2.1.2 - Supply-side policies and productive capacity

Productivity and productive capacity

An economy can produce more sustainably when its resources become more productive or its usable resources increase.

Supply-side policy aims to improve the economy's ability to produce goods and services. Productivity is output per unit of input, such as output per worker per hour. Total output is the total amount produced. They differ: employing more workers at unchanged productivity can raise total output; new technology can raise productivity even without more workers.

If training helps workers complete the same task accurately in less time, a firm can produce more with the same labour hours. Lower cost per unit can allow lower prices or higher profits for investment. Across many firms, improved productivity can increase productive capacity, the output the economy can sustain using its resources. Capacity is potential: actual output will still depend on whether customers demand the products.

These policies can support long-term growth without the same inflation pressure as simply increasing spending against unchanged capacity. They can reduce structural unemployment by improving workers' suitability for available jobs. Better quality and lower unit costs may improve international competitiveness, helping exports. Yet “supply-side” does not mean instant or costless. Building transport links takes resources today; unsuitable training may change neither productivity nor employment.

Privatisation and deregulation

Changing ownership and market rules can strengthen incentives, but the result depends on competition and the rules that remain.

Privatisation transfers an enterprise from public to private ownership. Private owners seeking profit may reduce waste, invest in technology or improve service to retain customers. More output from a given set of inputs increases productivity. The government can receive sale revenue and avoid continuing subsidies to a loss-making enterprise. Sale revenue is a one-off receipt, not a recurring productivity improvement.

Private ownership does not automatically create competition. If a privatised supplier retains monopoly power, it may raise prices instead of improving efficiency. Cost cutting can reduce jobs or service quality, including provision to unprofitable regions. Regulation or competition can make efficiency gains more likely to benefit consumers. Judge the ownership change by the industry and incentives rather than assuming private always means better.

Deregulation removes or reduces rules restricting economic activity. Simplifying unnecessary licensing can lower entry costs, allow new firms to compete and encourage innovation. If firms spend fewer resources on unnecessary administration, more can be used in production. Competition may push prices down and quality up.

Rules can also protect workers, consumers and the environment. Removing safety or pollution controls can increase harmful external costs even if recorded output rises. An economy might simplify duplicate paperwork while retaining essential safeguards. The relevant distinction is between a rule whose costs exceed its benefits and a rule preventing serious harm, rather than between all regulation and no regulation.

Skills and regions with high unemployment

Workers need both suitable skills and access to employers before an increase in potential employability becomes an actual job.

Education and training improve human capital: workers' skills and knowledge. Technical training can reduce errors and make new equipment usable, raising productivity. Retraining can help a worker from a declining industry qualify for a growing one, reducing structural unemployment. The return depends on quality, relevance and participation. A course preparing people for jobs that do not exist locally may leave unemployment unchanged unless workers can move or firms locate there.

Governments can use policies to boost regions with high unemployment, such as grants to firms locating there, enterprise zones, employment support or improved transport links. A grant lowers the initial cost of opening a factory and may attract investment and jobs. Local recruitment and suppliers can spread the benefits. Assistance may be especially useful where a plant closure left infrastructure and workers unused.

There are limits. A subsidised business might have located there anyway, or it might simply move jobs from another region, giving little national employment gain. A firm may leave when support ends. Jobs may require skills local workers lack. Grants cost public money, and a remote site without reliable electricity or roads may remain unattractive despite cheap premises. Combining relevant training with genuine business demand and access can address these barriers more effectively than announcing a spending total alone.