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How can wage policies help control inflation?

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The Code of Hammurabi diorite stela, with carved figures at the top showing Hammurabi seated with cuneiform inscriptions below. — Labour law Diorite stela inscribed with the Code of Hammurabi, 18th century bce.

In the context of labour law and economics, wage policies—often implemented as incomes policies—aim to control inflation by restraining the growth of wages and prices.12

These policies are designed to address "cost-push" inflation, where rising production costs lead to higher consumer prices. When wages increase faster than labour productivity, businesses often raise prices to protect profit margins, which in turn prompts workers to demand further wage increases to maintain their purchasing power. This cycle is known as a wage-price spiral.3456

To break this cycle, governments may use several approaches:
* Norm Setting: Establishing guidelines that link wage increases to expected gains in productivity, aiming to keep the general price level stable.4
* Collective Bargaining Influence: Encouraging or requiring unions and employers to moderate wage demands and price increases through voluntary cooperation or, in some cases, statutory control.145
* Direct Intervention: In some jurisdictions, governments may implement wage freezes or empower agencies to investigate and regulate wage settlements.15

While these policies seek to promote economic stability, they are often controversial and can be difficult to sustain, as they may be perceived as unfairly limiting workers' income compared to other forms of profit.125