Achieving wage and price stability at full employment has long been recognized as a central paradox of business-cycle and growth policies. Historically, the starting point for any successful wage policy has been the early inclusion of organized labor. As we consider managing and sustaining a tight labor market for the first time in decades, it’s important to understand both the challenge of creating successful wage policies without an existing strong labor movement, as well as the conditions necessary for successful wage stabilization beyond the labor market: stability of profits and prices at high employment.

The thrust of inflation control policies across the North Atlantic has long rested on national attempts to stabilize wages. Because labor is more ubiquitous as a cost in the economy—labor costs comprise some 62 percent of net output of nonfinancial corporate business in the United States—it has become the cornerstone of any macroeconomic stabilization policy, despite the fact that prices may rise for a variety of reasons. This is evident in the inflation control policy the United States is operating today, the primary element of which is central bank discretion in open market operations to reduce real investment and labor demand. Federal Reserve Chairman Jerome Powell has made this strategy of targeting wages explicit. In March, he said that wage increases “are running at levels that are well above what would be consistent with 2 percent inflation, our goal, over time.” In July, Powell explained that “We actually think we need a period of growth below potential in order to create some slack.” In December, he clarified that the growth in service prices is “very fundamentally about the labor market and wages” and that the Federal Open Market Committee (FOMC) was concerned that “you don’t really see much progress in terms of average hourly earnings coming down.” Mark Zandi, chief economist for the credit rating and research firm Moody’s, which is widely quoted by American national media, exemplifies this apparent consensus: “We need the slowdown in job growth and job creation pretty quickly to take the steam out of wage growth and quell inflationary pressure.” The Federal Reserve’s quarterly forecasts show the Fed board members progressively raising their median unemployment rate assumptions for 2023—from 3.5 percent and 3.9 percent in March and June to 4.4 percent and 4.6. percent in September and December, with some members aiming as high as 5.3 percent.

But engineered unemployment was not always accepted as a device for wage policy. Indeed, in the years after World War II, resorting to a deliberate recession in employment through raised interest rates was considered a socially inequitable and economically wasteful technique for economic stabilization. Because such a policy entailed a violation of congressional mandates “to promote maximum employment” and “to promote full employment and production,” policymakers confronting inflation and bounded by minimum employment targets learned to channel business-cycle policy during the so-called “Golden Age of Capitalism” into politically sophisticated “national wage policies” and eventually “incomes policies” that would shape the growth of labor and nonlabor incomes equitably within the bounds of real national product.

This brief considers the example of historical United States wage policies as the basis for considering alternatives to reducing the growth of employment and output in the pursuit of economic stabilization. If the US is to sustain tight employment for the prolonged periods necessary to accomplish national goals—including a conversion of our energy infrastructure, the expansion of affordable housing, the provision of affordable health care and expanded public education facilities, and the reduction of inequality in incomes and wealth—then a policy for stabilizing and guiding the growth of incomes in the course of an economic expansion will be an indispensable element of any national program.

This brief compares two periods of public spending-led growth during the 20th century when labor markets tightened and inflation threatened the public: World War II and the Vietnam War. The economic mobilizations of both periods raised production and employment to the available limits of capacity in critical sectors of the economy, creating an impetus for expanding capacity accompanied by situations in which the maintenance of stability required the active participation of both labor and management. Because the mobilizations differed markedly in the nature and timing of their public-private coordination, a comparison of the two periods offers an illustrative lesson on possible strategies for managing wages and prices during a period of full employment.

Both economic historians and historical actors have devoted considerable attention to the possibilities collective bargaining opened to pushing up costs in particular industries above various productivity measures. This focus, however, has diverted attention from the stability provided by union-organized labor markets; collective bargaining has been the only successful institutional device for wage policies that did not rely on unemployment. While real wage protection in the face of rising prices has been ubiquitously misunderstood as a contributor to inflation, in actual fact, every inflationary spiral but one in the US since World War II has seen labor’s share of national income fall in spite of rising wage rates. During the 20th century, rising wages only sustained prolonged wage-price spirals defensively. This is evident in the current inflation, which with rising wages saw an explosion in profits and a shift in the share of national income accruing to property during 2022.

This persistent defensive behavior shows that one key historical condition for success of any policy for wages intended to stabilize labor costs without sacrificing tight labor markets has been stability in the cost of living. Wages cannot be kept stable when the cost of living is rising. In the history of inflation-control policies, this has required skillful management of supply, targeted intervention into the price-making decisions of concentrated industries with market power, statutory controls over prices, materials allocations, tax increases on individuals and corporations, and excess-profits taxes to prevent the accumulation of opportunistic fortunes in times of emergency. Successfully deploying these tools has required the creation of institutions that allow labor, management, and the government to work and plan together to adjust wage structures, both to elicit greater labor supply and to limit the effects of those adjustments on prices. If high employment is to be reconciled with stability, those interested in managing and sustaining a tight labor market need to prioritize strengthening the labor movement in order to build institutions that foster tripartite policy setting—for example, by empowering sectoral wage boards and liberalizing labor organizing rights to grow unions’ power in sectoral bargaining. As the history of wage policies shows, the condition for their success has been the active participation and collaboration of those whose incomes the public is seeking to control.