Incomes policy

Incomes policies in economics are economy-wide wage and price controls, most commonly instituted as a response to inflation, and usually seeking to establish wages and prices below free market level.

Incomes policies have often been resorted to during wartime. During the French Revolution, "The Law of the Maximum" imposed price controls (by penalty of death) in an unsuccessful attempt to curb inflation, and such measures were also attempted after World War II. Peacetime income policies were resorted to in the USA in August 1971 as a response to inflation. The wage and price controls were effective initially but were made less restrictive in January 1973, and later removed when they seemed to be having no effect on curbing inflation. Incomes policies were successful in the United Kingdom during World War II but less successful in the post-war era.

Incomes policies vary from "voluntary" wage and price guidelines to mandatory controls like price/wage freezes. One variant is "tax-based incomes policies" (TIPs), where a government fee is imposed on those firms that raise prices and/or wages more than the controls allow.

Some economists agree that a credible incomes policy would help prevent inflation. However, by arbitrarily interfering with price signals, it provides an additional bar to achieving economic efficiency, potentially leading to shortages and declines in the quality of goods on the market and requiring large government bureaucracies for enforcement. That happened in the United States during the early 1970s. When the price of a good is lowered artificially, it creates less supply and more demand for the product, thereby creating shortages.

Some economists argue that incomes policies are less expensive (more efficient) than recessions as a way of fighting inflation, at least for mild inflation. Others argue that controls and mild recessions can be complementary solutions for relatively mild inflation.

The policy has the best chance of being credible and effective for the sectors of the economy dominated by monopolies or oligopolies, particularly nationalised industry, with a significant sector of workers organized in labor unions. Such institutions enable collective negotiation and monitoring of the wage and price agreements.

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