Macroeconomic Definition of the Day: Wage Price Spiral

What is a wage price spiral? I like this snippet I took  from a larger entry in BusinessDictionary.com. A wage price spiral (also referred to as a inflationary spiral), in layman’s terms, is when the “high cost of living prompts demands for higher wages which push production costs up forcing firms to increase prices, which in turn trigger calls for fresh wage increases … and so on.”

Is a wage price spiral imminent? Well as many a business student has heard in class, “it depends.” A recent on-line posting for Fortune has the Federal Reserve betting against it citing that the weak labor market will quash employee demands for wage increases.

Further Reading - IMF Working Paper: The Wage-Price Spiral: Industry Country Evidence and Implications

I thought this was an interesting read. Magda Kandil in this paper discusses “the dynamics of nominal wage and price adjustments in the face of aggregate demand shocks” and how “conditions in labor and product markets of various economies” effects those dynamics . I found this working paper on a resource I visit often, the SSRN (Social Science Research Network) Electronic Library. Check it out!