A Model of Incomes Policy in the U.K., 1963–79

Abstract

I INTRODUCTIONThia paper examines models to explain the determinants of incomes policy using quantitative continuous measures of incomes policy. The paper applies the policy reaction b e w o r k to incomes policy allowing for simultaneous feedback between policy and idation with empirical results for the period 1961-79.With the recent esception of S w a n (1980), incomes policy has typically been treated as predetermined when estimating aggregate wage adjustment models. The traditional approach in the empirical literature has been to measure incomes policy either as a set of on-off dummy variables or to divide the sample set into periods of policy-off and periods of policy-on. The dummy variable approach has considerable limitations, not least that it is very subjective and cannot easily capture the variety of incomes policy experienced since 1960. The frequency of incomes policy also means that it is not appropriate to regard policy simply as a temporary nuisance. In fact, there is the danger of spurious results since the multitude of dummy variables pick up the influence of other unidentified factors. Although Henry and Ormerod (1978) have used dummy variables to attempt to capture any policy rebound, the dummy variable approach cannot adequately deal with issues of timing.A quantitative continuous measure of policy can more adequately capture the intensity of incomes policy. Such a meaaure can be developed by using information on the nominal wage norm and its exceptions. The "effedive" nominal norm can be translated into a measure of real wage pressure. The real wage approach can be justiiied by the growing acceptance of the ml wage resistance model (Henry et d., 1976). If prices are determined aa a lagged mark-up on costs then a successful restraint of nominal wages w i l l a h be a reduction in real wages, at least in the short M. A constant nominal wage target will, therefore, imply a diminution of the real wage impact on policy in the longer run. The inclusion of the real wage term *Menuacript received 26.1.84; &tal version received 22.1.85. 31

Problem‐solutions in the Management of Information Systems Expertise

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