There are a number of ways that the government can use to control inflation. Inflation cannot be completely erased by these countries but the best thing to do is to control or minimize it since a zero percent inflation rate has never been achieved since history started. (Direct wage controls) Income policies (or direct wage controls) normally set limits on the rate of growth of wages. Therefore having the capability of reducing cost inflation. This policy should therefore be applied by the government to ensure that the wages are regulated, as this will effectively reduce inflation.
The government needs to influence wage growth by restricting pay rises in the public sector by setting or fixing cash limits for the pay of public sector employees. It is believed that any transaction and salaries of government employees are managed at a central place. The government therefore has full authority to regulate and limit the pay of public sector employees. If the salaries or pay are not controlled then it means that the demand for goods will be high. Many people will have a lot of money to spend. As stated earlier on high demand for goods and services is the major factor leading to inflation.
When the demand is low then it means that the population of the country will purchase fewer goods. In the private sector the government should try to request and hold discussions with the various employers of the firms to address the issue. Proper communication should also be made to the employees from the private sector on the risks brought by inflation. Various firms therefore should try to exercise moderation of wages. Even though this might be very difficult but negotiations can be made to address this issue.
Wage inflation normally falls when the economy is heading into recession and normally unemployment starts to rise. Growth of unemployment normally causes job insecurity whereby some workers may end up trading of lower pay claims for some degree of employment protection. In general direct wage control can only be effective when combined with policies designed to reduce the underlying causes of inflation during the wage and price control regime. Labor market reforms This is an example of a long-term policy that can be practiced to control inflation.
The labor market reforms may include weakening of trade union powers. In most cases trade union are formed to bargain for high pay rises for the workers in various organizations. If the powers of the unions are lowered then it means that their influence will not be felt in the environment. The various heads of organizations are also encouraged to practice new business approaches when recruiting employees in their firms. Such approaches like encouraging the growth of part time and temporary working along with the expansion of flexible working hours will lead to increased flexibility in the labor market.
Firms can therefore control their labor costs by practicing such methods and in the long run it will lead to a decline and reduction of cost-push inflationary pressure. Supply side reforms The supply side reforms emphasizes or suggests that if high out put can be produced at a lower cost per unit, then the economy can achieve sustained economic growth without inflation (George, 1990). An increase in aggregate supply is often a key long-term objective of government economic policy. The supply side economists advocate fighting inflation by fixing the exchange rate between the currency and some reference currency such as gold.
The government should apply the policy on the supply reform in order to increase the productive capacity of the economy in the log run. The reform will also help in raising the trend of growth and capital productivity. Even though quite a good number of supply side reform policies have been applied by the US government, more effort should be put in place to ensure that the various people of the economy effectively implement the policy. Increasing inn productivity will help the government to control unit labor costs, which is the central cause of cost-push inflation.