Is Incomes Policy the Answer to Unemployment?

Abstract

In Western Europe unemployment has remained obstinately high ever since 1975. What has prevented governments from reducing it? The answer is simple. If unemployment were reduced by normal methods, inflation would rise. It follows that the only way to cut the long-run level of unemployment is to find some other way of controlling inflation. No such device will be costless. But if we could find any method that was less costly than unemployment, we ought to adopt it. Maurice Chevalier was asked in later life what he thought of old age. It's not so bad, he replied, you consider the alternative. That was a true economist talking, and it is also the spirit in which I shall approach the unhappy choices open to us. My argument will proceed roughly as follows. First, imagine that a costless incomes policy is available. Then most people would probably agree that, if inflation was too high, a temporary incomes policy would be a good idea-in order to get inflation down. But what then, when it was down? We would still be left with far too high an unemployment rate. Only a permanent incomes policy can substantially reduce the non-inflationary level of unemployment. However, against these benefits have to be set the costs of an incomes policy. A conventional incomes policy, which permanently suspended collective bargaining, would be out of the question in a free society. So we have to have an incomes policy that works by incentive rather than by regulation. The best thing would be a tax on wage increases, levied on employers and proportional to wage increases above a prescribed norm. I shall spend some time discussing this tax using various different models of wage-setting to explain how it would have its effect. And finally, I shall try producing a first draft of the Operator's Manual.