Economic Report of the President

Together with a "jawboning" campaign aimed at producing widespreadcompliance with the standard by lowering expectations of inflation,such a TIP could lower the rate of inflation. Without jawboning,the cost of inducing compliance among workers with anticipatedpay raises far above the standard would be prohibitive. Even workerswho expected pay raises near the standard might be reluctant to sacrificepart of a pay raise that might be built into future wages in exchangefor a small tax credit that only lasted for 1 or 2 years. Themajor appeal of wage moderation is that if everyone cooperates byaccepting a smaller wage increase, the lower nominal wage gains willbe matched by lower price increases. Real wages will not fall, but inflationwill. A TIP alone cannot provide sufficient economic incentivesto make a low wage increase more attractive than a large one.However, with public appeals to moderation and clear evidence offiscal and monetary restraint, a TIP can contribute to slowing the inflationaryspiral.Costs and Effects of a Reward Pay TIPThe preceding discussion concluded that the most desirable typeof pay TIP would be a temporary hurdle type that provided a rewardfor keeping pay raises below the standard. To examine the possibleusefulness of such a TIP in dampening inflation, the Council of EconomicAdvisers attempted to estimate the costs and effects of areward TIP open to all employees, public and private. The rewardwas assumed to be a fixed percentage of wage income, up to themaximum social security wage base of $29,700. It was also assumedto be taxable and to be refundable to workers whose income tax liabilitywas less than the reward. The average rate of wage increase inthe absence of a TIP was assumed to be 9.7 percent.The probability that a group of workers would accept a wage increaseat or below the standard was assumed to depend upon thesize of the reward and the relationship of the group's potential wageincrease to the standard. The smaller the potential wage increase relativeto the standard and the greater the reward, the higher the probabilityof compliance. The results of this estimating procedure obviouslydepend very heavily on the specific relationships used to calculatethe probabilities of compliance for various groups of workers.Since there is no historical experience on which to base these relationships,the estimates presented below are simply examples basedupon a considered judgment of the issues.The costs, effects, and compliance rates that would result from variouscombinations of standards and rewards were estimated underthe assumptions mentioned above. Illustrative combinations of standardsand rewards at two levels of cost to the Federal budget are presentedin Table 7. These estimates suggest three things. First, for a64