VIIICONCLUSIONS

Derek Robinson and Ken Mayhew

In the pursuit of counter-inflationary pay developments governmentscan choose among different categories of policies. Incomes policies ofthe type conventionally adopted in Britain have been criticized as nomore than tinkering with the problem in that they seek to affect theresults of collective bargaining without tackling the processes ofbargaining or the underlying structural aspects of pay determination.Because they seek to minimize the use of general economic policymeasures, it might be concluded that they are incapable of doing morethan delaying pay increases and causing considerable distortions in themeantime. Tax-based incomes policies might be regarded in the samesort of light in that they concentrate on the results of bargaining with-out tackling the underlying causes or processes of inflation. Other typesof measures are general economic policies, structural policies and thosewhich seek to change attitudes and so behaviour. The differentapproaches are not mutually exclusive.

General Economic Policies

Demand management is seen as exerting influence on pay developmentsby changing the economic environment in which pay and price decisionsare taken so that as restrictionary measures are introduced thoseresponsible for pay and price decisions take less inflationary decisions.In a pure or simple form demand management requires no interventionin the processes of collective bargaining; changes in the results of paydetermination emerge from the altered economic conditions in whichdecisions are taken. Demand management might reduce inflation bycurtailing the demand for products and hence for labour, and also, per-haps, because trade unions believe that they are weaker when a squeezeis on and unemployment is rising, and therefore moderate their wageclaims. Both the demand and supply sides of the labour market mightbe affected. However, British experience suggests that whatever theefficacy of demand management policy might have been in the earlypost-war period, there was a reduction in its impact as time went on.It was necessary to induce larger increases in unemployment in order totry and moderate the inflationary pressures.

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Many supporters of demand management believed that the Phillipscurve provided an empirical basis for their approach by establishinga relationship between the level of unemployment and the rate ofchange of wages so that policy-makers were apparently faced by astraightforward choice. They could trade-off inflation against un-employment, and unemployment could be influenced, if not preciselydetermined, by appropriate demand management policies. However,almost as soon as the Phillips curve implications were widely acceptedby a majority of economists and policy-makers, the apparent con-sistency and constancy of the unemployment-wage increase relationshipdisappeared. All over the world Phillips curves shifted upwards and forgiven levels of unemployment there were larger increases in pay.

One explanation was the 'real wage target' view. Assume that tradeunions determine their wage claims by some real wage target. Thehigher taxes and interest rates associated with a contractionary phaseof demand management result in higher prices which lead to highermoney wage claims in order to achieve the real wage target. Alongsimilar lines, if individuals' reservation wages are determined in realterms, and remain constant, then a market force view of pay deter-mination also expects increases in money wages as a result of aneconomic squeeze. Even in a contractionary economic period there willbe a market pressure for higher money wages in some sectors or forsome groups of workers. Institutional and attitudinal factors mayencourage the spread of these pay rises to other parts of the economy.

Post-war experience may not in itself necessarily lead to the conclu-sion that demand management should be abandoned. It is possible thatthe ineffectiveness stemmed from the unwillingness of government topursue contractionary policies far enough or sternly enough. Tougherpolicies might have been more effective. We do not know and cannotknow. In a democratic society government policies are necessarilytempered by notions of what is politically tolerable as well as desirable.Perceptions of political tolerability, in terms of both general opinionof the electorate and of the government's own party organization,create a constraining framework for policy-makers. That the perceivedconstraints subsequently turn out to be unwarranted does not reducetheir importance at the time. Views of the tolerable level of unemploy-ment have changed substantially. For most of the post-war period itwas believed that the effective limits available to government were suchthat demand management policies could be used only within narrowmargins which prevented unemployment from rising too high. Govern-ments may try to push back the constraining frontiers of political un-acceptability but they still believe that some frontiers exist somewhere.

