With services and prices rising more than ever before — or at least in the last 40 years, requesting a wage increase seems reasonable. However, there have been arguments against this as they fear the wage increase will fuel inflation. This is what the “wage-price” spiral phenomenon explains.
This phenomenon suggests that high consumer prices prompt high nominal wage demand. When corporations give in to this demand, they increase production output prices to protect their profits. As prices rise parallel to the employees’ salaries, their purchasing power hardly changes. They will make another request, unconsciously continuing the cycle. The real wage hardly changes because of the continuous loop.
This may explain why wages don’t seem to keep up with inflation. Other than this phenomenon, firms are also concerned about profit margins and whether inflation stays. If inflation continues to fall, companies possibly cannot roll the salary increases back.
However, this “wage-price spiral” concern should no longer be in the picture. The current economy may have been experiencing the highest inflation ever since the 1980s, but it remains unique.
This year, American employees have received an average of 4% increase in salary. They are technically earning more dollars than when the pandemic hadn’t started yet. Still, this does not match the inflation. However, this debunks the “wage-spiral” myth, which claims to worsen inflation.
Also, Mary Daly, president of the Federal Reserve Bank of San Francisco, claimed that the “wage-price” spiral is indeed a myth, and she does not see this vicious cycle happening soon. Even FED Chair Powell recognized that the increase in nominal wage has little to do with the high consumer prices and inflation.
The more accurate phenomenon maybe is that the nominal wages will likely increase, given the companies debunk “wage-spiral,” as the inflation continues to fall. The recent CPI this November compared to October supports this, along with other studies.
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