Wage Claims, Incomes Policy, and the Path of Output and Inflation in a Formerly Centrally Planned Economy

52 Pages Posted: 15 Feb 2006

See all articles by Gian Maria Milesi-Ferretti

Gian Maria Milesi-Ferretti

International Monetary Fund (IMF); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: September 1992

Abstract

The corporate governance problem of state enterprises in former socialist economies can give rise to excessive wage claims and/or capital decumulation. This paper focuses on these problems, highlighting the dynamic links between wage behavior, the fiscal deficit, inflation and the capital stock. Wage controls have been widely advocated as a response to the corporate governance problem. We show that in the presence of excessive wage claims a system of wage controls can help to limit capital decumulation and reduce inflation, since wage moderation implies higher government revenues from the profit tax and therefore lower money creation. More specifically, it is shown that when wage levels are initially excessive a reduction in the degree of wage indexation is effective in lowering inflation if nominal wages do not provide, on average, full protection against future inflation.

JEL Classification: E63, E64, P50

Suggested Citation

Milesi-Ferretti, Gian Maria, Wage Claims, Incomes Policy, and the Path of Output and Inflation in a Formerly Centrally Planned Economy (September 1992). IMF Working Paper No. 92/74. Available at SSRN: https://ssrn.com/abstract=884969

Gian Maria Milesi-Ferretti (Contact Author)

International Monetary Fund (IMF) ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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