Supply Side Policies are policies aimed at increasing Aggregate Supply (AS), a shift from left to right. Successful policies lower thenatural rate of unemployment. They enhance the productive capacities of an economy while improving the quality and quantity of the four factors of production. However, Supply Side Policies are difficult to implement. They take long to take into effect and sometimes controversial.
Examples of Supply Side Policies
Wages – lowering wages frees up the labor market, which makes a lower paid job more attractive. To lower wages, the government would need to abolish minimum wage laws, decentralize trade union power, reduce of unemployment benefits, lower income tax and make hiring/firing easier and cheaper for firms. However, these policies are very politically unpopular and aren’t likely to be implemented.
Capital Markets – By increasing competition between banks to make loans more attractive, and reducing financial crowding out and by making savings more attractive, governments create more money for banks to use for investment.
Entrepreneurship – By lowering marginal tax rates and encouraging share ownership amongst employees.
Competition and Efficiency – Through the removal of monopolies, by encouraging privatisation, freeing up trade and implementing inward investment policies.