WAGE CONTROLS DURING THE TRANSITION FROM CENTRAL PLANNING TO A MARKET ECONOMY

Abstract

Wage controls have been integral to the stabilization programs of the formerly socialist countries of Central and Eastern Europe that are now moving toward market economies. The usual rationale for such restraints in heterodox stabilization efforts has been the need to break the momentum of inflationary expectations. In economies in transition the pervasive weakness of governance of state enterprises supplies an added imperative: the controls are needed to hold the line against pressures for excessive wage increases, which must ultimately be paid for by decapitalization of firms, reduction of tax revenues, or accumulation of enterprise debt. Examination of the design and enforcement of various systems of wage control leads to the conclusion that wage controls inevitably distort decisions on employment and work effort. These distortions, moreover, are the result of the same features of state enterprises that necessitate wage controls in the first place. Ultimately, the only way to avoid such distortions is to remove uncertainty about the timing of privatization, to ensure that workers and management have a welldefined stake in the newly privatized firms, and to establish financial discipline over the enterprises.