Price/wage spiral

As a wage -price spiral is called a Aufschaukelungseffekt between wage increases on the one hand and price increases on the other side due to permanent adaptive responses of households and firms to an inflationary development. It arises in the distribution struggle between the social partners (trade unions and employers ). If the cost of the company can not be offset by cost reductions ( = higher productivity) and rise, companies must pass on the increased cost of goods prices. If prices feed through to the domestic market and the trade unions to compensate demand a wage increase, this means a further cost increase for the company, which are then passed on to the prices of goods. These price increases as a reaction to previous cost increases are also called second-round effects.

The effect of a wage -price spiral is not or only partially occurs under the following conditions:

• In markets with strong competition ( European or global market for the products). Here, the contractor cost increases can not pass on the price because of the price war.

• If rising costs for contractor may be offset by cost reductions due to increasing productivity.

• In times of a weak economy. Here it is possible to trade unions rarely enforce wage increases.

• In times of low inflationary development

Term

As a wage -price spiral a mutually propelling wage and price inflation is referred to in economic theory. Basic idea is that workers, represented by the trade unions, at least a constant real wage () aspire. On the other hand, companies want to generate a constant profit margin (). This results in rising wages to rising prices, which in turn pulls the demand for wage increases by itself.

Key factors influencing this relationship, which will be explained in detail below, are the price expectations (Pe ), expected inflation ( e) and the negotiating positions of. Wage setting at the parties, which depend largely on the unemployment rate ( u)

The point of view of workers

Starting point for the call for higher nominal wages is the wage-setting equation:

W = ErrPc (u, z).

The amount of the nominal wage W on the one hand depends on the expected price Pe and on the other hand by the function F (u, z), where F (u, z) reflects the influence of the unemployment rate u and the remaining factors z to W. There is a negative correlation between the level of the nominal wage W and the unemployment rate u. This is due to the bargaining power of workers and unions. With low unemployment, it is difficult for companies to find the " right " workers, they have to pay higher wages ( uW ). With a high unemployment rate, the bargaining position of workers is bad, its influence on the determination of wages decreases. The collective variable z comprises the remaining factors that affect the wage setting, such as the level of unemployment benefits or minimum wages. You positively affects the development of the nominal wage from ( zW ) and is usually considered to be constant. The expected price level (Pe ) is determined by the expected inflation ( e ), for which usually the actual inflation rate of the previous year is used ( et = t -1).

In summary it can be said that the level of nominal wages of the expected prices and thus the expected inflation and the assertiveness of participants to the wage setting depends significantly.

The business perspective

The prices of the company are determined according to the price -setting equation:

P = (1 ) W.

It can be seen that the rates of mark-up and the amount of the nominal wage W depend. To be maintained at a constant level, the price must rise with rising wages.

Associated with the Phillips curve

The British economist Alban W. Phillips discovered in 1958 a connection between unemployment and inflation. He compared these values ​​(for UK ) for each year since 1861 and observed a negative correlation between the two. With high unemployment, inflation was low and vice versa. In a repetition of this study in the U.S. with the data from 1900 to 1960, the same tendency became apparent: Low unemployment has been accompanied by high inflation, high unemployment, low inflation. The intersection of the curve with the horizontal axis indicates the so-called " natural rate of unemployment " again ( NAIRU = Nonaccelerating inflation rate of unemployment ), an inflation- neutral unemployment rate. If the level of unemployment among this rate, which improves the bargaining position of workers, the rate of inflation increases, because higher nominal wages can be enforced, which ( as explained above) with a constant mark-up a price increase moving to itself.

Critical review

Other influencing factors

It must be asked whether the level of nominal wages and prices depends solely on the price and expected inflation and the unemployment rate. In markets with strong competition can be a price increase for the company is very difficult to enforce if they want to maintain their competitiveness. Rising wages play only a minor role and have no immediate rise in prices. A wage increase can be ( at least partially ) offset through an increase in productivity of workers, so that the effect is attenuated on prices. Wages are usually negotiated depends on the industry, so that comprehensive wage and consequent price increases are unlikely. The introduction of a minimum wage for all workers, however, would almost certainly cause prices to increase by itself.

Historical example

A real example of the wage-price spiral, the Scala was mobile in Italy. Here the wages the ( rising ) prices were after the second world war quarterly adjusted automatically, which increased inflation caused that almost 22 % was in 1980. After a long dispute, the law was abolished in 1993. However, a mono-causal reasons for the massive price increases this year only by the ever-increasing wages is not permitted. On inflation, other factors also have an influence.

Swell

• Olivier Blanchard, Gerhard Illing: Macroeconomics. 3rd updated edition. Pearson Education, Inc., Munich, etc. 2004, ISBN 3-8273-7051-5 (Wi - Economics ), ( Nachdruck. ibid. 2005).
• Paul A. Samuelson, William D. Nordhaus: Economics. Fundamentals of macro - and microeconomics. Volume 1 fundamentally revised German edition 8. Bund- Verlag, Cologne, 1987, ISBN 3-7663-0985-4.
• Phillips curve agenda. (PDF, 305 KB) acc. 29. June 2011.

Documents

• Inflation