Canadian wage and price controls : evaluating the impact of the Anti-Inflation Board upon private and public sector wage settlements
Date
1984
Authors
Anderton, Robert Martin
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Abstract
An econometric wage equation is developed and is used to calculate the effect of the AIB wage guidelines upon negotiated wage settlements in the public and private sectors. The general specification of the wage equation is based upon two main explanatory variables; the expected rate of inflation and the excess demand for labour.
This study experiments with five different methods of calculating the expected rate of inflation. The results indicate that the best method of estimating price expectations is by entering the past rates of change of the CPI directly into the wage equation, thus capturing the price expectations information that is contained in each observation of the wage data. Therefore, this price expectations proxy is used throughout the analysis. Two of the unsuccessful experimental methods of calculating price expectations are based upon past rates of change of the money supply. The results show that past growth rates of the money supply are not significant variables in the price expectations formation mechanism of wage negotiators. Therefore, it is concluded that the strategy of Monetary Gradualism was not responsible for reducing wage inflation, by decreasing price expectations, during the period of the AIB guidelines.
A distributed lag of the unemployment rate is used as one component of the excess demand for labour proxy variable. A proxy variable designed to represent movements in the natural rate of unemployment (Un) is included in the wage equations in order to adjust the above unemployment rate so that the excess demand for labour variable approximates Ut - Un. Three different possible proxy variables for Un are evaluated. Of these three, the proxy variable designed to indicate changes in the generosity of the VIC system 1s the best variable to represent changes in Un. Estimated regressions reveal that the linear version of the excess demand variable is the most appropriate specification for the wage equations as it provides more explanatory power concerning wage movements than the non linear version.
Three intercept shift dummy variables are included in the wage equations in order to reveal the impact of the AIB upon the rate of wage change. The first AIB dummy variable registers the effect of the AIB upon wage inflation during the actual guidelines period. Almost all of the empirical results for this dummy variable indicate that, during the period of the AIB guidelines, the rate of wage increase was substant i ally lower than that which would have occurred in the absence of the AIB. Furthermore, the results consistently show that the AIB reduced wage inflation in the private sector to a greater extent than in the public sector.
The other two AIB dummy variables are designed to indicate whether the AIB affected wage inflation outside of the actual guidelines period by inducing an 'anticipation effect' and/or a wage 'explosion'. All of the wage equations display dummy variables which agree that a wage 'explosion' was not present in the immediate post-AIB period. Similarly, the empirical results reveal that an 'anticipation effect' did not occur in the immediate pre-AIB period in the private sector. However, the 'anticipation effect' dummy variable is both positive and statistically significant in the public sector. Unfortunately, it is unclear as to whether this dummy variable actually represents an 'anticipation effect' as it is possible that other reasons are responsible for the statistical significance of this variable.