A wage-price spiral is a macroeconomic theory that describes a cycle where rising wages cause prices to increase, and those higher prices then cause wages to increase even more. This creates a positive feedback loop that can amplify the effects of inflation.
Here's how a wage-price spiral works:
- Workers demand higher wages: Workers want their wages to keep up with the rising cost of living.
- Businesses raise prices: The higher wages increase the cost of doing business, so businesses raise prices to compensate.
- Consumers demand more: With higher wages, consumers can buy more goods and services, which increases demand and causes prices to rise even more.
However, some say that wage-price spirals are more theoretical than practical. For example, the 1970s, which is often used as an example of a wage-price spiral, may have been more affected by oil price shocks than wage gains.
