Wage-and-Price Controls

Wage Controls

Wage controls refer to a form of government intervention where a minimum or a maximum is imposed on wages. Imposing a minimum, or a floor, is aimed at securing a living wage for labor. Imposing a maximum, or a ceiling, on the other hand, is directed at curbing inflation. Wage controls are also considered as a social measure to prevent exploitation of labor. Wage controls are usually used in times of economic instability. Minimum wage, which was first introduced in the United States after the Great Depression, is an example of wage floors.

Some economists argue against wage floors. They contend that wage floors would create surpluses. Since wage floors cause wages to be higher than they would be under free market, employers would not have the incentive to hire as much labor. Thus, wage floors, while providing a living wage for those who have a job, would increase unemployment.

Price Controls

Price controls refer to a form of government intervention where a minimum or a maximum is imposed on the prices of some goods and services. Imposing a maximum, or a ceiling, is aimed at reducing inflation and keeping prices of these goods and services from increasing dramatically. Usually, price ceilings are used in times of economic instability resulting from wars or natural disasters. The prices of goods and services under a price ceiling would be less than their prices under free market. For example, during the 1970s the U.S. government used price controls to prevent the prices of gasoline from increasing; a price ceiling was imposed. Price controls were also imposed during World War II, the Vietnam War, and the Korean War.

Most economists do not favor the use of price controls, at least not for long periods of time. The argument is that the use of price ceilings produces shortages since the demand for the products or services would be much higher than the supply. Supply would not increase to meet the higher demand due to the imposed price ceiling. The price ceiling would make it not profitable for producers to increase supply. The shortages would thus be seen in the form of waiting lines and deteriorating quality. In addition, price ceilings may create black markets where pricecontrolled goods and service would be traded.

At present, the use of price controls in the pharmaceuticals industry to regulate the prices of prescription drugs is debated. On the one hand, imposing price ceilings on prescription drugs would make them more affordable to patients. On the other hand, price ceilings would have a negative impact on research and development in the pharmaceuticals industry, as investment capital would seek opportunities that yield higher returns.