Economic Report of the President

given standard, as the reward and the cost rise, so does the reductionof wage inflation. Second, there is some tradeoff between standardand reward. That is, a program with a high standard and a lowreward may cost the same as a program with a lower standard andhigher reward. Third, for a given budgetary cost, a low-standard, highrewardcombination tends to be more effective in reducing wageinflation than a high-standard, low-reward combination. The selectionof that combination may create a problem of credibility. A TIP that isrelatively effective in restraining pay increases for a given cost willtend to have lower compliance rates than a program with a higherstandard and lower reward but which has less of the desired effect oncompensation. This happens because higher standards put morepeople in compliance who do not have to modify their wage behavior.TABLE 7.—Estimated effects and compliance rates of various pay TIPsStandard — Reward(percent)$12 billion budgetary cost: 27 — 2Y27y 2 _ 2V*8 - 2 .$16 billion budgetary cost: 27 - 37y 2 - 2%.8 - 2V 2 .Compliance rate(percent)*50 255 961.854.659.865.3Effect onwage inflation(percentagepoints)-0 9387-.79-1.09-1.01-.911 Percent of workers in establishments that have an average pay raise less than or equal to standard.2 Net tax expenditure less reduction in Federal compensation. Federal Government pay increase assumed to comply withstandard—reduced from assumed economy-wide wage increase in absence of pay TIP.Source: Council of Economic Advisers.A TIP should be judged not only on its initial impact, but on itsfull effect over a 2- or 3-year period. A TIP continued for 2 yearswith a reduced pay standard in the second year could make a significantcontribution to lowering inflation.PRICE TIPSExperience with incomes policies here and abroad, including thepay and price standards, suggests that a pay TIP is easier to administerand likely to cause fewer distortions than a price TIP. Nevertheless,a price TIP may be a necessary complement to a pay TIP becauserestraints on pay alone, even with a reward TIP, might appearinequitable. Furthermore, a price TIP could speed up the effect of apay TIP by shortening the lag between the lowering of pay increasesand their effect on price increases.It would be unrealistic to set a single price standard for all firms.Productivity growth among industries varies substantially, as dochanges in the prices of raw materials and other costs of production.65