INCOMES POLICY: A CAUTIONARY NOTE
| DOI | http://doi.org/10.1111/j.1467-9485.1978.tb00246.x |
| Published date | 01 June 1978 |
| Author | G. T. Boon |
| Date | 01 June 1978 |
Scottish
Journal
of
Polilical
Economy,
Vol.
25,
No.
2,
June
1978
Notes
and
Communications
INCOMES POLICY: A CAUTIONARY
NOTE
G.
T.
BOON
University
of
Newcastle
upon
Tyne
J.
A.
Trevithick has argued that Keynesian labour supply to a particular
labour market depends on relative and real wages.' If union leaders are
obsessed with preserving differentials, demand restraint will not reduce wage
inflation
so
much as raise Keynesian involuntary unemployment. Hence a
government wishing to end inflation without sacrificing its full employment
goal must use
a
prices and incomes policy with demand restraint. Moreover,
monetarists hold that unemployment resulting from demand restraint will be
less the faster are inflationary expectations reduced. Expectations are com-
monly assumed to be based
on
a weighted average of past price increases. A
prices and incomes policy which reduces inflation will, after
a
lag, reduce
expected inflation. Thus even
a
monetarist may accept a temporary prices
and incomes policy if its entailed resource misallocations are not large.
TABLE
1
Sector
A
Sector
B
Earnings index one year prior to policy start
%
increase in year preceding policy
Earnings index at start
of
policy
%
increase in first year of policy
Earnings index after one year of policy
%
increase in second year
of
policy
Earnings index at policy demise
%
increase
for
A's
index to reach
151-25
Earnings index given
a
10%
increase over
151.25
which is the index required on the relatively
optimistic assumptions that
A
thinks B wishes
to return to pre-policy differentials and
both think inflation will
be
10%
i.e. policy demise indices rise overall by
which yields an earnings index
of
%
increase
for
B to maintain demise differential
100
100
115
125
15%
25
%
10%
10%
10%
10%
126.5 137.5
139.1
5
151.25
8.75
%
166.38 166.38
19.57%
10%
19.57
%
180.85
The arguments in this paragraph come from three of Trevithick's recent publications
which
I
trust may
be
taken together. The arguments may
be
found in Trevithick
(1976a,
1976b, 1977).
Date
of
receipt
of
ha1 manuscripts:
9
February
1978.
I4*
20
1
To continue reading
Request your trial