11 - INCOMES POLICY

Summary

INTRODUCTION

Wage subsidies and profit sharing have a common origin in the perception that the existing arrangements for wage and price determination stand in the way of full employment. Incomes policy, an expression which entered the vocabulary of economics after the Second World War, refers to measures intended to influence directly the level, or the rate of change, of money incomes, especially wages and salaries. It is normally taken to exclude monetary and fiscal policy, whose influence on wages and other incomes is indirect. Historically, wages policy and incomes policy were first discussed as means to contain the cost inflation which accompanied the full employment which came to be taken for granted in the years following the war. Analytically, the incomes policy concept fitted comfortably into the Keynesian paradigm, and can be illustrated by reference to the Phillips curve in its original form, which postulated a simple inverse relationship between the level of unemployment and the rate of change of money wages, sometimes called wage inflation. If, in a closed economy, changes in productivity were taken to be exogenous, and if, in addition, prices were determined by costs, the Phillips relation between unemployment and wage inflation could be transformed into one between unemployment and price inflation – or inflation tout court. If such a relationship were found to rest on strong empirical foundations, it follows that there would be a trade-off between unemployment and inflation.