A reduction in the rate of inflation requires a reduction in the rateof increase of money incomes so that, in relation to some point in thepast, money incomes rise by less than prices have done. There will be,

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at least in the short run, a reduction in real incomes or in expected realincomes. The lower inflation may lead to faster economic growth sothat real incomes may ultimately be higher than would have occurredwith the previous inflation rate. It is the short-term problem involved inobtaining a reduction in real living standards which creates difficultiesfor demand management policies. With periodic collective bargainingtrade unions accept that there will be a gradual reduction in livingstandards of their members between the settlement dates. It is difficultfor them to accept that these gradual reductions are not restored, andthey hope to increase them in the subsequent negotiations. Demandmanagement policies require that unions and their members changetheir established attitudes to the minimum requirements of collectivebargaining or that they modify their time-scale so that restoration oferoded real wages takes place over a series of subsequent negotiationswhen the benefits of higher growth are available. This requires a signifi-cant change in attitudes and behaviour, reflecting a belief that posterityand the government's economic policies will take care of them.

The emphasis on demand management in the UK has been on fiscalpolicy with monetary policy tending to take a secondary supportiverole. The effects of an increase in income tax is quickly understoodeven though many tax-payers may be unaware of their actual marginalrate of taxation. Higher indirect taxes lead to price rises which arequickly translated into increases in the Retail Price Index which generatehigher wage claims. Perceptions and attitudes may be such that evenneutral compensating switches between direct and indirect taxes havethe effect of generating stronger pressures for wage increases.

The effects of the monetary policy component of demand manage-ment were generally less obvious and less pronounced. Higher interestrates had some effects on prices and costs such as mortgages. Tightercontrols on bank lending, often imposed to avoid the higher interestrates that would have been involved in obtaining a reduction in banklending through the price mechanism, had some effects on moderatingdemand but less on preventing compensatory wage increases.

Much depends on the effects of the policy on employers. If thegovernment is successful in slowing down the rate of increase of moneydemand employers may try to hold wage settlements below the rate ofincrease in prices. This is not as simple as it might sound. Over the post-war period there seems to have been established a view of fairness heldby employers that compensation for past price rises is reasonable. It ispossible that this is no more than a recognition by many employers thatthe real reservation wage of labour either collectively or individuallydetermined is relatively fixed and that attempts to reduce it wouldhave serious adverse effects upon their labour supply.

Disillusionment with the outcome of demand management policiesin practice, encouraged by changes in the emphasis of much economic

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theory, fostered a revival of monetarism. Put simply, it may be believedthat inflation always and everywhere is a monetary phenomenon, sothat control of the money supply is both a necessary and probably asufficient condition to control inflation. There are varied sects withinthe monetarist persuasion but generally speaking monetarists believethat there is some sort of expectations-augmented Phillips curve suchthat unemployment returns to the natural rate of unemployment in thelong-run although short-run deviations below this level may be possibleif the government pumps in increases in the money supply. In time,however, these merely result in higher rates of inflation.

While it may be possible to produce economic models which displaythe behavioural characteristics necessary to establish these short- andlong-run effects, they owe more to the assumptions inherent in themodel than to any established real-world characteristics of the pay andprice determining processes. Moreover, the natural rate of unemploy-ment is at any period of time unknown and is subject to a large numberof changing factors. The models rest on an assumption that labourmarkets clear in real wage terms, or display tendencies to do so, andthat they would do so were the distorting influences of trade unions,government intervention and so on removed. The real reservation wagesof individuals play a major, though often implicit, role in the theoreti-cal models. In practice, for an economy such as the UK, the size of thepublic sector, almost one-third of the total employed workforce, meansthat a significant part of the pay determining activities are not subjectto the product market mechanisms which underlie the monetaristanalysis. To the extent that comparability, either formal or informal,plays a part in pay determination, and particularly if public sector paymovements affect those in the private sector, a monetarist explanationcannot provide sufficient guidance for a government. It is a necessarycondition for a monetarist counter-inflation policy that rules bedeveloped to determine or influence public sector pay.

