Essay Plans

Describe the role of prices and incomes policies as a means of controlling inflation.

SYNOPSIS:

POINTS:

  1. The aim of a prices and incomes policy is to keep aggregate wage increases in line with aggregate productivity increases. By keeping wages on a self-financing basis wage-pushing inflation could be overcome. This would reduce inflationary pressure in terms of expectations, demand (from the wages) and costs.

  2. It is not necessary to learn a whole heap of facts and figures about incomes policies, the following would suffice:

    • Nov 1972 - Feb 1974 - A Programme for Controlling Inflation - 3 stages

    • July 1975 - March 1979 - Social Contract - 4 stages. Last two stages were:-

        July 1977 - 1978 - wages 10% maximum with exception for self-financing productivity schemes.

        July 1978 - March 1979 - 5% maximum with exception for self-financing productivity schemes.

  3. Discussion now of the problems:

    • What is 'income'? (overtime? bonuses? local agreements?)

    • Flat-rate or percentages or a mixture? (Students should be able to work through examples showing how either of the methods - flat rate or percentage - will affect differentials).

    • Do we ignore increments based on service?

    • If a wage freeze then where are the incentives for productivity increases? If you are already super-efficient then productivity increases are less likely thus it pays to be inefficient! Also, what if productivity is increase because of improved investment in machinery?

    • Any government intervention will affect the allocation of resources - a prices and incomes policy is such an example.

    • What if firms refuse to comply? Can the private sector be monitored?

  4. The only way to increase wages will be to change jobs thus a huge increase in transitional unemployment is likely.

  5. The above problem notwithstanding the implementation of a prices and incomes policy is still favoured today. In the short term it may be effective but wages/prices may rise immediately the policy ends (costs of production may have been rising all the time owing to material increases thus profits will have been squeezed); wages immediately prior to the policy may have been deliberately high IN ANTICIPATION. Arguably the government now is pursuing an incomes policy in its role as an employer -witness the teachers, railworkers industrial action in 1989. Monetarists argue that an incomes policy is unnecessary as if monetarist policy is followed inflation falls thus wage claims will be revised downwards.
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