An Incomes Policy for the United States?

Abstract

THE term has been widely used in western Europe as a name for policies designed to restrain the increase of wages, profits, and other claims to income under conditions of full employment. The closest comparable policy in the United States is the announcement of price-wage guideposts in the Economic Report of the President. If there is a difference in meaning between the two terms, it is that term suggests direct or separate measures to restrain the rise in profits, interest, and rent, while price-wage guideposts would restrain them indirectly and as a group by limiting the margin between prices and wages. Incomes policies are an attempt to make possible a low rate of unemployment without inflation. There can be little doubt that in and of itself, such a result would be desirable. Low unemployment and stable prices are both widely accepted goals of economic policy, and to get more of one with no less of the other would be universally applauded. There is room for doubt, however, about the effectiveness and costs of incomes policies. I have not myself studied the operation of incomes policies in western Europe. However, my colleague Arnold R. Weber has been studying these policies and has concluded that their effectiveness has been very limited both in extent and in duration. Wage and price restraint, especially if requested during a time of major economic difficulties such as a balance-of-payments crisis, will for a while have a noticeable impact. As time goes on, however, this impact weakens; the support given to the policies becomes eroded; and the underlying inflationary pressures reassert themselves. In many cases, the result has been a socalled wage drift-a rise in earnings above the increases in called for in collective-bargaining agreements. The sources of wage drift include shifts in occupational composition, or upgrading; increases in piecework or incentive earnings; and even the payment of black wages above the level specified by contract. One of the most interesting examples of the operation of incomes policies has been the Netherlands, which has a highly centralized system of tripartite collective bargaining in which are determined through complex negotiations among employer organizations, trade unions, and government economists and planners. The decisions reached through this unique process have the force of law. Nevertheless, the hourly earnings of male workers in the Netherlands rose 15.6 per cent in 1954, 8.5 per cent in 1956, and 10.8 per cent in 1957. Weber concludes, Dutch experience indicates that governmental restraints and labor responsibility . . . can diminish immediate pressures on the general level of wages. Nonetheless, in a period of continued full employment, labor market forces will in* This paper is a slightly revised version of the one presented to the Conference of Business Economists, University of Chicago, April, 1965.