## Wage Controls and Employment in a Socialist Economy

_IMF Working Papers, November 1, 1991_

## Source details

**Canonical URL:** [Wage Controls and Employment in a Socialist Economy](https://www.imf.org/en/publications/wp/issues/2016/12/30/wage-controls-and-employment-in-a-socialist-economy-986)

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## Bibliographic details
- Authors: Timothy D. Lane
- Published: November 1, 1991
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451853384.001

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### Summary
- Wage controls have been an important element of several of the stabilization programs recently introduced in reforming socialist economies.
- In some cases, the controls have been placed on each state enterprise’s total wage bill, rather than on the wage rate paid.
- Such an incomes policy would be expected to have a dampening effect on employment, but this has not generally occurred; on the contrary, declines in employment in state enterprises have typically been much less than the associated declines in output.
- This paper presents a simple model of a labor-managed enterprise which offers an explanation of the behavior of wages and employment under such an incomes policy.

### Key findings and observations
- Wage-bill controls (controls on each state enterprise’s total wage bill) differ from wage-rate controls and have distinct labor-market effects.
- Empirical pattern: declines in employment in state enterprises have typically been much less than the associated declines in output under incomes policies.
- A model of a labor-managed enterprise can explain observed behavior of wages and employment when wage-bill constraints are imposed.

### Analytical approach
- The paper develops a simple model of a labor-managed enterprise to analyze:
  - how wage-bill constraints affect the employment decision of labor-managed firms;
  - the interaction between output declines and employment responses under incomes policies.

### Policy implications
- Incomes policies that constrain total wage bills do not necessarily translate into proportional employment reductions; employment declines can be smaller than output declines.
- Understanding firm ownership/management structure (labor-managed vs. socialized vs. privatized) is critical for predicting labor-market outcomes under wage controls.

### Subjects and keywords
- Subject: Employment, Expenditure, Income, Labor, Labor markets, National accounts, Unemployment benefits, Wages
- Keywords: bill constraint, Central and Eastern Europe, Employment, employment decision, Income, incomes policy, Labor markets, labor-managed firm, privatized firm, profit contour, socialized firm, Unemployment benefits, wage control, Wages, WP

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/wage-controls-and-employment-in-a-socialist-economy-986_