Wage and price controls (incomes policies)

Wage and price controls are government-imposed limits on increases in wages and prices. Also called incomes policies, wage and price controls are typically imposed during wartime to limit INFLATION. During wars, government spending usually expands rapidly to provide the materials and weapons needed for defense. At the same time, governments conscript or enlist large numbers of young adults, reducing the supply of labor available in the private sector. During World War II, the federal government enforced wage and price controls through the National War Labor Board and the Office of Price Administration. Citizens were encouraged to voluntarily reduce their CONSUMPTION of needed war materials. Families reduced the number of vehicles driven, and women sacrificed new PRODUCTs (at the time), including nylon hosiery, but rationing was also needed in order to have sufficient supplies for the military. In a market system, price acts as the basis of rationing. If DEMAND exceeds SUPPLY, prices rise, and only those consumers willing and able to pay the new, higher price will purchase the product. During World War II, rationing coupons were used to limit consumer demand. Coupons were needed to purchase gasoline and other necessities. This gave rise to a “black market,” where, for a higher price, consumers could purchase additional quantities of the price-controlled product. When the price of a specific product is controlled, it is called a price ceiling. When the prices of many or most goods are controlled, it is called price controls. In 1989 the government of Nepal, after a trade blockade by India (Nepal is landlocked and has no domestic source of hydrocarbons), imposed price controls on gasoline and kerosene. The government restricted prices to what they were before the blockade. The responses were amazing. On the demand side, consumers switched to wood for cooking and heat, driving up the price of firewood in a country already facing a serious deforestation problem and horrible air pollution in the Katmandu valley. The price of rickshaw rides rose as wealthy citizens put away their automobiles. Buses, with no changes in prices, became incredibly crowded and dangerously overweighted as they crept through the Himalayan Mountains. On the supply side, entrepreneurs hoarded fuels in their 17th-century wooden homes, selling gasoline at the equivalent of $8.00 per gallon. Hard-working traders smuggled gas and kerosene across the border from India, literally carrying the now-precious resource on their backs. Wage controls are less frequently used than price controls. During World War II, government-imposed wage controls led to many changes, some of them good. First, with fewer male workers available, employers were forced to end discriminatory practices toward women. Second, because they were not allowed to pay higher wages, employers began offering their workers extra COMPENSATION AND BENEFITS, including health-care benefits. The most recent American use of wage and price controls was during the Nixon administration. In 1971 President Richard Nixon imposed a 90-day wage and price freeze in the hope of breaking inflationary expectations. The controls continued beyond the 90-day period but had mixed results, and while they slowed inflation, it returned after they were removed. During the 1960s, the Kennedy administration established wage and price “guideposts”—governmentrecommended increases in wages and prices. Though they were not backed by any penalty for violations, the guideposts helped stabilize prices during the period. Government can also influence wages and prices through their purchases. The U.S. government spends approximately $2 trillion annually. Government-negotiated prices for pharmaceuticals, defense materials, and other public goods as well as government salaries for military and civilian workers influence market prices and wages.
See also PRICE CEILINGS, PRICE CONTROLS; PRICE FLOORS, PRICE SUPPORTS.