Should inflation be controlled by wage-price controls?

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Expert Solution

Wage-price controls can be seen as a potential tool to control inflation. The argument goes that when we put the wage-price controls, then workers cannot negotiate a higher wage. As they don't have higher wages, they would curtail their demand which could be then contain the price inflation. In some way, higher wages can also be seen as a supply shock which reduces the output and also increases the price.

However, it may not be an effective tool if the source of inflation is not known. Identifying whether a given price rise is demand side or supply side is a challenge for any policy maker. Often policy makers resort to hiking interest rate in the market by reducing the money supply. There is a positive association between money supply and price inflation. Hence, controlling wage and/or price is not be a good idea. Moreoever it will negatively impact capital formation in the economy as people may not save enough. Wage-price controls can thus affect the economy negatively in future time period. It may not actually resolve the true causes behind inflation.

Rahul Sunny answered 1 year ago

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