What is Wage Push Inflation?
234 reads · Last updated: December 5, 2024
Wage push inflation is an overall rise in the cost of goods and services that results from a rise in wages. To maintain corporate profits after an increase in wages, employers must increase the prices they charge for the goods and services they provide. The overall increased cost of goods and services has a circular effect on the wage increase; eventually, as goods and services in the market overall increase, higher wages will be needed to compensate for the increased prices of consumer goods.
Definition
Wage-push inflation refers to the overall increase in the cost of goods and services resulting from rising wages. After wages increase, employers must raise the prices of the goods and services they offer to maintain profits. The overall cost increase of goods and services creates a cyclical effect on wage increases; eventually, as the overall prices of goods and services in the market rise, wages need to be increased to compensate for the rising prices of consumer goods.
Origin
The concept of wage-push inflation originated in mid-20th century economic studies, particularly during the post-war economic recovery period. With the strengthening of unions and tightening labor markets, wage increases became a significant driver of inflation. The oil crisis of the 1970s further exacerbated this phenomenon, leading to a rise in inflation globally.
Categories and Features
Wage-push inflation can be categorized into two types: one caused by tight labor markets leading to wage increases, and the other by strengthened union bargaining power leading to wage increases. The former typically occurs during economic booms when unemployment is low, and companies raise wages to attract and retain employees. The latter is more related to the collective bargaining power of unions, which negotiate higher wages and benefits for their members.
The main feature of wage-push inflation is its self-reinforcing cycle: wage increases lead to higher prices for goods and services, which in turn increase the cost of living, forcing workers to demand higher wages.
Case Studies
A typical case is the United States in the 1970s, when soaring oil prices led to increased living costs, prompting unions to demand higher wages to maintain living standards. This wage increase further fueled inflation, creating a wage-price spiral. Another example is Japan during the late 1980s economic bubble, where tight labor markets led to wage increases, which in turn drove inflation.
Common Issues
Investors often worry about the erosion of corporate profits and the negative impact on overall economic growth when considering wage-push inflation. A common misconception is attributing all inflation to wage increases, while ignoring other factors such as rising raw material prices and monetary policy impacts.
