SUPPLY-SIDE POLICIES

 The overreaching goal of supply-side policies is
to increase the potential output of the economy by
increasing the quantity of the factors of
production and/or improving the quality of the
factors of production.
 Supply-side policies can be divided into:
 Market-oriented supply-side policies
 Interventionist policies

MARKET-ORIENTED SUPPLY-SIDE
POLICIES

 These policies focus on allowing markets to
operate freely, with minimal government
intervention.
 The word “incentives” is often used to describe
these policies, as they are designed to increase the
incentives for labour to work harder and more
productively, and to increase the incentives for
firms to increase productivity

REDUCTION IN INCOME TAXES
 If people work harder and make more money, it is
possible that they will have to pay higher taxes on
the higher levels of income. This may act as a
disincentive to work.
 If taxes are reduced, it is hoped that there will be
a greater incentive for labour to work harder and
to become more productive, thus increasing the
potential output of the economy.

REDUCTION IN CORPORATION TAXES
 If businesses are able to keep more of their
profits, then they will have more money available
for investment. As investment is the addition of
capital stock to the economy, this will increase
the potential output of the economy.
 Moreover, if businesses know that they are going
to be able to keep a larger share of their profits,
rather than give it to the government in taxes,
then they will have more incentive to produce
efficiently.

REDUCTION IN TRADE UNION POWER
 It is often perceived that trade unions push wages up
too high and increase the costs of production to
firms. As a result, a reduction in trade union power
will reduce the ability of unions to negotiate high
wages and therefore lower the costs of production to
firms, thus increasing their potential output.
 However, the main goal of trade unions is to protect
the rights of workers, and reduced union power may
result in the exploitation of workers.

REDUCTION OR ELIMINATION OF MINIMUM WAGES
 Minimum wage will keep the price of labour at a
level above its free market level. If the minimum
wage were to be abolished, then this would also
decrease the costs of production and increase
aggregate supply.
 While this might provide some benefit in terms of
the overall growth of the economy, it will reduce
living standards for those workers who were
working for minimum wages

REDUCTION IN UNEMPLOYMENT BENEFITS
 If unemployed people are given generous
unemployment benefits from the government, it
may be argued that they have less incentive to
find jobs.
 These economists would recommend that
unemployment benefits be reduced to encourage
unemployed people to take the available jobs in
the economy.

DEREGULATION
 If governments have placed many regulations on the
operations of businesses, then this may increase their
costs of production, thereby reducing aggregate
supply in the economy. A reduction in the number
and /or the severity of regulations, i.e. deregulation,
will lower their costs and increase aggregate supply.
 However, this might include reduced regulations on
safety or environmental standards, and this can have
severe negative consequences for workers and the
environment.

PRIVATIZATION
 This is the sale of public, government-owned
firms, to the private sector.
 According to market-oriented economists,
privately-owned profit-maximizing firms will be
much more efficient and productive than
government-run firms. They will have the
incentive to increase potential output

INTERVENTIONIST SUPPLY-SIDE POLICIES
 These policies are based on the idea that the
government has a fundamental role to play in
actively encouraging growth. They include

EDUCATION AND TRAINING
 In order to constantly increase the quality of labour,
it is the responsibility of the government to ensure
that education and training facilities are geared to
providing the necessary skills and knowledge for a
dynamic economy
 This is related to both the skills and knowledge that
young people need to help them enter the labour
force and also to the retraining of workers to help
them adjust to changing economic situations.

RESEARCH AND DEVELOPMENT (R&D)
 It is important that an economy’s firms are able to stay
up-to-date with modern developments, to develop new
production techniques and to constantly seek improved
methods of production. All these may increase the
economy’s potential output, but will involve extensive
spending on R&D. Governments can actively encourage
research and development by firms by offering tax
incentives. For example, they could allow firms not to
pay taxes on the retained profits used for R&D. this is
known as tax credit.
 Governments could also finance R&D in public research
facilities and universities.

PROVISION OF INFRASTRUCTURE
 The productive potential of an economy will be
enhanced by improved infrastructure, such as
better transportation linkages and
telecommunications.

IMPROVED INFORMATION
 Governments can finance trade fairs to facilitate
the sharing of expertise and information among a
country’s firms.