LABOUR MARKET INSTITUTIONS AND INFLATION*
| DOI | http://doi.org/10.1111/j.1467-8543.1976.tb00035.x |
| Author | Douglas A. Smith |
| Published date | 01 March 1976 |
| Date | 01 March 1976 |
British Journal
of
Industrial Relations
Vol.
XIV
No.
1
LABOUR MARKET INSTITUTIONS AND INFLATION*
DOUGLAS A. SMITH?
THE recent literature on economic policy with respect to unemployment and infla-
tion is characterised by
a
sharp division between the accepted theory of inflation
and frequently prescribed policies to combat inflation. This paper is intended to
deal with only one aspect of the process of inflation and that is what Solow has
called ‘the problem of premature inflation’,’ in which ‘modern mixed capitalist
economies tend to generate unacceptably fast increases in money wages and
prices while there is not general excess demand’.*
Such a view recognises that the primary responsibility for the recent inflation
lies with the monetary and fiscal authorities. The question to which this paper
is
directed is that of the residual contribution of the labour market to the type of
persistent inflation that has characterised the recent past.
At issue is the role of labour union power and the assumptions involved in the
traditional view that such power cannot contribute to the process of inflation. The
contention of this paper is that the existence of market power can be
a
con-
tributing factor in the persistence of inflation which is of particular importance
during periods of slack demand. This is shown to produce results which conflict
with the traditional view because of the neglect in that approach of the interaction
of two important institutional features of labour markets. These features are the
divergent nature of the utility functions of trade union leaders and members and
the existence of what is termed the process of social comparison which creates an
interdependent structure of wage rates. The interaction of these factors is of
crucial importance and produces the results that are discussed in this paper.
An examination of the shortcomings of the traditional labour market model
is
a matter of concern since
a
contrary view of the inflationary process appears to
be the basis for most types of incomes policies such as the wage-price guideposts
of the mid-1960s or the more recent era of direct intervention in labour and
product markets. This paper is, consequently, an attempt to bridge the gap
between theory and policy and hopefully to provide a basis for further work in
this important area.
1 MARKET POWER THEORIES
OF
INFLATION
The term market power is one which is often used in a rather imprecise way. In
this paper the term is applied to the impact of institutions on the outputs of the in-
dustrial relations system in particular, although the term is also used to describe
the impact of concentration on the product market. Most of the different cost-
push theories of inflation rely on market power as the initiating factor in the
process
of
inflation.
In brief, the reasoning behind such theories is as follows. There exists a
number
of
institutions
in
society whose collective power allows them to set prices
at levels higher than those that would be determined in perfectly competitive
markets. In addition to the usual misallocation effects, it is then argued that such
actions have important implications for the conduct of economic stabilisation
*
I
am particularly indebted to Michael J. Piore and Joseph Quinn for substantial comments during
the preparation of
this
paper. Financial support from a Canada Council doctoral fellowship and
from the Scanlon Memorial fellowship, at M.I.T., is gratefully acknowledged.
t
Assistant Professor, Department of
Economics,
Carleton University, Ottawa, Ontario.
35
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