the availability of job vacancy information.

    To improve skills and quality of the labour market:

    • Government could subsidise training or spend more on education which will also lower costs for firms or they will have to train fewer workers.

    To improve infrastructure:

    • Governments could spend more on roads or schools.

    How can firms increase the supply of products and services without increasing costs?

    Reduce costs:

    • Cheaper supplies
    • Lower wages (employ migrant workers)
    • Mass-produce (use machinery)
    • Make workforce more efficient

     

    Working tax credits:

    • Money given to working parents on low wages to encourage them to keep working
    • This can help with childcare

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