Overview of market-based supply-side policies

Market-based supply-side policies aim to boost economic growth by enhancing the efficiency and competitiveness of markets. These approaches gained popularity as drivers of expansion but came under criticism following the 2008-09 global financial crisis, with organisations like the International Monetary Fund (IMF) noting that the resulting growth was often unstable and short-lived.

Categories of market-based supply-side policies

These policies are divided into three main groups, each focusing on different aspects of the economy:

• Product market related policies - These target the structure and regulation of markets for goods and services to promote competition and efficiency.
• Labour market related policies - These focus on reforming labour markets to reduce costs and increase flexibility for employers.
• Incentive-related policies - These involve tax adjustments to encourage work, investment, and entrepreneurship.

Product market related policies

Product market related policies seek to remove barriers to competition and efficiency in the markets for goods and services, which can shift both the short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS) curves to the right.

Anti-monopoly regulation

Monopolies can result in elevated prices, reduced production levels, slower technological progress, and greater income disparities. Governments use competition authorities and antitrust legislation to curb monopoly power.

Different countries interpret anti-competitive practices variably; some prevent high market concentration proactively, while others act only if consumers are directly affected.

As markets become international through globalisation, assessing monopoly power becomes more complex since it may span beyond national boundaries.

Deregulation

Deregulation involves removing or easing unnecessary rules and restrictions on businesses and markets to foster competition. While some rules are essential for market functioning, others protect vested interests or serve social goals.

Evaluation:

• Effective deregulation enhances competition and productivity, leading to rightward shifts in SRAS and LRAS.
• Poorly implemented deregulation, such as in the financial industry, contributed to the global financial crisis.

Privatisation

Privatisation transfers government-owned assets, typically businesses, to private ownership to improve efficiency.

Evaluation:

• Private operators are motivated by profits to run operations more effectively, respond to customer demands, and implement innovations.
• It can create private monopolies, resulting in higher charges, job losses, and poorer service standards.

The success of privatisation varies depending on the context, with evidence showing inconsistent results.

Trade liberalisation

Trade liberalisation removes protections like tariffs, quotas, subsidies, and regulatory hurdles that shield local firms from international rivals.

Evaluation:

• It compels domestic companies to lower expenses, reduce prices, and innovate to remain competitive.
• It may cause job losses in affected sectors, push smaller businesses out of the market, and lead to global dominance by a handful of large corporations.

Labour market related policies

Labour market related policies aim to make employment more flexible and cost-effective for businesses, potentially lowering prices, increasing output, and attracting investment.

Reducing labour union power

Limiting union influence seeks to cut wage expenses, enabling firms to hire more workers and expand production.

Evaluation:

• Lower wages can reduce prices and draw foreign direct investment.
• Unions safeguard workers by enforcing safety standards and preventing unfair dismissals.
• Without them, the share of national income going to wages often declines.

Decreasing or abolishing minimum wage

High minimum wages can raise employment costs, possibly leading to higher unemployment. Reducing minimum wages lowers production expenses, which may decrease prices and boost output.

Evidence from studies:

• Research indicates that moderate increases in minimum wages do not necessarily raise unemployment.
• They can enhance productivity by improving worker morale and job satisfaction.

Reducing non-wage labour costs

Non-wage costs include employer payments for insurance and pensions, which add to overall hiring expenses. Cutting these costs reduces total production expenses for businesses.

Such reductions can lower workers' take-home pay, particularly affecting those with lower skills.

Decreasing unemployment benefits

Generous unemployment benefits, measured by the replacement ratio (benefits relative to previous earnings), can reduce the motivation to seek work. Lowering the amount and length of benefits encourages quicker job acceptance.

This may push individuals into roles below their skill level, harming overall economic efficiency.

Incentive-related policies

Incentive-related policies use tax reforms to stimulate supply-side improvements, such as greater workforce participation and investment.

Cutting personal income taxes

Reducing taxes on individual earnings, popularised by supply-side economists in the 1980s, aims to encourage more people to join the workforce or work extra hours. Higher after-tax income should boost labour supply.

Increased disposable income might lead individuals to opt for more leisure time instead of additional work.

Cutting business taxes and capital gains tax

Lowering corporate taxes seeks to make investments more profitable and drive economic expansion.

Corporate tax cuts:

• Aim to enhance the attractiveness of investing in new projects.
• Evidence often shows limited increases in actual investment following such cuts.

Capital gains tax reductions:

• These target investments in assets like shares, bonds, and property to promote growth.
• Studies suggest these cuts have minimal effects on overall growth but tend to widen income inequality.