To conclude that monetarism is not enough, is, therefore, on onelevel, to do no more than recognize the limitations inherent in ananalytical approach which is overwhelmingly, if not completely, basedon assumptions about market behaviour where product market forcesplay a crucial role. In the public sector product market factors do not,and in some cases cannot, play this assumed role. It is inevitable there-fore that a government pursuing a monetarist policy reinforces it withsome measures which can be described as structural or attitudinal. Itdoes not matter how ideologically committed to a 'market' approachto policies the government might be; it has no choice but to recognizethe need for additional measures. Moreover, as we have seen, even inthe private sector where it is thought market forces can and do play alarger part in determining pay movements, structural and attitudinal

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changes are advocated either to speed up the market adjustment pro-cesses or to allow them to operate with lower levels of unemployment.

Both Keynesians and monetarists, if they are policy-makers ratherthan pure theoreticians, now recognize that general economic policiesdesigned only to influence the economic environment within which payand price decisions are taken, are not sufficient to obtain the desiredcounter-inflationary pressure on pay in a politically desirable way. Thecritical policy question, therefore, is not whether structural or attitudi-nal measures should be introduced, but rather which structural orattitudinal measures are likely to be most effective in obtaining theparticular mix of economic results which are politically and sociallydesirable and tolerable.

Structural Measures

Structural measures are designed to change the balance of economicactivity or the institutions through which economic decisions are taken.They include the full range of government provided measures and pro-visions. They can be seen as the total structure of institutions, provisionsand organizations through which decisions are taken, and whose exist-ence, form or content might influence these decisions and behaviour.

Indirect measures to alter the balance of power in collective bargain-ing seek to do so by altering the processes of bargaining - particularly,perhaps, the use of the strike weapon or threat of it. The bargainingprocesses are changed in order that different results may emerge. At thesame time changes may be made which, by obtaining changes in theway certain institutions behave, will lead to more moderate wagepressures. Industrial relations legislation may be seen as offering oppor-tunities to induce changes in both behaviour and results. The structureof collective bargaining may exert an independent pressure on bargainingresults. The more decentralized the bargaining unit the greater, it maybe thought, will be the influence of both labour and product marketforces. Larger bargaining units may blunt the cutting edge of thesemarket forces. Public sector bargaining is dominated by industry-levelpay agreements, although in some cases these may be moderated bymore locally determined productivity payments. Trade unions willpress for the retention of industry-wide bargaining where they believethat it will lead to better results, as can be seen from trade unionresistance to proposals to move away from a national agreement on payin the water industry at the end of 1982.

Whether shifting the bargaining levels does lead to better or worseresults, no matter how these terms are interpreted, depends not only onwhether or not labour and product market forces do impinge differentlyon different parts of an industry or some other larger bargaining units,

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but whether these varying forces will be translated into differing pay orproductivity decisions. This may depend more on the response of thetwo sides to bargaining añd the attitudes and beliefs they take withthem to the bargaining table than upon the simple existence of sharpermarket forces.

Pay determination is complex. Economic forces have to be perceived,interpreted and translated into decisions. They are done so within aframework of institutional and social factors which are to greater orlesser extent prescribed by prevailing notions of fairness, equity andefficiency as affected by questions of motivation and morale. Thebargaining parties may have some shared values and some which diverge.Over large areas of employment and collective bargaining they havecreated procedures and accepted rules of conduct. These processes ofbargaining are generally acceptable to the parties because they produceresults which are acceptable, not necessarily desirable, first choice oroptimum, but in comparison with other likely out-turns, acceptable.

The use of arbitration over interests and formal systems of compara-bility are two important structural features of British industrial relations.Proposals to require arbitrators to base their awards on some particulareconomic argument, such as the effect on employment, raise two majordifficulties. First, the parties to arbitration may not themselves wish tohave this as the priority goal. Second, the rule may in fact be either in-determinate or, in many cases, incapable of implementation without farmore information than is currently available to arbitrators and possiblyeven to the parties to arbitration. Measures to require arbitrators to givepriority, or even exclusivity, to certain criteria, run the risk of so chang-ing the perceived acceptability of arbitration to one or both of theparties that the whole edifice of voluntary arbitration will collapse.

