Front Matter Page

Research Department

Contents

• Summary

• I. Introduction

• II. General Equilibrium With Queuing

• III. Wage Hikes and Economic Crises

• IV. Other Methods for Allocating Shortage Rent

• V. Remedies and Obstacles to Implementation

• VI. Closing Remarks

• Table:

  • Rankings of Three Allocation Methods

• Bibliography

Summary

It is not unusual for reforming socialist economies to relax wage controls without hardening budget constraints on enterprises or freeing consumer goods prices. This policy can be dangerously destabilizing,. while higher wages permit workers to purchase more of some goods, they also tend to exacerbate shortages and to breed waste and corruption. Economy-wide wage increases tend to benefit middlemen more than workers, to reduce labor productivity, and, beyond a certain level, to hurt workers. This is true regardless of whether deficit goods are strictly rationed, are sold randomly at official prices to queuing workers, or are offered to workers only at black market prices. If workers pursue an economic strategy of “strike for higher wages until welfare improves,” and if the government response is to “raise wages until workers stop striking,” the economy could spiral downwards in a self-perpetuating economic crisis.

For any given wage and price level, rationing offers the maximum short-term benefit to workers. Output will be less than under corruption, but higher than under queuing. Rationing also raises the threshold beyond which wage hikes impoverish workers. If distribution of deficit goods is tied to labor effort, the economic crisis described above can in principle be remedied or averted. From a broader perspective, however, rationing is part of the problem. Shortage economies need more, not less, flexible di s tribut ion and pricing.

Recent Soviet economic development illustrates both crisis and a continuing search for remedies. Efforts to devolve authority from central planners to enterprises in practice gave the latter much more influence over wages than over product lines or prices charged to customers. The result was a surge in nominal demand, with wages rising in three years over 20 percent relative to official prices. This was a serious blow to an already ailing economy. Price reform was repeatedly delayed in an ultimately futile search for more politically palatable alternatives. By mid-1990, the normal retail distribution network had virtually collapsed. Sales were increasingly conducted by invitation only, often through factories and other workplaces that used them for payment-in-kind. The proliferation of barter and barter-like transactions also served to disrupt established economic links and further strained relations between republics.

The central lesson of this paper for policymakers in a reforming shortage economy is the need to keep wage liberalization from outpacing price liberalization, preferably through acceleration of the latter. Tinkering with distribution methods offers only limited potential for remedying the ill effects, as improvements in one sphere tend to be linked with deterioration in others.

“The position of the economy continues to deteriorate. The volume of production is declining. Economic links are being broken. Separatism is on the increase. The consumer market is in dire straits. The budget deficit and the solvency of the government are now at critical levels. Antisocial behavior and crime are increasing. People are finding life more and more difficult and are losing their interest in work and their belief in the future.”

U.S.S.R. Presidential Guidelines for the Stabilization of the Economy and Transition to a Market Economy.

October 16, 1990