In macroeconomics, a wage-price spiral (also called a wage/price spiral or price/wage spiral) is a proposed explanation for
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
, in which wage increases cause price increases which in turn cause wage increases, in a
positive feedback loop
Positive feedback (exacerbating feedback, self-reinforcing feedback) is a process that occurs in a feedback loop which exacerbates the effects of a small disturbance. That is, the effects of a perturbation on a system include an increase in the ...
.
Greg Mankiw
Nicholas Gregory Mankiw (; born February 3, 1958) is an American macroeconomist who is currently the Robert M. Beren Professor of Economics at Harvard University. Mankiw is best known in academia for his work on New Keynesian economics.
Mankiw ...
writes, "At some point, this spiral of ever-rising wages and prices will slow... In the long run, the economy returns to
he pointwhere the aggregate-demand curve crosses the long-run aggregate-supply curve."
History
An early use of the concept was in 1868. The term "wage-price spiral" appeared in a 1937 ''New York Times'' article about a steel-workers' strike. In the 1970s, US President Richard Nixon attempted to break what he saw as a "spiral" of prices and costs, by imposing a price freeze, with little effect.
Some sources distinguish between wage-price spirals and price-wage spirals.
According to Daniel J.B. Mitchell and Christopher L. Erickson, the concept fell out of favor with the decline of unions and collective bargaining. They write, "With the rapid pace of union membership decline in the early 1980s, followed by erosion relative to the overall workforce thereafter, it became progressively difficult to tie inflation to unions, and thus to worker demands."
Olivier J. Blanchard argues that the concept fell out of favor with the rise of
rational expectations
In economics, "rational expectations" are model-consistent expectations, in that agents inside the model are assumed to "know the model" and on average take the model's predictions as valid. Rational expectations ensure internal consistency i ...
theory. Blanchard attempts to rehabilitate the concept.
Criticism
The ''
Socialist Worker
''Socialist Worker'' is the name of several far-left newspapers currently or formerly associated with the International Socialist Tendency (IST). It is a weekly newspaper published by the Socialist Workers Party (SWP) in the United Kingdom since ...
'' argues that it is a myth used to prevent wage increases.
''
Tribune
Tribune () was the title of various elected officials in ancient Rome. The two most important were the tribunes of the plebs and the military tribunes. For most of Roman history, a college of ten tribunes of the plebs acted as a check on th ...
'' magazine also sees the concept as rhetoric intended to hold down worker wages.
Milton Friedman
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
criticised the concept of wage-price spirals, arguing "It's the external manifestation of inflation, but not its source... the inflation arises from one and only one reason: an increase in a quantity of money."
Wage-price spirals will break naturally if the quantity of money is not increased, albeit in the meanwhile "there will for
a time be a continuation of inflation" as well as "some measure of recession and unemployment".
See also
*
Cost-push inflation
*
Demand-pull inflation
Demand-pull inflation is asserted to arise when aggregate demand in an economy is more than aggregate supply. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips c ...
*
Built-in inflation
Built-in inflation is a type of inflation that results from past events and persists in the present.
Built-in inflation is one of three major determinants of the current inflation rate. In Robert J. Gordon's triangle model of inflation, the curr ...
*
Triangle model
A triangle is a polygon with three edges and three vertices. It is one of the basic shapes in geometry. A triangle with vertices ''A'', ''B'', and ''C'' is denoted \triangle ABC.
In Euclidean geometry, any three points, when non-collinear ...
References
{{DEFAULTSORT:Price wage spiral
Inflation