There is an additional danger in the public sector where governmentmay decide as a deliberate act of policy that it is not prepared to acceptan arbitration award which exceeds its own last offer. A governmentwhich is committed to a public sector pay policy which requires strictlimits on pay increases may find its strategy undermined or destroyedby arbitration. Arbitration of interests involves risks to both parties.Government may be unwilling to take those risks and regard the main-tenance of its public sector pay policy as more important than anydamage it may do to public sector industrial relations.

The independence of arbitrators in the sense that they are not thereto further the public interest as enunciated by a government but ratherto serve the interests of the parties to the case as they see them,inevitably raises problems for a government preoccupied with inflation.A comprehensive incomes policy recognizes this by subjecting arbitra-tion decisions to the general incomes policy rules. This may lead to adecline in the use of arbitration but it may not do serious long lastingdamage. Indeed, if arbitrators make awards which are in excess of the

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policy provisions, even though they cannot be implemented, this mightactually strengthen the support for the arbitration system and its inde-pendence. A government which includes as a main plank in its counter-inflationary programme its own views of fairness, whether these beexpressed in a comprehensive incomes policy or in specific, and possiblydifferentiated limits for the public sector, will feel less compunctionabout refusing to allow wage claims to go to arbitration, even if thismeans industrial disputes. Governments should be extremely chary oftrying to suborn the arbitration process to obtain some economicobjective. Its prime purpose is an industrial relations one. Attemptingto change the structure of industrial relations by imposed rules forarbitrators will do far more damage than will government's refusal toallow arbitration in the public sector.

In a related way government's attempts to reduce the use of com-parability can be seen as a structural change. Formal comparability, asexercised through the Civil Service Pay Research Unit, may be at oneend of a spectrum but some sort of comparability, formal or informal,crude or refined, seems to be deeply embedded in British processes ofpay determination. It may be that a forceful government can changeinstitutional behaviour and attitudes towards fairness so that com-parability withers away. We doubt this. As an indicator of fairness itruns deep in the system. Unions and individuals may accept that inseriously adverse times they are unable to obtain what they regard asfair, but this does not necessarily mean that they have revised theirbasic beliefs or reduced the importance they attach to comparability.The notion of tactical withdrawal is no less relevant to industrialrelations than it is to military activities.

Further, some application of comparability is in practice an important,if not a necessary, part of responding to market forces. Employers needto assess their rates of pay in relation to those obtainable from otheremployers with whom they are competing for labour. The applicationof market-based policies and the use of comparability for institutionalreasons as a method of determining pay are inter-mixed. It may bepossible to move away from a predominant reliance on formal com-parability as the method of determining pay to the exclusion of otherconsiderations, but this should be seen as a shift in degree, not a funda-mental change in direction.

The use of partial measures which change the institutional contextof some areas of pay determination will impinge most on the publicsector. This is to be expected; the public sector is more amenable todirect government pressure than is the private sector.

Cash limits in their various forms may reduce pay increases. Theywill inevitably raise the level of conflict from that of the industry to apolitical issue. It may be argued that cash limits have the advantageover a comprehensive incomes policy that they avoid the difficulty

