Definition: The Price and Wage are the direct measures used to control inflation. In situations, where both the monetary and fiscal policy stands inadequate the price and wage control method is used to tame the situation.
The price and wage control are studied conjointly because whatever is the cause of initial inflation, the cost-push and price-push inflation go together. Under the Price Control Method, there are fixed retail prices of goods and services, applicable to all the goods or partially confined to those which are scarce and essential for basic livelihood. The major objective of the price control method is to prevent the rise in the prices of scarce commodities and at the same time ration the use of goods and services.
Whether the price control method works efficiently to control inflation is quite skeptical because the price controls often lead to black-marketing of commodities, unfair distribution of scarce resources, and other faulty practices, especially in the regions where the administration is inefficient and corrupt.
The Wage Control Method is typically used in the situation where the inflation is of cost-push and wage-push nature. Under this method, a rise in the wage rate is restricted through a ceiling imposed on the wage incomes in both the public and private sectors. This ceiling is called as “wage-freeze.”
In case, the labor unions are strong and oppose the wage freeze; then the government uses a weaker method called as “Jawboning” to control inflation. The Jawboning, also called as moral suasion is the method that forces moral responsibility on the trade unions for the consequences of cost-push inflation and further discourages them from demanding higher wages. This method is short-lived and hence cannot be used to overcome the persistent inflation.
A more sensible and widely used method to control wage-push inflation is “ Wage Guideposts”, a plan of action prepared to fight inflation. It is prepared with a consent and common agreement between the government representatives, businessmen and trade unions to have a controlled and disciplined upward movement in the wages and prices. Under this method, the wages and prices are administered by the board of representatives.