Incomes Policy

The concept of ‘Incomes Policy’ has gained currency in recent years, especially in developed countries of the west, as a means to fight ‘demand pull’ and ‘cost push’ inflation. The central objective of this policy is to reconcile economic growth and price stability. The price stability is to be ensured by restraining increase in wages and other incomes from outstripping the growth of real national product.

Incomes policy seeks to concentrate on curbing the private consumption expenditure in an effort to reduce the pressure of ‘aggregate demand’ on ‘aggregate supplies’. This concentration on restraining the private consumer expenditure is justified on the ground that out of the important constituents of aggregate effective demand, (private consumption expenditure; government consumption expenditure; investment expenditure in private and public sectors; and the excess of exports of goods and services over their imports in the market) this item is the largest – accounting for about two-thirds to three-fourths in most countries. (In fact, variations from country to country are wide and this is only a rough approximation). In other words, incomes policy implies deliberate intervention by the authorities in gross money incomes from rising excessively in relation to the growth of national output in real terms.

Need and Working of Incomes Policy

The necessity for an appropriate incomes policy is being increasingly felt on account of the intensification of the tendencies towards cost inflation, because the proportion of incomes and prices determined in non-competitive markets is likely to increase with increasing industrial employment, growing unionization, and collective bargaining and increasing scale of enterprises. Further, longer experience of consistently high level of aggregate demand as enunciated above may lead to encouragement of a more aggressive attitude on the part of labor and more permissive attitude on the part of the employers towards wage increases, leading to a strengthening of the bargaining position of unions.

The inducement to adopt income policy is stronger in some countries than in others, depending on the prevailing socio-economic circumstances. The inducement is more where relative price stability is needed to facilitate expansion of employment (either before or when the employment objective is met) or to improve a critical balance of payments position. Disciplinarians in the field of international economics prefer incomes policy to set right chronic balance of payments to a policy of devaluation or deflation.

However, when it comes to guidelines for other types of incomes like profit, rent and interest, its policy prescription is less clear. While the general objective, as discussed above, has been laid down in many developed countries like Netherlands, Sweden, France, Norway, U.K. and U.S.A., no operational incomes policy has been adopted in any country except Netherlands. In U.K., first attempt at incomes policy was made during the Second World War and met with a little success due to accompanying circumstances (exceptional in nature) like subsidies, price controls, rationing, compulsory savings etc, all played an important part in holding down prices. There was a good deal of suppressed inflation in the economy but towards the end of 1950, wage restraint began to break down and incomes policy was held in abeyance in U.K. during the fifties. The labor government which took office in 1964 presented a policy on productivity, prices and incomes as an integral part of its plan for promoting economic growth but later on due to bad economic conditions, balance of payments difficulties and rising prices and incomes ran into difficulty. The U.S. abandoned wage price controls in 1974. European incomes policy, however, did not fare badly, though it proved to be a costly experiment and in the long run not only inflation continued but it also led to distortions in the economy giving rise to more severe inflations in U.K., U.S.A. and Japan from 1974 onward. In U.K., where a beginning was made, many practical implications came to light during the course of its working. One of these is that in a period of excessive overall demand an incomes policy though useful can play a role only subordinate to fiscal, monetary and other economic policies to fight cost inflation.

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