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BPEA Article

The Response of Wages and Prices to the First Two Years of Controls

Abstract

IN A PREVIOUS PAPER I reached the conclusion that Phases I and II of the Nixon wage-price control program had achieved a slight reduction in the advance of wages and a marked decline in the rise in prices between 1971:3 and 1972:2 as compared with econometric simulations of the hypothetical paths in the absence of controls. At first glance these relationships appear to have been reversed in the past year. Prices have exploded upward at rates exceeding all forecasts, whereas the apparent absence of any significant response of wages to observed price behaviorh as led to widespread puzzlement about the mystery of the "docile worker." If the response of profits to the business expansion in 1972 was sluggish, the price rebound of 1973 appears to have regained the lost ground. The purpose of this paper is to examine this view of recent wage and price behavior. Specifically, how sluggish has been the response of wage increases relative to price inflation in 1973, as compared with econometric forecasts based on data for 1954-70? And to what extent has the price performance of 1973 permitted profits to rebound along the predicted, normal, cyclical recovery path, in contrast with my earlier conclusion that Phases I and II, by depressing prices, had held profits well below this path? Since the earlier paper has evoked considerable controversy, I begin by reviewing the methodology of this genus of policy evaluation, and try to anticipate the likely direction of its inherent biases.

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