An Incomes Policy to Help the Unemployed

Abstract

Our argument has fourteen points:

• 1. More demand would without doubt generate more jobs.

• 2. It would also generate more inflation, assuming no incomes policy.

• 3. Inflation is mainly caused by wage increases.

• 4. Therefore, to get more jobs without increasing inflation, we must find a new method of restraining wage increases.

• 5. The aim of such wage restraint is not to reduce real wages, but to control inflation.

• 6. It must, if possible, be based on agreement between the TUC, CBI and government.

• 7. There must also be some method of making any centrally-determined policy bite at the level of the individual bargaining unit.

• 8. The policy will be doomed if it attempts to impose an absolute limit on the growth of pay, for this prevents decentralised changes in relativities, and, once the limit is broken, the policy collapses.

• 9. It follows that we need (i) a ‘reference level’ for the growth of average hourly earnings in every firm and (ii) a financial penalty for firms exceeding that level. If the firm exceeds the reference level, it should pay a heavy fine proportional to its excess wage bill.

• 10. Such a counter-inflation tax is administratively straightforward and can be collected jointly with PAYE income tax.

• 11. The policy should not discourage profit-sharing nor productivity agreements. This can be ensured by not counting against the permitted growth of workers’ incomes any genuine growth in profits paid to workers.

• 12. In the public sector, we need a single public sector pay information board, and a presumption that pay in public services will grow at a comparable rate to that in comparator groups.

• 13. We should restrain dividends as well as pay. We should therefore subject dividends to the same reference level, using the same tax mechanism to discourage excessive distributions.

• 14. Those who reject these suggestions should feel obliged to suggest some better way of generating more jobs without increasing inflation.

Richard Layard is Professor of Economics at the London School of Economics and Head of the Centre for Labour Economics. He is Chairman of the Council of the Employment Institute. Stephen Nickell is Professor of Economics at the University of Oxford and Director of the Institute of Economics and Statistics. He is a Council member of the Employment Institute. The first version of this text was published in October 1986.