INFLATIONARY TENDENCIES, resulting in rising wages and prices, have prevailed in most countries since the end of World War II. In certain countries, at certain times, they have been due primarily to a tendency for general demand to exceed potential supply. Many governments have tried to counteract these inflationary pressures by relying on fiscal and monetary policies. In other countries, and at other times, however, inflationary tendencies have been due primarily to the attempt of labor as a whole to secure higher real rewards than correspond to its productivity, or to an attempt to maintain wage differentials that are incompatible with the current distribution of demand between different types of labor. The success of such attempts, which presupposes imperfect competition in the labor market, makes it possible for wages to rise faster than productivity even though the real demand for labor may not be, on balance, excessive in the economy. Prices, as a consequence, also tend to rise. A wage-price spiral comes into existence; wages and prices push each other up.
Governments, in attempting to resist inflation by influencing wages, may have in mind their effects on the demand for final consumer goods or their effects on costs of production. As income received by a factor of production, wages largely determine the level of consumption in the economy. As a payment to a factor of production, wages enter into costs. Anything that keeps down the level of wages will, therefore, tend to moderate the increase in prices both by reducing consumption demand and by reducing costs of production. The effects of wage changes on the balance of payments also operate through the two channels. On the demand side, a reduction in wages will reduce the level of consumption and hence the need for imports, while at the same time it will increase the surplus available for export abroad. On the cost side, wage restraint will tend to improve the competitive position of the country in international markets.
Wage policy may therefore be relevant whether the cause of the inflation is cost pressures or excessive effective demand. Although in a demand inflation it would be possible to control the increase in prices by disinflationary policies other than wage control, these might well involve the scaling down of investment plans and at least a temporary loss of employment, which might be unwelcome. Wage controls might then help to control the inflationary tendencies without sacrificing investment, by reducing the propensity to consume—though at the cost of creating a shortage of labor. Generally, in an inflationary situation that is due to excess demand, the demand aspect of wage policy tends to predominate over the cost aspect. However, cost considerations are generally more relevant when a country strives to maintain its competitive position in international markets. Again, whenever products are priced on a cost-plus basis, a control of wages, by restraining wage increases, may prevent price increases by keeping down costs of production.
Wage policy cannot be effective unless the authorities are in a position to exercise some form of control over, or at least influence on, wages. The present paper deals with the Netherlands where, since the end of World War II, governmental control on wages has been applied, in addition to fiscal, monetary, and price controls. The acceptance of a wage policy in the Netherlands was facilitated by the peculiar circumstances prevailing in the country in the postwar period.
In spite of direct governmental control over wages, collective bargaining between employers and labor has not been suppressed. Individual employers’ and workers’ unions regularly negotiate over wages and other conditions of employment. The agreements so arrived at have to be approved by a state-appointed Board of Conciliators.
The application of wage policy in the Netherlands has been flexible, to suit the economic conditions in the country. In the early years after liberation, wage policy succeeded in controlling real wages in the interests of balance of payments equilibrium and national reconstruction. Following the Korean crisis in 1950, the Government even succeeded in imposing a cut in real wages for balance of payments reasons. In 1957 also, following the payments crisis in 1956-57, a restrictive wage policy was an important part of the over-all anti-inflationary policies of the Government.
Wage policy initially was more important for controlling consumption than for keeping down wage costs. The share of wages in national income, as well as average household consumption as a proportion of national income, declined continuously until 1953. Since 1955, however, with consumption stable at about 65 per cent of national income, the cost aspect rather than the consumption aspect of wage policy would seem to be the more significant.
Labor scarcity probably declined from 1948 to 1952, though the available indices may not be entirely reliable. This was followed by a period of increasing scarcity from 1952 to 1955. After a period of relaxation from 1956 to 1958, the market tightened once again in 1959 and in 1960.
Although most of the permitted wage increases were uniform for all industries, special wage increases were granted in some occupations, and relative wages were affected by the introduction of systems of piece-rate payments and standardized methods of job evaluation. These special wage increases resulted in different rates of change in earnings in different industries, which seem to have been related to the relative labor scarcity in these industries. Lastly, in spite of the spread of job evaluation methods, the wage structure as between workers of different degrees of skill has not changed substantially from that initially fixed in 1946.
Mr. Bhatia, economist in the African Department, is a graduate of Bombay University and of Oxford University. He was formerly a member of the staff of the Indian Ministry of Finance and has contributed several articles to economic journals. Mr. Bouter, economist in the Research and Statistics Department, is a graduate of the Netherlands School of Economics. He was formerly on the staff of the Central Planning Bureau in the Netherlands and Head of the Bureau of Statistics in the Netherlands Antilles.
Membership figures as at October 1, 1960.
See P. S. Pels, “The ‘Labour Foundation’ in the Netherlands,” International Labour Review, Vol. LXXV (1957), pp. 437-49, for a more detailed account of the origin and functioning of the Foundation of Labor.
The Government has not asked the Council for advice on all matters. For example, advice was not requested on the increases in subsidies in 1956 and 1958, or on the rent increases in 1955 and 1957. However, the Government has generally asked for advice on matters of wage policy. See Dr. W. Drees, Jr., “Centraal Planbureau, Sociaal-Economische Raad en democratie,” Economisch-Statistische Berichten, March 11, 1959, pp. 184-87.
During 1955-56, when the Council did not succeed in making any positive recommendations as to the increase in wages to be granted, the Government referred the problem back to the Foundation of Labor for further discussion. After difficult negotiations, in which the Government acted as a mediator, an agreement was reached between the parties.
The outbreak of the Korean conflict in 1950, which greatly disturbed the newly established internal equilibrium, could have been the occasion for the country to reinstate the system of direct internal controls. Instead, the Government embarked in March 1951 on a vigorous policy of disinflation by reducing food subsidies, increasing taxes, and raising the official discount rate.
These and the following figures represent the increases between January and December.
The rise of about 4 per cent in the average wage index for 1953, compared with 1952, was due to the fact that the increases in 1952 were effected in the latter half of that year.
The productivity criterion may be especially difficult to apply in service industries.
The annual average of working days lost in industrial stoppages during 1946-59 amounted to about 150,000 in the Netherlands and about 3,000,000 in the United Kingdom. Thus, the United Kingdom (with a labor force about six times as large as that of the Netherlands) lost about twenty times as many working days as the Netherlands through industrial strikes.
The entire increase in prices and wages between 1953 and 1957 cannot be attributed to conditions of labor scarcity. A part of the increase during this period was to compensate for the increase in controlled rents and the abolition of consumers’ subsidies.
Under this method, each job is graded according to the number of job evaluation points applicable to the particular kind of work. A standard money value per point is fixed by the Board of State Conciliators for each of the five groups of townships, based on regional price differentials for consumer goods.