Prices and Wages in Transition Economies (Essays in Public Policy #29)

Description

Most prices have been decontrolled in Eastern Europe. Exceptions remain mostly for energy and basic foodstuffs. By contrast, wages are severely constrained. The asymmetry reflects problems with managerial incentives as well as fiscal considerations that will be alleviated when managerial compensation is tied to profitability and when an explicit tax system is instituted. The price controls that do exist lead to hording and distortions. In the former Soviet Union, these distortions are pervasive. An analysis that compares Soviet prices with U.S. prices shows that they line up reasonably well on average but that there are some major discrepancies. Still, the conclusion is that shortages occurred primarily because the wage/price ratio is out of line, creating a surplus of money at state-set prices. If relative price distortions are important, the distortions are generated by the prices of raw materials, energy, and intermediate goods. Further, even correct relative prices do not provide appropriate signals in a command economy.