Supply-Side Policies 2

Reducing the Natural Rate of Unemployment using Supply-Side Policies

The natural rate of unemployment is unaffected by aggregate demand (AD) in an economy. Governments have to use supply-side policies to reduce the natural rate of unemployment.

Reducing structural unemployment

Structural unemployment is usually caused by a mismatch or deficit of skills in an economy.
The most direct solution to this is to provide, subsidise or incentivise education and retraining schemes. This should lead to the workers learning the skills needed to be useful in the current economy and be in position to gain employment.
Workers may be geographically immobile and have the wrong skills for their region. Here, the government could offer incentives to workers or firms to relocate.

Example of reduction in structural unemployment

The UK government has recently devised and encouraged schemes which get those leaving the armed forces into work after they finish serving.
Schemes which give skills needed for work in civilian life have made it much easier for those leaving the forces to find work.

Reducing frictional unemployment

Frictional unemployment is harder to solve because time delays are almost inevitable in the recruitment process as firms try to find the best workers for the job. Solving this may be less of a priority for governments.
Governments can look to improve the flow of information about jobs through job centres and the Internet which makes it easier for those out of work to find suitable jobs.
Governments could make it easier for firms to do background checks on workers or easier to register new workers for tax. This could reduce the amount of time taken to find workers and for them to start new jobs.

Supply-Side Policy vs Supply-Side Improvements

Supply side policies are the actions taken by the government to improve aggregate supply (AS) in the economy. Supply-side improvement refers to the increase in aggregate supply.

Supply-side policies

Supply side policies are the actions taken by the government to improve aggregate supply (AS) in the economy.

Supply-side improvements

Supply-side improvement refers to the increase in aggregate supply.
These improvements could come about as a result of supply-side policies or other factors in the market.

Supply-Side Policies and Unemployment, Inflation and BoP

Supply-side policies are those designed to increase aggregate supply (AS). Examples of supply-side policies include education and training, tax cuts, deregulation.

Unemployment

A number of supply-side policies are designed to improve the ease of hiring employees and make them more productive when in employment.
If labour is more productive then it is more valuable to firms and more workers will be hired. This reduces unemployment.
For example, if the government introduces retraining schemes for the structurally unemployed, then those workers will become more valuable to firms and are more likely to find employment.
If it is easier to hire labour then frictional unemployment will be reduced because it will take workers less time to find a job and start work.

Inflation

Supply-side policies aim to increase aggregate supply in both the short and long run. Supply-side improvements are illustrated by a rightward shift in the SRAS and/or the LRAS curves.
This leads to increased output and a reduced price level, ceteris paribus.
In reality, most countries face some degree of inflationary pressure. Supply-side improvements will usually reduce the upward pressure on prices rather than lead to a falling price level (deflation).

Balance of payments

Supply side improvement leads to increased output and a reduced price level. Cheaper goods and services are more competitive compared to foreign goods and services as a result.
- Households may start consuming domestic goods instead of imports.
- Foreign households may buy more UK exports if they are cheaper and more price competitive.
If the value of exports rises and the value of imports falls, then the current account balance will improve.