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which arises from unions seeking to challenge the norm. This seemsmistaken. The cash limit figure is no less susceptible to political orindustrial attack than is a norm. Where it might have some advantageis that it can be varied from industry to industry in response to per-ceived differences in industrial strength. This will be at the expense ofequity which might he considered part of a government's approach topay, and in the longer run will demonstrate to unions arid their mem-bers the advantages of building and using industrial strength. Unionswill press to bargain about the size of the cash limit. Adroit selectionof individual targets or limits, combined with resolute action in theirimplementation, may well prove successful, at a cost, in destroyingexisting attitudes. This may require flexibility in the determination ofindividual limits and rigidity in their implementation. As with abolitionof Wages Councils or other forms of protection for the low-paid, it willrun counter to many existing notions of fairness but, in some regards,this is the essential nature of the problem facing a government whichattempts to replace the existing pay determination arrangements withthose more closely resembling what it sees to be a market system.Notions and practices of fairness are introduced just because the marketdoes not provide them. If it did there would be no need to create insti-tutions and arrangements to moderate the market results by considera-tions of equity, fairness and other social value judgements. It is theinnate conflict between economic and social objectives that generatesthe need for government to intervene. These measures require at thevery minimum a reluctant acquiescence, and preferably the consent, ofthose affected, which may be induced or encouraged by the provisionsof sanctions against those who do not adapt to the new conditions.The Meade proposals which have been discussed and the implications ofBrown's chapter recognize this. Both Hunter and Kessler emphasize therole of acceptability. Structural changes include a tremendous range ofmeasures ranging from relatively small adaptations to major funda-mental reforms. They all require acceptance and the more fundamentalthe change the more important are the reactions of those affectedby them.

Attitudes

Both general economic and structural measures are intended to changebehaviour by changing attitudes. There are occasions when governmentsseek to influence attitudes without other measures. Exhortations forwage restraint, based on either appeals to the public or self-interest,have been a fairly regular feature of British political life. There may beopportunities to change attitudes, either of bargainers, or, more gener-ally, those who influence prevailing views or public opinion. This maychange the perceived boundaries of what is politically tolerable.

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Economics, and particularly labour economics, is much concernedwith attitudes and value judgements even though these may be oftenunderplayed in theoretical approaches and disguised by the use ofterminology, which seeks to minimize the importance of these areas ofsubjective value judgements. The concept of the reservation wage hingeson individual judgements and attitudes. The Protestant work ethic stillplays an important role and for the vast majority of labour marketparticipants probably outweighs the unemployment benefits-monetarygains from work trade-off. Structural change which does not modifyattitudes may not lead to different behaviour. Even if there are changesin attitudes and behaviour in some parts of the economy if these arenot accompanied by similar changes elsewhere there may be but short-term gains which generate subsequent reactions as incomes policies aresupposed to do. While structural changes may lead to different attitudesand behaviour it should not be assumed that they will always do so orthat the new attitudes and behaviour will be those expected or soughtby their proponents.

In comes Policiès

Incomes policies may be criticized on theoretical, empirical or politicalgrounds. Theoretical opposition may be based on a priori commitmentto certain aspects of economic theory and the assumptions oftenadopted in theoretical analysis. Empirical criticism may be derived fromeconometric analysis, which incorporates some judgement as to whatwould have happened in the absence of the policy, or on simpler morepragmatic grounds that they seem to caus a lot of trouble and end in awage explosion. Political opposition from the right may reflect the viewthat not only is it economically harmful to try and interfere with theoperation of market forces but that the involvement of the state indetailed economic decision-taking on pay and prices is in itself undesir-able. Even if incomes policies were effective they would still be bad.Criticism from the left, particularly trade unions, is that it is undesirableto place constraints on free collective bargaining, particularly in amixed or capitalist economy. The defence of 'free' collective bargainingis seen by many trade unionists as a necessary bulwark for the mainten-ance of a democratic society. Some of them may also believe that anincomes policy attempting to obtain a re-distribution of income wouldadversely affect the interests of their members, although others, whomight hope to obtain relative advantages from a policy may still oppose'on principle'.

The evidence seems to suggest that incomes policies as applied in theUK have had a delaying effect on pay increases. Observers with thebenefit of hindsight may claim that this over-all neutrality of incomespolicies on the rate of pay increases is a small gain in relation to the

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problems and distortions involved. However, those watching thedevelopments at the time might well have been satisfied to obtain adelay. The time-scale of inflationary pressures are important. Also, ofcourse, each period of incomes policy needs to be judged in relation toits own policy content. Thus the later stages of the Heath policycontained the threshold provisions which meant that in the event of thethreshold level being triggered pay would rise faster than might haveoccurred without a policy. It is necessary to distinguish criticism of acategory of policy measures from criticism of the content of particularexamples of that policy measure unless one asserts that the particularcontents are an inevitable feature of the category.

