Wage-price spiral

A wage-price spiral is a build-up effect between wage increases on the one hand and price increases on the other hand due to constant adjustment reactions by households and companies to inflationary developments. It arises from the distribution struggle between the collective bargaining partners (trade unions and employers). If the costs for the company rise and cannot be absorbed by cost reductions (= higher productivity), the companies have to pass the increased costs on to the price of goods. If prices hit the domestic market and the unions demand a wage increase to compensate, this means a further increase in costs for companies, which in turn are passed on to the prices of goods. These price increases as a reaction to previous cost increases are also known as the second-round effect .

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

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

• When increasing costs for entrepreneurs can be offset by reducing costs due to increasing productivity .

• In times of a weak economy . Here, the trade unions rarely succeed in pushing through wage increases.

• In times of low inflationary development

term

In economic theory, a reciprocal wage and price inflation is referred to as a wage-price spiral. The basic idea is that the employees , represented by the trade unions, strive for at least a constant real wage ( ). On the other hand, companies want to generate a constant profit premium ( ). With rising wages, this leads to rising prices, which in turn leads to demands for wage increases. ${\displaystyle {\tfrac {W}{P}}}$ ${\displaystyle \mu }$

Important influencing factors of this relationship, which are to be explained in detail below, are price expectations ( ), expected inflation ( ) and the negotiating positions of those involved in wage setting, which largely depend on the unemployment rate ( ). ${\displaystyle P^{\mathrm {e} }}$ ${\displaystyle \Pi ^{\mathrm {e} }}$ ${\displaystyle u}$

The workers' point of view

The starting point for calling for higher nominal wages is the wage setting equation:

${\displaystyle W=P^{\mathrm {e} }F(u,z)}$.

The amount of the nominal wage thus depends both on price expectations and, secondly, by the function from where the impact of unemployment and the remaining factors to reflect. There is a negative relationship between the level of the nominal wage and the unemployment rate . This is due to the negotiating position of the employees and the trade unions. When unemployment is low, it is difficult for companies to find the "suitable" workers; they have to pay more wages ( ). When the unemployment rate is high, the bargaining position of workers is poor and their influence on determining wages decreases. The collective variable z includes the remaining factors that influence wage setting, such as B. the amount of unemployment benefit or statutory minimum wages. It has a positive effect on the development of the nominal wage ( ) and is usually regarded as constant. The expected price level (P ^e ) is determined according to the expected inflation ( ), for which the actual inflation rate of the previous year is usually used ( ). ${\displaystyle W}$ ${\displaystyle P^{\mathrm {e} }}$ ${\displaystyle F(u,z)}$ ${\displaystyle F(u,z)}$ ${\displaystyle u}$ ${\displaystyle z}$ ${\displaystyle W}$ ${\displaystyle W}$ ${\displaystyle u}$ ${\displaystyle \downarrow u\rightarrow W\uparrow }$ ${\displaystyle \uparrow z\rightarrow W\uparrow }$ ${\displaystyle \Pi ^{\mathrm {e} }}$ ${\displaystyle \Pi _{\mathrm {t} }^{\mathrm {e} }=\Pi _{\mathrm {t-1} }}$

In summary, it can be said that the level of nominal wages depends largely on the expected prices and thus the expected inflation and the assertiveness of those involved in setting wages.

The company's point of view

The prices of the companies are determined according to the pricing equation:

${\displaystyle P=(1+\mu )W}$.

From this it can be seen that the prices depend on the profit markup and the level of the nominal wage . If wages are to be kept at a constant level, the price must rise as well. ${\displaystyle \mu }$ ${\displaystyle W}$ ${\displaystyle \mu }$

Connection with the Phillips curve

Phillps curve USA 1900–1960, trend trend

→ Main article : Phillips curve

The British economist Alban W. Phillips discovered a connection between unemployment and the inflation rate in 1958. He compared these values ​​(for the UK) for every year since 1861 and observed a negative correlation between the two. When unemployment was high, inflation was low and vice versa. When this study was repeated in the USA with data from 1900 to 1960, the same trend emerged: low unemployment went hand in hand with high inflation, and high unemployment went hand in hand with low inflation. The intersection of the curve with the horizontal axis represents the so-called "natural rate of unemployment" again ( inflation is not accelerating unemployment , english nonaccelerating inflation rate of unemployment , short NAIRU ), an inflation-neutral unemployment rate. If the level of unemployment falls below this rate, which improves the bargaining position of the workers, the inflation rate rises because higher nominal wages can be enforced, which (as already explained above) leads to a price increase with a constant profit premium. ${\displaystyle \mu }$

Critical consideration

Other influencing factors

The question must be asked whether the level of nominal wages and prices depends solely on price and inflation expectations and the unemployment rate. In highly competitive markets, it is very difficult for companies to push through a price increase if they want to maintain their competitiveness . Rising wages only play a subordinate role here and do not result in an immediate rise in prices. An increase in wages can (at least in part) be offset by an increase in the productivity of employees, so that the effect on prices is dampened. Wages are usually negotiated depending on the sector, so that nationwide wage increases and the resulting price increases are unlikely. The introduction of a statutory minimum wage for all workers would almost certainly lead to a price increase.

Historical example

A real example of the wage-price spiral was Scala mobile in Italy . Here, after the Second World War, wages were automatically adjusted quarterly to the (rising) prices, which caused increased inflation, which in 1980 was almost 22%. After a long dispute, the law was abolished in 1993. However, a monocausal justification of the massive price increases in these years solely through the constantly rising wages is not permissible. Other factors also influence inflation.

swell

• Olivier Blanchard , Gerhard Illing: Macroeconomics. 3rd updated edition. Pearson Studium, Munich et al. 2004, ISBN 3-8273-7051-5 ( Wi - Wirtschaft ), (reprint. Ibid 2005).
• Paul A. Samuelson , William D. Nordhaus : Economics. Basics of macro and micro economics. Volume 1. 8. Fundamentally revised new German edition. Bund-Verlag, Cologne 1987, ISBN 3-7663-0985-4 .
• Phillips curve agenda ( Memento from March 13, 2007 in the Internet Archive ). (PDF; 305 kB) acc. June 29, 2011.

supporting documents

1. ↑ Glossary:. http://akademie.postbank.de/glossar.php?_chapter_no=10&_section_no=3&_unit_no=3&keyword=Lohn-Preis-Spirale  ( page no longer available , search in web archives )  Info: The link was automatically marked as defective. Please check the link according to the instructions and then remove this notice.  
2. ↑ Olivier Blanchard and Gerhard Illing: Macroeconomics . 3rd edition, Pearson Studium, Munich 2004, pp. 188–190
3. ↑ Olivier Blanchard and Gerhard Illing: Macroeconomics . 3rd edition, Pearson Studium, Munich 2004, pp. 239–243
4. ^ Paul A. Samuelson and William D. Nordhaus: Volkswirtschaftslehre 1, Fundamentals of macro and microeconomics, 8th edition, Bund-Verlag, Cologne 1987, p. 392 f.