prices and incomes policy

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Related to prices and incomes policy: Wage and price controls

prices and incomes policy

the application of controls on PRICES and INCOMES (particularly wages) in order to stop or slow down INFLATION in an economy. See ECONOMIC POLICY.

prices and incomes policy

a policy concerned with controlling INFLATION by directly attempting to halt or slow down the INFLATIONARY SPIRAL of price-wage rises, in contrast to deflationary MONETARY POLICY and FISCAL POLICY, which work indirectly to achieve the same result. The basic rationale for a prices and incomes policy is that whereas deflationary monetary and fiscal policies can only control inflation by increasing the rate of unemployment, a prices and incomes policy, if applied rigorously, can check inflation and maintain high levels of employment.

A prices and incomes policy can be operated on a voluntary or a statutory (compulsory) basis. In the former case, an appeal is made to the collective responsibilities of firms not to increase their prices ‘unduly’ and for trade unions to ‘moderate’ their demands for wage increases. The very vagueness of such exhortations, however, is usually given short shrift by vested interests. A statutory policy has more chance of success, certainly in the medium term, if it is backed by strong penalties for non-compliance. Typical elements of the statutory approach include:

  1. an initial, brief (six months-one year) standstill or ‘freeze’ on all price, wage, dividend, etc., increases;
  2. a following period (usually ‘phased‘to allow for a progressive relaxation of controls) in which either (i) general ‘norms’ are laid down for permitted price and wages, for example, limiting them to, say, 3% per annum, or (ii), more specifically, the establishment of formulas for linking permitted price and wage increases to, for example, in the case of a price rise, nonabsorbable cost increases, and, in the case of a wage rise, to increases in productivity This latter approach requires the establishment of some regulatory body (such as the National Board for Prices and Incomes, the Price Commission, the Pay Board, which formerly operated in Britain) to ensure that proposed price and wage increases are indeed justified.

Proponents of a prices and incomes policy see it as a useful way of‘defusing’ inflationary expectations, thereby removing the danger of accelerating inflation rate. On the debit side, it must be recognized that, because such a policy interferes with the operation of market forces, it is likely to produce distortions in factor and product markets.