It is also possible that incomes policies as we have seen them shouldnot be regarded as providing satisfactory evidence from which to judgetheir possible effectiveness. They have all been relatively short-termmeasures. It can be argued that for an incomes policy to succeed it isnecessary for it to be perceived as a long-term measure. If pay bargainersbelieve it is only a temporary interruption to 'normal' behaviour theresults will be no more than a shifting of the time-scale of inflationarypressures. If the objective is to change attitudes and behaviour by theimposition of new institutions so that the results of pay determinationbecome different, and enduringly different, it may be necessary tooperate an incomes policy for sufficient time for attitudes to changeand for collective bargaining behaviour to adapt to the new conditions.

Tax-based incomes policies differ from those traditionally adoptedin Britain. They seek to obtain different wage results by imposing'automatic' tax penalties. If pay settlements do not fall and the penaltiesare incurred unemployment could rise as a result of a decrease in effec-tive demand. There need be no correlation between the incidence ofabove-the-norm pay settlements and the rising unemployment of parti-cular groups, firms or industries. Their advocates claim that suchpolicies will obtain the desired results without the bureaucratic inter-vention in individual decisions thereby retaining the freedom of indivi-dual decision-takers to respond to economic forces according to theirown perceptions of their best interests. The tax penalties become partof the economic framework making up the economic and market forcesto which decision-takers respond. We believe that the effects on theresults of collective bargaining will be minor and that the administrativeinvolvement could be large. The public sector provides a large area ofinapplicability or blunted effectiveness. The tax penalty on employersis unlikely to be sufficiently heavy or felt quickly enough to lead tomuch lower wage settlements.

The FutureConcern with inflation and unemployment will dominate the economicscene. Governments will have to search for policy measures to contain

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inflationary pressures even though the perceived limits of tolerableinflation will vary. The relative merits of general economic measuresversus institutional and attitudinal ones will continue to be debated bypolicy-makers and economists. That this debate will not be resolved,and indeed may be insoluble, is probably an innate part of the economicproblem. We just do not know how far institutional measures aredependent on the prevailing economic environment for their success,and how far general economic measures require institutional changesbefore they can attain the desired economic objective without threaten-ing other economic and social objectives. Moreover, economic policieshave to be implemented within the perceived boundaries of politicalacceptability, which means acceptability to both the government of theday and its supporters, and the electorate. The effectiveness of measureswhich seek to shift the balance of power by industrial relations legisla-tion may be dependent on the state of the economy which has itselfalready shifted the balance of power. The willingness of employers toexercise such legal rights as are given to them may be influenced bythe state of product and labour markets, and similarly the willingness oftrade unions and their members to accept such constraints may be afunction of the state of the economy. The institutional measures maytherefore do no more than seek legislatively to underwrite the currentposition. The more important issue is whether such legal under-writingcan remain effective if the economic conditions change. The same sortof question arises with other developments, such as attempts to changethe nature of the arbitration process, the use of comparability, or theintroduction of a tax-based incomes policy. Measures which mightappear to work for a time because of the underlying economic con-ditions may be rejected when the balance of power shifts in response toeconomic conditions. Success may be ephemeral in that if the economygrows as a result of these policy measures, that growth itself may leadto the re-establishment of the old power relations and the return ofattitudes and behaviour which will lead to the re-emergence of the oldproblems and possibly the negation of the economic growth.

