An Introduction to Supply-side Policies (AQA A Level Economics)

Definition

• Government policies aimed at increasing the production capacity of the economy
• Achieved by by focusing on factors that affect the supply side, such as labor, capital, technology, and entrepreneurship

• Specific actions made by firms within the supply side of the economy to enhance its performance and efficiency

Objective

• Influence the macroeconomic environment and structural conditions of the economy to promote long-term growth and competitiveness

• Enhance efficiency, quality, and competitiveness within individual firms or sectors

Examples

• Tax cuts, deregulation, investment in education and training, subsidies for research and development, and infrastructure development

• Firms adopt new production techniques, invest in advanced machinery, implement quality control measures, streamline supply chains, enhance worker skills through training programs etc.

Scope

• Broad range of government interventions aimed at shaping the overall economic environment

• Actions taken by firms, industries, or markets to boost efficiency and productivity

Agency

• Typically involves government intervention and policymaking.

• Can be driven by various agents, including businesses, workers, consumers, and technological advancements

Impact of Supply-Side Policies

Explanation 

Economic growth

• The potential national output increases, leading to higher real gross domestic product (rGDP)

Unemployment 

• Supply-side policies reduce labour costs and create labour market flexibility through:
  • Decreasing trade union power so wages can be decreased
  • Decreasing or abolishing minimum wages to lower costs of production
  • Restructuring the unemployment benefits system to incentivise the unemployed to seek work

Inflation 

• Supply-side policies reduce average price levels
  • By deregulating the market and reducing taxes, it reduces businesses’ costs of production there will be less cost-push inflation 
  • Demand-pull inflation could also be reduced as potential capacity of economy increases (PPC curve shifts outwards)

Balance of payments 

• Supply side policies such as Increased spending on innovation and direct support to firms (subsidies) promotes international competitiveness
  • This can increase the value of net exports
  • An increase in export demand from abroad causes the balance of payments on the current account to improve 

Enhances labour market flexibility

• Labour market deregulation, flexible work arrangements, and reducing barriers to entry into professions increase the flexibility of the labour market
  • This flexibility allows workers to more easily transition between jobs, and reduces frictional unemployment

Investment in human capital reduces structural unemployment

• Education and training systems enhance the skills of the workforce
• A more skilled workforce is better equipped to meet the demands of a changing economy, which reduces structural unemployment

Encouraging entrepreneurship and innovation creates new jobs

• Policies such as tax incentives for research and development (R&D), subsidies for small business create new job opportunities, thereby reducing unemployment.

Lowering barriers to employment reduces frictional unemployment

• Cutting red tape for businesses, lowering taxes on labour, and implementing targeted employment subsidies, encourage hiring and labour force participation
• More people enter the labour market, reducing the natural rate of unemployment.

Promoting investment and economic growth can reduce structural and frictional unemployment

• Tax cuts for businesses, deregulation, infrastructure investment, and trade liberalisation, stimulate investment and economic growth
• A growing economy generates more job opportunities and reduces unemployment over the long term