Is a Wage-Price Spiral Emerging?

Abstract

Since early 2021, accelerating price and wage increases have been a key feature of the economy. As the economy reopened from the pandemic, consumer demand soared, supply chains were slow to adapt, and prices rose at their fastest pace in nearly 40 years. At the same time, labor shortages increased wages-creating concern that a self-reinforcing "wage-price spiral" may be emerging. The wage-price spiral theory asserts that when prices rise, workers demand higher wages; as wages increase, firms pass on the higher labor costs to consumers in the form of higher prices, and this process repeats in a self-sustaining cycle. Such a wage-price spiral was last observed in the persistently high inflation period of the 1970s. Does recent inflation portend reemergence of wage-price spirals?

Author:

Laurel Hammond and Michel Becnel