Difference between Wage Policy and Monetary Policy

This article will help you to learn about the difference between wage policy and monetary policy.

Difference between Wage Policy and Monetary Policy

Taking a more balanced and comprehensive view, the possible or probable effects of wage reduction on employment are indeterminate, necessitating more empirical evidence before any conclusive opinion on the matter can be formed.

The only conclusion that emerges is that, at best, a flexible wage policy is no better than a flexible monetary policy. Dudley Dillard has remarked that.

“It is important to view Keynes’ conclusion on wage policy in the broad perspective of his position as a theorist and as an advocate of monetary policy. What his (Keynes’) analysis amounts to is simply that a flexible monetary policy is an alternative to and on both economic and political grounds is preferable to a flexible wage policy. He acknowledges that money wage cuts may increase employment slightly, but his main contention is that anything which might be accomplished by cutting wages can (as well) be accomplished by monetary policy” (a policy of increasing supply of money by lowering the bank rate, when, prices must be made to rise and so on).

Keynes himself remarked that “taking account of actual practices and institutions of the contemporary world” a stable wage policy having favourable effect on business expectations is to be preferred to a flexible wage policy under which wages continue to sag downward by easy stages as unemployment increases.

According to Keynes, “Theoretically at least, we can produce precisely the same effects on the rate of interest by reducing wages, whilst leaving the quantity of money unchanged, that, we can produce by increasing the quantity of money, whilst leaving the level of wages unchanged. It follows that wage reductions, as a method of securing full employment, are also subject to same limitations as the method of increasing the quantity of money. Just as a moderate increase in the quantity of money may exert an inadequate influence over the long term rate of interest whilst an immoderate increase may offset its other advantages by its disturbing effect on confidence so a moderate reduction in money wages may prove inadequate whilst an immoderate reduction might shatter confidence even if it were practicable. There is, therefore, no ground for the belief that a flexible wage policy is capable of maintaining a state of continuous full employment the economic system cannot be made self- adjusting along these lines.” He further remarked that only a foolish person “would prefer a flexible wage policy to a flexible money policy.”

The following reasons are advanced against flexible wage policy vis-a-vis flexible money policy:

(i) If lowering rate of interest has to be brought about by a sagging wage level, there would be, for reasons already enumerated, a double drag on the MEC and a double reason for putting off investment and thus postponing recovery.

(ii) Again, except a socialist community, where wage policy is settled by law, there is no uniform means of effecting wage reductions for every class of labour. This would be achieved by a slow and wasteful process effecting most of the weakest group; whereas, the quantity of money is within the power of most governments by open market and other similar operations. Moreover, the method (money policy) which is more easy and practical is preferable to a method which is more difficult to apply (wage policy).

(iii) The chief demerit of a flexible wage policy in a free society like ours is that it will cause great instability of prices as to make business calculations impossible. A free enterprise economic system based on price mechanism requires for its proper functioning a reasonable stable value of monetary unit “and wage stability is basic to monetary stability” (Hansen).

(iv) Further, according to Keynes, having regard to the remuneration of the most of the groups in society, which are fixed in terms of money and the comparatively somewhat inflexible. “It can only be an unjust person who would prefer a flexible wage policy, unless he can point to advantages from the former not obtainable from the latter.”

(v) Moreover, the lower price level incident a fall in money wages increasing the real burden of both the private and public debt. If the public debt happens to be heavy, this becomes a major objection to any deflationary policy like wage and price reductions. Thus, according to Keynes, “having regard to excessive burden of many types of debt, it can only be an inexperienced person who would prefer the former.”

(vi) A general money wage cut policy is not favoured on the ground that it leads to more Unequal distribution of real income between the wage earning classes and non-wage earning classes (rentiers, etc.) as the latter would gain a clear advantage at the expense of the working class, as they would continue to get fixed income from bonds and other forms of contractual securities, while the income of the working class will decline as a result of wage cuts.

(vii) Again, a general wage cut policy is denounced on social, political, and economic grounds, inasmuch as, it leads to great discontentment, opposition by workers and trade unions. Economically, it does not have any favourable effects on the constituents of effective demand. It is anti-moral and anti­social.

(viii) Finally, in case of unclosed system, reductions in money wages though it may improve the “balance of trade”, is likely to worsen the “terms of trade” leading to a reduction in real income.