Supply-side policy

Supply-side policies are longer-term policies which attempt to improve the productivity and flexibility of labour and the competitiveness of firms. 

Supply-side policy became an important policy tool in the early 1980s when economists and policy makers began to question whether fiscal policy alone could achieve key macroeconomic policy objectives.

The acceptance of the use of supply-side policy co-incides with the 'rise' of supply-side economics in the late 1970s, popularized by American economist Arthur Laffer.

In essence, supply-side economics provided a return to 'classical' economic tradition of the 19th Century, in which understanding the principles and 'laws' of production, specialisation, and efficiency became the central purpose of economic theory.

Supply-side policy emerged out of this concern with supply and how to improve supply-side performance.

This contrasts with Keynesian economics, which identifies the manipulation of aggregate demand as the primary means of achieving macro-economic objectives.

Today, supply-side policies include a range of measures designed to improve productivity and efficiency, including:

  1. removing rigidities in the labour market, such as reducing trade union powers
  2. reducing marginal tax rates to encourage work
  3. reducing the level of welfare benefits to reduce welfare dependency
  4. business start-up incentives
  5. incentives to use new technology
  6. promoting training and education to increase employability
  7. promoting a healthy work-force
  8. removing obstacles to competition

Graphically, effective supply-side policy will shift the long run aggregate supply curve to the right.

The long run AS curve

This means that increases in aggregate demand may raise employment and lower unemployment without puting upward pressure on prices.

Video on supply side policy

Criticisms

Specific supply-side policies have their critics, especially interms of their potential effect on inequality - for example, measures to reduce unions powers and reducing welfare benefits are likely to impact the poorest and widen the gap between 'rich and poor'.

Supporters of supply-side reforms point to the fact that supply-side policy improves employability and reduces unemployment - a major cause of poverty and inequality.

In addition, critics argue that supply-side measures often take a very long time to have an effect - including measured to stimulate enterprise and policies to improve education.


Aggregate demand

Aggregate demand and the AD curve.

Aggregate demand
Fiscal policy

How can fiscal policy influence aggregate demand?

Fiscal policy
Monetary policy

How effective is monetray policy?

Monetary policy

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