The Definition of Incomes Policy

A macroeconomic policy directly controlling factor incomes. Many Western countries since 1945 have used it as an alternative to fiscal and monetary policies with the hope that, by controlling wage fixing in the labour market, the rate of increase of product prices would be reduced. The most extreme form is a wages freeze, e.g. the UK's in 1966. Milder forms include setting a norm for wage increases in line with the rise in productivity, allowing for exceptional increases such to help low-paid workers, to alleviate a labour shortage or to preserve comparable pay for different occupational groups), or an exhortation to pay smaller increases.

Many countries, including the UK and the USA, have only used incomes policies intermittently, but the Netherlands is exceptional in achieving the implementation of a long-term policy from 1948 to the 1960s. Some incomes policies have included restrictions on increases in company dividends in order to restrain all types of personal incomes: however, this approach has produced distortions in capital markets.

There were many US experiments in income policies in the period 1962-71, some of them inspiring the shape of UK incomes policies. In January 1962 the US council of Economic Advisers published Guideposts for Non-inflationary Wage and Price Behavior in which the trend in productivity was used as the general guidepost for non-inflationary wage settlements. Specific guideposts were abandoned in 1967 but in 1970 a National Commission on Productivity was set up; inflation alerts were published when there were significant wage and price increases. In 1971, there was a ninety-day wage-price freeze: its sequel was the setting up of a tripartite Pay Board and a Price Commission. The effectiveness of this policy has long been debated: it is difficult to establish that the guideposts reduced wage inflation.

The UK had statutory incomes policies for the periods 1966-70 and 1972-74, compulsory policies 1975-7 and voluntary policies 1948-50, 1961-2 and 1977-9. There was a tendency to impose an incomes policy in a crisis in the most severe form - a wage freeze for up to one year - and then to relax the policy by permitting exceptions to the principle that wage increases should be in line with general productivity increases. An innovation of the 1970s was to choose as a wage norm a flat rate cash increase; this helped the lower paid but reduced wage differentials, opening the door to a flood of subsequent wage claims.

Some observers of incomes policies are more sympathetic towards them. Rostow, for example, has noted that in 1984, Japan, West Germany and Switzerland were able by means of incomes policies to have lower prime interest rates, lower unemployment, lower inflation and large balance of payments surpluses. In sum, to be successful an incomes policy should provide more helpful economic and financial information and education in its use to wage bargainers, as well as an element of real wage increases.