Tuesday, 7 June 2011

Supply-side policies.

I'm going to be doing a list of every supply-side policy (that I can think of) with brief analysis and one evaluative comment.

Education increases the adaptability of the workforce, making labour markets more flexible by improving the transferable skills of the workers.
But it is very costly to implement, and comes with a time-lag. Also any effects on AS depend on the quality of the education provided.
Training raises the MRP (or productivity) of each worker, increasing AS by reducing unit labour costs as well as increasing output.
But it suffers from similar problems to education, it is quite expensive, and the time-delay means that there's a chance that once the workers have been fully trained may no longer be needed (example: people trained to write in shorthand, just before technology replaced it.)
Subsidies can be used to increase the productivity of firms, or help increase their price competitiveness by paying a part of the cost of production (thus increasing AS).
But it may lead to a dependence of the firms on the subsidies, which makes them inefficient.
Reducing trade union power helps to reduce the levels of bargaining power that workers have over employers, which makes labour markets more flexible as firms can hire and fire workers when necessary without fear of repercussions.
But many people would argue it's not fair for workers, and may reduce their productivity (as they could get depressed or less motivated to work if they feel their employer is exploiting them).
Reducing import tariffs, especially of raw materials. This would have the effect of reducing the costs of production for firms.
But there was probably a reason the tariffs were there in the first place, perhaps to improve the balance of trade, which would worsen, as imports would increase (providing they are price-elastic).
Reducing unemployment benefits should help reduce unemployment (through the unemployment trap).
But it may reduce consumption.
Improving transport infrastructure would improve labour mobility and reduce transport costs to firms.
But it's costly and can take a long time.

While there are more, these are the first ones that came to my head.. Lots of the other ones have rather boring  evaluative comments.. "time lag, high cost"...


  1. Supply side policies and a recession....

    A reduction in trade union power but...if earnings are held down then the chances of recession might increase

    Cuts in income tax rates to increase incentives to work this could have beneficial demand-side effects by increasing disposable income, although the tax cuts might just be saved. Also, danger of increased inflationary pressures

    Cuts in rates of corporation tax – Ireland only
    12.5% compared with UK of 28% might help to increase investment and FDI but unlikely if fear of recession is great. Also danger that the increased injection could exacerbate inflation

    Further reductions in unemployment benefits
    and/or limiting benefits to those who demonstrate willingness to take a job but…this would reduce the incomes of those on low incomes so further reducing consumption and making recession more likely

    A reduction in red tape – EU regulations have
    increased admin burden on most firms, for example health and safety but...no guarantee that this would prevent recession although such measures would reduce cost

    Improvements in infrastructure but…take considerable time to implement.

  2. Deregulation: Removing old and useless regulations on Businesses, to spur economic growth.
    Privatization: To use profit motive to increase efficiency.
    Nationalization: To provide economic support to loss-making firms.
    Competition policy: To reduce the power of monopolies and spur competition

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