Results and problems of five years of incomes policy: an initial quantitative evaluation

What role was played by the incomes policy launched in 1992-93? Part of a new “culture of stability” or factor distorting the adjustment process? This paper makes an initial evaluation of the effects of the reform of the wage-bargaining system on the link between wages and prices, on the costs of disinflation and on the non-accelerating-inflation rate of unemployment (NAIRU). The lesser reactivity of nominal wages appears to have reduced the overall magnitude of the response of the price system to nominal shocks, whose effects were prolonged, with wider fluctuations in real wages. Counterfactual simulations confirm the importance of incomes policy in curbing the inflationary pressures: in its absence, inflation would have been between 2 and 3 percentage points higher in 1996. Achieving the inflation rates that were reached in the period in question through monetary policy action alone would have been much costlier and would have imperiled the process of fiscal consolidation. The effects on the determinants of the NAIRU appear less significant instead, although in assessing this result account it is necessary to consider that the new bargaining system has yet to find a definitive configuration.