IMF Working Papers

Economic Crisis in a Shortage Economy

Author/Editor:

Kent Osband

Publication Date:

April 1, 1991

Summary:

It is not unusual for reforming socialist economies to relax wage controls without hardening budget constraints on enterprises or freeing consumer goods prices. This policy can be dangerously destabilizing. While higher wages permit workers to purchase more of some goods, they also tend to exacerbate shortages and to breed waste and corruption. Beyond a certain level, economy-wide wage hikes will worsen worker welfare. This is true regardless of whether deficit goods are strictly rationed, are sold randomly at official prices to queuing workers, or are offered to workers by “insiders” only at black market prices. However, the form of allocation does influence output and worker welfare.

Series:

Working Paper No. 1991/038

Subject:

Corruption Crime Income Labor National accounts Price controls Prices Wages