We believe that the changes in behaviour and attitudes recentlyobserved owe far more to the rising level of unemployment and the fearof job loss than to any contribution from structural changes or funda-mental shifts in attitudes. Moreover, we believe it is rising unemploy-ment and not merely the very high level of unemployment, which hashad this effect. A levelling off in the unemployment rate would not,therefore, be sufficient to maintain the counter-inflationary pressures.Constantly rising unemployment as a necessary condition for the con-tainment of inflationary pressures is something we regard as undesirable,indeed unacceptable. For this reason we believe that it is essential totry and find structural, institutional or attitudinal measures which willpermit an expansion of economic activity without recreating intoler-

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able inflationary pressures. While none of the options discussed in thisvolume necessarily provide firm grounds for concluding that suchmeasures are available and viable, we nevertheless believe that somechanges may offer sufficient hope as to justify further consideration.

Because we believe that social value judgements are so deeplyembedded into the British system of pay determination we do notregard proposals to eliminate them as realistic. Instead, we prefer toexplore the possibilities of incorporating them in an institutional frame-work which, while recognizing them, seeks to contain them. Not all theinstitutional arrangements and practices which seek to incorporateconcepts of fairness and equity into pay determination are economicallyacceptable. The aggregate economic demands on the economy exceedthe real supply. It is not simply a question of redistribution. Structuralchanges which move aggregate monetary demands closer to real supplywill moderate inflationary pressures.

The structural changes taking place in collective bargaining areactually making it more difficult to relate the aggregate demand andsupply positions. Proposals for some national forum to discuss theaggregates and relate them to individual bargaining decisions are onesolution. Our view is that this is desirable but, on its own, insufficient.The national forum will rely too much on voluntary commitment.Given the fragmented and competitive nature of collective bargainingin Britain it is necessary to have some pressures inducing change inbehaviour to ensure that the aggregation of the individual decisions ismore in line with the real supply possibilities.

For this reason we believe that comprehensive prices and incomespolicies have a role to play. We recognize that general opinion is againstthem. We believe that much of this criticism is misguided and that it isoften made against the criteria of some ideal economic system. This isnot the choice facing policy-makers. They have to choose betweenpossible realistic policy options. We have no doubt that the apparentgains and losses of comprehensive incomes policies look far morefavourable when compared with the results of the present package ofgovernment policy measures which include unemployment of well overthree million. The depressing feature of the present policy discussion isthe refusal of trade unions to recognize that there are serious problemsin reconciling counter-inflationary policies with high employment.Some structural or attitudinal changes are imperative if governments arenot to resort to general economic measures which attempt to restrictpay through increasing unemployment. It is simply not possible toignore the inflationary consequences of an expansion of economicactivity given our present structural features and attitudes and behaviour.

Some structural policies make only superficial changes. Others gofurther than this, but still leave the brunt of the burden to be carriedby general economic measures. It is because of this that we advocate

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an incomes policy combined with active manpower policies. The formerdeals with demand-side pressures in pay determination, and the latteraffects supply-side factors in the labour market, so that together theycontribute to the reconciliation of higher employment and less infla-tion. Other structural measures which exercise some influence on paydetermination by affecting the use of arbitration or by indirectmeasures, might reinforce the effects of incomes policy.

Whatever is tried there will be conflict between prevailing notions offairness and what is regarded as economically necessary. The question isnot whether notions of fairness can be totally disregarded, but ratherhow they can be changed or reconciled with economic requirements.For this sort of change time is needed. Attitudes and value judgementscannot be changed overnight. They are more likely to be changed ifthose whose perceived self-interests are to be adversely affected can bepersuaded that the new criteria and standards are generally acceptableand acceptable to those whose opinions the adversely affected groupsregard as legitimate or reasonable. To this end we would hope thattrade unions might be induced to participate in an incomes policy. Ifthey do not, there seems little prospect of them achieving their otherobjectives. Recourse to general economic measures, which any govern-ment will fall back on in the absence of other possible realistic options,will shift the balance of power against them so that they cannot obtaintheir other objectives. Similarly employers will find that the depressedeconomic environment offers no long-term suitable conditions for theirobjectives. At its lowest an incomes policy offers hope because all theother options are so much worse.

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