Wage and Price Controls

Wage and Price Controls

Wage and Price Controls are comprehensive government restrictions on the maximum rate at which wages and prices may increase during a specified time period. Wage and price controls can be distinguished from other types of government price and wage intervention by 2 characteristics. First, they are adopted for the purpose of controlling overall INFLATION, rather than to achieve some specific economic efficiency or economic equity goal (in contrast, for example, to minimum wage legislation). Second, they affect many sectors of the economy rather than focusing on one particular market, unlike programs such as agricultural price supports. Controls are a type of incomes policy (ie, any government policy that has a direct effect on overall price and wage setting in the economy). Other examples of incomes policy include voluntary wage and price guidelines and tax incentives to encourage lower rates of wage and price increase.

Many nations, including Canada, instituted a system of both price controls and rationing during WWII to prevent the profiteering and skyrocketing prices that might otherwise have resulted from wartime shortages (see WARTIME PRICES AND TRADE BOARD). These measures were largely abandoned in the postwar era. However, during the 1950s and 1960s a number of European countries experimented with income-policy interventions, including wage and price controls. Controls were primarily used as an attempt to combat inflation, and stimulative monetary and fiscal policies were used to reduce unemployment. The experiences with this type of policy combination were largely unsuccessful. The buoyant demand conditions created by high money-supply growth rates and various government spending and taxation initiatives either made the controls themselves unworkable and ineffective or created substantial latent inflationary pressure that was manifested when controls were finally lifted. This was also largely the fate of an American trial with controls in the early 1970s.

Subsequently, economists have realized that if controls are to be successful, they must be viewed as a complement to, rather than a substitute for, restrictive monetary and fiscal policy. While high inflation can eventually be controlled by significant lowering of money-supply growth rates, the process may be long and may involve painfully high UNEMPLOYMENT. Controls are seen by some economists as a means of overcoming the strong momentum of high price and wage increases and hence easing the transition to lower inflation.

Canada's only experience in peacetime with controls occurred 1975-78 in response to the exceptionally high inflation rates of 1974-75. The federal Anti-Inflation Act established a 3-year controls system. Wage guidelines were binding on all firms with 500 or more employees, on all federal employees, and (with the agreement of the majority of provincial governments) on most other public-sector employees. Profit-margin controls restricted the price and cost markups of large firms. Although the magnitude of the effect of the legislation is debatable, empirical analysis has generally supported the claim that the controls program did reduce inflation below the level that otherwise would have prevailed.