Incomes Policy: A Re-appraisal.

In this paper we examine the effects of the policies of wage and price restraint that have at various times been employed in Britain since 1945. We have taken the two-equation model that has been studied extensively in the context of data for both the United Kingdom and the United States,[2] and have assumed that, although far from perfect, this model will be a good enough statistical description of wage and price inflation to allow it to catch any major influence of wage and price restraints. In order to see how the potential effects of incomes policies should be specified in this two-equation model, we are forced to examine the derivation of the equations in some detail. In this process we discover that shift dummies which have been used by other investigators[3] to catch the effects of incomes policies are inappropriate and that their use can give rise to misleading results. After conducting tests more satisfactory than those employing shift dummies, we conclude that the data are not inconsistent with the view that wage and price restraints have usually been ineffective in restraining inflation, and also that the restraints have sometimes actually had the effect of raising the rate of inflation above what it would otherwise have been. This perverse effect is very noticeable in the most recent periods of "restraint" since 1966. [ABSTRACT FROM AUTHOR]