Wage-Price Controls and the Labor Market's Response: The Nixon Controls of 1972
Wilhite, Allen Ward
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https://hdl.handle.net/2142/70722
Description
Title
Wage-Price Controls and the Labor Market's Response: The Nixon Controls of 1972
Author(s)
Wilhite, Allen Ward
Issue Date
1981
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, General
Abstract
In recent history much of the Western World has been plagued with high rates of unemployment and high rates of inflation. These simultaneous disruptions are particularly puzzling because they are either unaffected by normal monetary and fiscal policies, or if affected many governments seem unwilling to impose the necessary restraint to solve this dilemma. As a result wage-price controls have often been suggested as a plausible policy tool.
Since controls seem to be an increasingly important tool, a number of economists have investigated the effectiveness and impact of controls on an economy. Unfortunately one particular aspect of controls has been largely ignored. This neglected effect is the impact a controls program may have on the labor market. The current paper is designed to help fill this gap.
Specifically this study investigates the impact of the Nixon controls on quit rates and layoff rates in the industries controlled. The Nixon controls were designed to concentrate wage and price restraint on particular sectors of the economy. This restraint may have two effects. First of all wage controls may alter relative wages of workers (their current wage in relation to alternative wages) which may in turn affect quit rates. Secondly price controls and wage controls may affect a firm's real wage (the money wage divided by that firm's product price). This changing real wage affects the cost of labor for that employer and may alter layoff rates.
Two simple theoretical models are presented to predict the workers and employers reaction to controls. These predictions are tested empirically using cross sectional regressions evaluated with data from three digit manufacturing industries. Included in the cross sectional equations are three policy variables derived from the enforcement rules established by the Nixon Administration. These policy variables are designed to measure the degree of restraint imposed on the various industries. The impact of controls on average wages, real wages, quit rates, and layoff rates is calculated by comparing the change in the coefficients of the policy variables across time, i.e. comparing the results of three cross sectional regressions evaluated using data collected before, during, and after controls.
The results are consistent with the predictions made by the theory. In short, it appears the Nixon wage controls did restrain average wages and real wages in the targeted industries. Furthermore the industries with a falling relative wage had a significant increase in their quit rates while industries with falling real wages had falling layoff rates as predicted. Similarly the Nixon price controls seem to have significantly increased real wages (the cost of labor) and layoff rates in these price controlled industries also increased. Over all the results are consistent with the notion that the labor market responds in a predictable manner to controls.
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