Widespread recent experience of rapidly rising prices and costs has created renewed interest in incomes policy as an effective anti-inflationary weapon. This article provides a survey of some major issues of incomes policy rather than an evaluation of individual countries’ policies. It seeks to highlight and explain the changing emphasis of such policies in the three periods when they were widely adopted—just after World War II, during the early 1960s, and during the last few years. Attention is drawn to the changing context for incomes policy resulting from the adaptation of wage-bargaining institutions to expectations of continued high levels of employment and from the growing “openness” of the industrial economies. Sources of information on particular countries are indicated.1 The concluding section considers the case for incomes policy at the present time.
Anne Romanis Braun, Assistant to the Director, Research Department, is a graduate of Cambridge University. She formerly worked as an economist at the Oxford University Institute of Economics and Statistics, in the U.K. Ministry of Production and Board of Trade, the Organization for European Economic Cooperation, and the United Nations. She has published a number of articles in the field of incomes policy and of international trade.
A preliminary version of this paper was presented at a seminar, organized by the Regional Office for Latin America and the Caribbean, International Bank for Reconstruction and Development, on “Lessons for Latin America of Industrial Countries’ Experience with Incomes Policies,” April 25, 1974.
Citations by author and date refer to the Bibliography, pp. 30–36.
Saunders (1971), p. 332; Economic Commission for Europe—cited elsewhere in these footnotes as ECE (1967), Ch. 1, p. 2.
A high degree of coordination in wage fixing applied throughout the postwar period in the countries mentioned, and more recently in Belgium and Ireland—Blanpain (1971); Browne (1965). Elements of greater coordination have also appeared in Italy—Saunders (1972).
Policies during this period are described in Roberts (1958); Sturmthal (1957); Marris (1961); Edelman and Fleming (1965); David C. Smith (1966); ECE (1967), Ch. 4. See also Skånland (1964) on Norway; Johnston (1962) on Sweden; Markman (1964) on the Federal Republic of Germany; Pedersen (1964) and Hoffmeyer (1964) on Denmark; Zoeteweij (1955), Pedersen (1957), and Windmuller (1969) on the Netherlands.
The 1967 ECE Study, Incomes in Postwar Europe, stated, “For the present purpose, incomes policy is taken to mean the effort to acquire a degree of direct collective control over the level and structure of the remuneration of labour and capital and over the distribution of the national income to households and enterprises. … The phrase ‘collective’ rather than ‘government’ control is used because it is taken as a reasonable assumption for western European societies that the decisions will remain, essentially, in the private sector and that governments, even if they hold certain compulsory powers, must influence primary incomes mainly by guidance and persuasion of managements, workers and their representative organizations; in practice, in particular for wages and salaries, it is the policies adopted by these collective organizations which must be the instruments of incomes policy” (Ch. 1, p. 2).
Ibid., Ch. 1, p. 5. See also Council on Prices, Productivity and Incomes (1961), pp. 25–29.
The highly influential framework of guidelines in the Economic Report of the President for 1962 clearly relates to a situation of less than full employment, as it refers to industries in which there is usually an excess of manpower.
Policies during this period are described in the ECE Study of 1967, Ch. 4. See also Pen (1963) and (1964) on the Netherlands; Johnston (1963) and Faxen (1964) on Sweden; Phelps Brown (1966), Fels (1972), Ch. II, and Dorfman (1973) on the United Kingdom; Kienzl (1966) on Austria; and Dunlop (1966), Sheahan (1967), and Ackley (1972 a) on the United States.
Lindbeck (pp. 307–308) and Johnson (p. 319) in the panel discussion, “World Inflation,” in Stabilization Policies in Interdependent Economies, ed. by Claassen and Salin (1972—cited elsewhere in these footnotes as “World Inflation.”
Fels (1972), Ch. 3; David C. Smith (1968 a); ECE (1967), Ch. 4, pp. 17–20; OECD (1970), pp. 86–88; Ulman and Flanagan (1971), pp. 17–23; Blackaby (1971); Balfour (1972 a); Hunter (1973); Mitchell (1972); Roberts and Rothwell (1972); Jones (1973).
For details of the U.S. stabilization program over the period August 15, 1971 to April 30, 1974, see the various Economic Stabilization Program Quarterly Reports issued by the Cost of Living Council. See also Bosworth (1972) and (1974); Doeringer (1972); Weber (1973); Dunlop (1974 a) and (1974 b); Hamilton (1974); and Mitchell and Weber (1974).
Johnson, “World Inflation,” pp. 310–11.
Wildcat strikes in the United Kingdom, France, Italy, the Federal Republic of Germany, Sweden, and elsewhere were sometimes directed against the central union negotiators as well as against the employers. Ulman and Flanagan (1971), pp. 236–37.
In the immediate postwar years, however, there was an exceptional complicating factor in the form of large pent-up liquid personal savings in some countries, notably the United Kingdom and the United States.
Firms will generally be disinclined to charge prices that are much below the going rate, or to keep down prices when other producers are raising prices, unless they can foresee being able to expand output and employment considerably without causing the existing level of wage rates to rise.
Because of its larger size, the United States is a much more important component of the international market than any other industrial country, and a less open economy.
