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Wage-Price Spiral

What is 'Wage-Price Spiral'

The wage-price spiral is a macroeconomic theory used to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. The wage-price spiral suggests that rising wages increases disposable income, thus raising the demand for goods and causing prices to rise. Rising prices cause demand for higher wages, which leads to higher production costs and further upward pressure on prices, creating a conceptual spiral.

Explaining 'Wage-Price Spiral'

Wage-price spiral is an economic term that describes how prices increase when wages increase. It's a phenomenon that occasionally occurs when the general prices for goods and services increase, causing workers to demand a wage hike. The wage increase effectively increases general business expenses that are passed on to the consumer in the form of higher prices. It's essentially a loop or cycle that perpetuates itself by consistent prices increases.

How a Wage-Price Spiral Begins

A wage-price spiral is a simple matter of the effect of supply and demand on aggregate prices. People who make income above their cost of living usually decide on an allocation mix between savings and consumer spending. As wages increase, so too does a consumer's propensity to both save and consume.

Stopping a Wage-Price Spiral

Governments and economies like to have stable inflation — or price increases. A wage-price spiral often makes inflation increase higher than is ideal. Governments have the option of stopping this inflationary environment through the actions of the Federal Reserve or central bank. A country's central bank can use monetary policy, by way of the interest rate, reserve requirements or open market operations, to curb the wage-price spiral.


Further Reading


Keynesian dynamics and the wage–price spiral: a baseline disequilibrium model
www.sciencedirect.com [PDF]
… our approach, standard Keynesian feedback mechanisms are coupled with a wage–price spiral having a … forward looking solution (which incorporates the whole future of the economy) by way … accumulation and thus from the government budget equation on real economic activity …

Inflationary inertia in a wage-price spiral modelInflationary inertia in a wage-price spiral model
www.sciencedirect.com [PDF]
… our approach, standard Keynesian feedback mechanisms are coupled with a wage–price spiral having a … forward looking solution (which incorporates the whole future of the economy) by way … accumulation and thus from the government budget equation on real economic activity …

Keynesian Dynamics and the Wage-Price Spiral: Analyzing and Estimating a Baseline Disequilibrium ModelKeynesian Dynamics and the Wage-Price Spiral: Analyzing and Estimating a Baseline Disequilibrium Model
ideas.repec.org [PDF]
… our approach, standard Keynesian feedback mechanisms are coupled with a wage–price spiral having a … forward looking solution (which incorporates the whole future of the economy) by way … accumulation and thus from the government budget equation on real economic activity …

Slowing the wage-price spiral: the macroeconomic viewSlowing the wage-price spiral: the macroeconomic view
www.jstor.org [PDF]
… our approach, standard Keynesian feedback mechanisms are coupled with a wage–price spiral having a … forward looking solution (which incorporates the whole future of the economy) by way … accumulation and thus from the government budget equation on real economic activity …

The wage–price spiral: International evidence and implicationsThe wage–price spiral: International evidence and implications
www.sciencedirect.com [PDF]
… our approach, standard Keynesian feedback mechanisms are coupled with a wage–price spiral having a … forward looking solution (which incorporates the whole future of the economy) by way … accumulation and thus from the government budget equation on real economic activity …

Inflation expectations of households: do they influence wage-price dynamics in India?Inflation expectations of households: do they influence wage-price dynamics in India?
www.tandfonline.com [PDF]
… our approach, standard Keynesian feedback mechanisms are coupled with a wage–price spiral having a … forward looking solution (which incorporates the whole future of the economy) by way … accumulation and thus from the government budget equation on real economic activity …

Keynesian dynamics and the wage–price spiral: identifying downward rigiditiesKeynesian dynamics and the wage–price spiral: identifying downward rigidities
link.springer.com [PDF]
… our approach, standard Keynesian feedback mechanisms are coupled with a wage–price spiral having a … forward looking solution (which incorporates the whole future of the economy) by way … accumulation and thus from the government budget equation on real economic activity …

Wage–price dynamics and income distribution in a semi-structural Keynes–Goodwin modelWage–price dynamics and income distribution in a semi-structural Keynes–Goodwin model
www.sciencedirect.com [PDF]
… our approach, standard Keynesian feedback mechanisms are coupled with a wage–price spiral having a … forward looking solution (which incorporates the whole future of the economy) by way … accumulation and thus from the government budget equation on real economic activity …

Consumption taxes and compensatory financeConsumption taxes and compensatory finance
www.jstor.org [PDF]
… our approach, standard Keynesian feedback mechanisms are coupled with a wage–price spiral having a … forward looking solution (which incorporates the whole future of the economy) by way … accumulation and thus from the government budget equation on real economic activity …


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