1Microeconomics

1.1Competitive Markets: Demand & Suply

1.1.1Markets & Demand

1.1.2Diminishing Marginal Returns

1.1.3Supply

1.1.4Market Equilibrium

1.1.5Price Mechanism

1.1.6Consumer & Producer Surplus

1.1.7IB Multiple Choice - Demand

1.1.8IB Multiple Choice - Supply

1.2Elasticity

1.2.1Elasticities of Demand

1.2.2Factors Affecting Price Elasticity of Demand

1.2.3Elasticity of Supply

1.2.4Price Elasticity of Supply

1.2.5IB Multiple Choice - Price Elasticity of Demand

1.2.6IB Multiple Choice - Price Elasticity of Supply

1.2.7IB Multiple Choice - Other Elasticities

1.3Government Intervention

1.3.1Indirect Taxes & Subsidies

1.3.2Application Question - Taxing Prices or Quantities

1.3.3Subsidies & Price Controls

1.3.4Deadweight Loss & Government Intervention

1.3.5Elasticity & Tax Incidence

1.3.6IB Multiple Choice - Government Intervention

1.4Market Failure

1.4.1Types of Market Failure

1.4.2Introduction to Externalities

1.4.3Negative Externalities

1.4.4Policy for Negative Externalities

1.4.5Positive Externalities

1.4.6The Deadweight Welfare Loss of Externalities

1.4.7Case Study - The Externalities of Education

1.4.8Public Goods & the Free-Rider Problem

1.4.9Asymmetric Information

1.4.10End of Topic Test - Market Failure

1.4.11Application Questions - Market Failure

1.5HL: Theory of the Firm & Market Structures

1.5.1Theory of the Firm & Market Structures

2Macroeconomics

2.1The Level of Overall Economic Activity

2.1.1The Circular Flow of Income

2.1.2Defining GDP

2.1.3Limitations of GDP

2.1.4IB Multiple Choice - Economic Indicators

2.1.5Business Cycles

2.1.6Output Gaps

2.2Aggregate Demand & Aggregate Supply

2.2.1The Aggregate Demand Curve

2.2.2Components of Aggregate Demand

2.2.3Shape of the Aggregate Demand Curve

2.2.4Shifts in Aggregate Demand

2.2.5IB Multiple Choice - Aggregate Demand

2.2.6Short & Long-Run Aggregate Supply

2.2.7Alternative Models of LRAS

2.2.8Equilibrium in the AD-AS Model

2.2.9Output Gaps & the AD-AS Model

2.3Macroeconomic Objectives

2.3.1Introduction to Unemployment

2.3.2Limitations of Unemployment

2.3.3Types of Unemployment

2.3.4Causes & Impact of Unemployment

2.3.5Defining Inflation

2.3.6Measuring Inflation

2.3.7Use of Index Numbers

2.3.8The Consumer Price Index

2.3.9Consequences of Inflation

2.3.10Causes of Inflation

2.3.11Inflation & Unemployment Tradeoff

2.3.12The Short-Run Phillips Curve

2.3.13The Long-Run Phillips Curve

2.4Economic Growth, Poverty & Inequality

2.4.1Measuring Economic Growth

2.4.2Determinants of Productivity

2.4.3Economic Growth & Productivity

2.4.4Absolute & Relative Poverty

2.4.5Inequality

2.4.6Inequality 2

2.4.7Lorenz Curve

2.4.8Government Policy on Poverty

2.4.9End of Topic Test - Poverty & Inequality

2.4.10Application - Inequality & Poverty

2.5Fiscal Policy

2.5.1Introduction to Fiscal Policy

2.5.2Fiscal Policy and AD-AS Model

2.5.3Fiscal Policy Lags

2.5.4Automatic Stabilizers

2.5.5IB Multiple Choice - Fiscal Policy

2.6Monetary Policy

2.6.1Objectives of Monetary Policy

2.6.2Monetary Policy Implementation

2.6.3Monetary Policy & AD-AS Model

2.6.4Monetary Policy Lags & Pitfalls

2.7Supply-Side Policies

2.7.1Supply-Side Policies

2.7.2Supply-Side Policies 2

3The Global Economy

3.1International Trade

3.1.1Globalisation

3.1.2Globalisation for LEDCs

3.1.3Globalisation for MEDCs

3.1.4Comparative Advantage & Trade

3.1.5Protectionism

3.1.6Arguments for Protectionism

3.1.7Arguments Against Protectionism

3.1.8End of Topic Test - Globalisation & Trade

3.1.9Case Study - Globalisation & Trade

3.2Exchange Rates

3.2.1Floating Exchange Rates

3.2.2Fixed Exchange Rate

3.2.3Effect of a Stronger & Weaker Dollar

3.3The Balance of Payments

3.3.1Balance of Payments

3.3.2Balance of Payments 2

3.3.3FDI & Reducing a BoP Deficit

3.4Economic Integration

3.4.1Customs Unions & WTO

3.4.2Merged Currency

3.5Terms of Trade

3.5.1Absolute & Comparative Advantage

3.5.2Gains from Trade

3.5.3Terms of Trade

3.5.4IB Multiple Choice - Comparative Advantage & Trade

3.6Economic Development

3.6.1Factors Influencing Growth & Development

3.6.2International Institutions

3.6.3Measures of Development

3.6.4Barriers to Development

3.6.5Case Study - The Bottom Billion

3.6.6End of Topic Test - Emerging & Developing

3.7The Role of Domestic & International Factors

3.7.1Interventionist Strategies

3.7.2Development Strategies

3.7.3Development Promotion Policies

3.7.4End of Topic Test - Growth & Global Development

3.7.5Application Questions -Growth & Global Development

3.8The Role of International Trade

3.8.1International Institutions

3.8.2End of Topic Test - Globalisation & Trade

3.9The Role of Foreign Aid

3.9.1Aid

3.9.2Limitations of Aid

3.9.3Support for Aid

3.9.4Application Questions - Developing Countries

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