Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Wage-Price Spiral

What it is:

Also called cost-push inflation, a wage-price spiral is an economic term that describes how prices increase when wages increase.

How it works (Example):

The general idea behind a wage-price spiral is a simple one of supply and demand. People can do only two things with money: save it or spend it. If they have more money on hand, they likely will spend at least some of that money. Accordingly, putting more money in people's hands creates more demand for goods and services. Thus, something like a wage increase across the board (think, for example, of a rise in the minimum wage) creates more demand for goods and services and drives up the prices of those goods and services.

In turn, goods and services eventually begin to look expensive to people, so they lobby for higher wages. The higher wages put more money in their hands, which in turn drives the prices of goods and services even higher.

Why it Matters:

The wage-price spiral is a central part of many economic controversies and is a big part of Keynesian economic theory. Often, arguments against raising wages or for limiting the wage power of unions incorporate these ideas. Note too that the increased demand for goods and services can trickle across borders, driving up prices in countries that do not have increasing wages.