The ultimate tendency for all wages to move upward in line with wages in the open sector in a small economy where the whole labor force is organized in a strongly coordinated union movement and the open sector is dominated by large high-productivity enterprises is exemplified in the Scandinavian model of wage movements (Aukrust, 1970; Edgren, Faxen, and Odhner, 1969).
These authorities suggested that under fixed exchange rates and strongly coordinated wage bargaining, the rate of wage increase in the “exposed” sector should rise approximately in line with the increase in labor productivity in that sector plus the increase in world market prices for its products, in order to leave the exposed industries “reasonably competitive” (Aukrust, 1970, p. 38). (In other words, employers should resist wage claims that would require larger price increases than were occurring in the world market prices if their existing percentage markups for depreciation and profits were to be maintained. The reasoning was apparently that enterprises needed to maintain the existing markups to be sure of maintaining their competitiveness (by investment, promotion efforts, etc.) vis-à-vis foreign concerns that were presumed to be following the same rule.) Wages would increase at much the same rate in the sheltered sector, and since average profit margins there tended to be maintained, the rate of price increase would be determined by the rise in world market prices for the “exposed” sector and the difference between the rate of productivity growth in the two sectors (Lindbeck, 1972, pp. 252–53).
The Scandinavian model of wage determination illustrates the incompatibility with price stability of income distribution goals involving the maintenance both of the share of wages in income generated in the open sector and of relative wage and salary levels between sectors, even when world market prices are stable. Such goals clearly expose the economy to a risk of substantial domestic price inflation should world prices for industrial products rise. Although the published versions of the model appeared as late as 1969, when the external constraint on the “exposed” sector had greatly weakened with strong demand conditions and rising prices for durable goods in world markets, they contain almost no reference to this danger. Both studies are shot through with the idea that the “exposed” industries are facing stiff competition. (“If their costs increase, they must sustain the whole effect in the form of reduced profits,” Aukrust, 1970, p. 8.)
“Britain provides a very clear example of this. Attempts to restrain wage movements in the public sector (a sheltered sector) between 1971–72 eventually resulted in a coal miners’ stoppage (1972) which was settled by the awarding of a 25 per cent wage increase. This resulted in a general increase in the level of wage settlements during 1972 and in November of that year the Government was forced to introduce a statutory wage freeze followed by a gradual relaxation. The relaxation was more freely applied in the “open” sectors of the economy than in the sheltered sectors. Attempts to prevent wage increases in this sector matching the “open” sector again led to a coal miners’ stoppage (1974) and the end of statutory wage restraint.” (Professor B. C. Roberts in correspondence with the author.)
Johnson, “World Inflation,” p. 311.
See pp. 12–13 and 16–18.
A selected listing of econometric studies on this topic is included as Part II of the Bibliography.
The Economic Report of the President (1973) described the purpose of the controls as being to reduce the risk that the rate of inflation would rise again and to increase the probability of a further decline, so as to enable the Government to follow a more expansionary policy (p. 53); it concluded that the controls had made “a very significant contribution” in this respect during 1971 and 1972 (p. 62). “The fact of the controls, plus their initial success, had reduced inflationary expectations, held down total spending, restrained the tendency to boost wages and prices, and permitted output to rise more rapidly than it would otherwise have done” (Economic Report of the President, 1974, p. 99).
The average increase, excluding increases resulting from cost of living escalator adjustments, was 7.1, compared with 8.5 in 1972 and 13.1 in 1971 and 1970 (Dunlop, 1974 a, p. 466).
Phelps Brown actually stated the object of his proposals as “to improve on the present system of collective bargaining so as to provide means of pay-fixing that will do more to meet” such requirements as the avoidance of cost inflation; equity for the individual employee and a say in fixing his own terms of employment; the adjustment of differentials in accordance with the job requirements; and adjustment of the broader pay structure in accordance with macroeconomic and social considerations (Phelps Brown, 1972, pp. 31–32).
In Great Britain about 300 such units would include large firms, the nationalized industries, public administration, the Agricultural Wages Board, and the Wage Councils for other industries, and would cover about one third of all employees.
Professor Dunlop, in his illuminating lecture on recent U.S. experience with price and wage controls given at Monash University (October 1974), cites examples of improvement in the collective bargaining structure for an industry as a result of a wages stabilization scheme. In his view, wage restraint cannot be concerned exclusively with holding down the current rate of increase in compensation. “Wage stabilization is also concerned with changes in the structure of collective bargaining, in the development of voluntary dispute settling machinery, in encouraging the joint study and introduction of new technology and changes in work rules, in the development of new sources of wage and benefit data for the parties, and a host of other activities which over the long run will improve the quality of collective bargaining and create a less inflation-prone sector of the economy …. in my experience a better job of short-term restraint can in fact be accomplished if the stabilization agency is genuinely assisting the parties in a particular industry or sector to approach systematically problems which they previously have ignored or patched up temporarily” (Dunlop, 1974 b, pp. 18–19).
Ibid., p. 217.
Saunders (1971), p. 352.
Ulman and Flanagan (1971), pp. 255–56; Isaac (1973). Isaac also points out the need to revise progressive income tax schedules to take account of the effects of inflation in raising nominal incomes, causing higher rates of tax to become payable at a given level of real income. “The pay packet contains pay net of tax, and in their wage demands it is with this that the workers are concerned” (p. 253).