As the unemployment rate remains above 10 percent, we hear a number of prescriptions about what ought to be done. Of course there are those calling for more stimulus spending while others call for greater tax credits to encourage investment. Each of these approaches can be said to fall into the broad category of fiscal policy. From a monetary policy standpoint, the Fed continues to maintain low interest rates in the hopes that that too will encourage investment through the low cost of money. At a certain level we need a mixture of both fiscal and monetary policy. Both are important stabilizers. Missing from this mix is a what Sidney Weintraub almost four decades ago referred to as “incomes policy” or simply wage policy.

Conservative economists like Milton Friedman thought that monetary policy would serve as a means of maintaining wage restraint. While advocating roughly a three percent steady growth in the money supply to maintain stability, it was also assumed that money wages would also be constrained. In short, wages would increase to match productivity (which was roughly rising at three percent per year overall), but faster wage growth would be harder to achieve.

Weintraub sought to go further with the argument that incomes policy was really the missing stabilizer, and that proponents of both fiscal and monetary policy should actually welcome incomes policy as a supplement to their proposals. His approach didn’t leave the constraint of wage growth to chance—there would be tax penalty for further wage increases. Today, the problem is the reverse of the one found in Weintraub’s time—too sluggish wage gains, not too rapid gains—but the logic and need for a wage policy still applies.

What we need today is faster wage growth. Although the term incomes policy was often used as a euphemism for wage and salary restraints, an incomes or wage policy for our time should be viewed as an essential ingredient in shoring up the middle class and maintaining economic security through its potential to arrest wage stagnation.

The problem is that monetary policy and fiscal policy are not enough to do the job alone. Fiscal policy involves huge expenditures of public monies which, if not properly targeted, will not necessarily have the desired effects. Sure, various interests will benefit from grants and contracts, but the impact will not be widely dispersed. Moreover, increased spending eventually necessitates new taxes. Monetary policy also comes with a cost. By law, the Federal Reserve serves the banking interest and its primary responsibility is to ensure the solvency of banks. As inflation rises, the Fed typically applies the breaks with higher interest rates and reserve requirements, which produces unemployment. And yet, increased taxes due to increased spending will only lead workers to seek higher wages to pay the increased tax, thereby exacerbating inflation. In the current downturn, when wages are stagnant, and in the upturn when wages will—hopefully—be rising, the missing third element is an incomes policy that aims at more steady wage growth.

Weintraub was only too quick to point out the immorality of economists applying the brakes to control for inflation, as they themselves were unlikely to lose their jobs. As he put it: “The unemployed are thus the innocent lambs led to the slaughter through conventional tactics.”^[1] Therefore, Weintraub was suggesting that if wages could be stabilized, then price stability would avert economic damage occasioned by conventional stabilization tools.

In previous posts I have argued for wage policy as a set of labor market institutions for the purpose of bolstering wages. Wage policy is important because without it the erosion in the value of workers’ wages means that they are unable to continue demanding goods and services. Without a wage policy that would have the macroeconomic benefits of allowing workers to maintain their purchasing power, traditional fiscal and monetary policy as tools for job creation are only bound to fail. An economy, after all, needs to be built from the bottom-up; not the top-down.

As policymakers debate the best means of moving forward on job creation, it might behoove them to think of all the possible tools that could be employed, even if it means thinking outside their traditional boxes.