What is the Price/Wage Spiral?

The price/wage spiral represents the interdependence of prices for goods and services, and wages. Both price and wage spiral upward, so that neither higher prices nor higher wages economically benefit the worker or companies that sell goods and services. Price/wage spiral is a type of inflation that results in both higher prices and wages, but ends up with each dollar spent or earned being valued less.

Price/wage spiral is more common when workers are organized into unions. With fewer unions in the US, price/wage spiral is less common. However, when it occurs, it can affect all people, and is particularly detrimental to workers who are non-union. One can evaluate the price/wage spiral in the medical field as an example of how this form of inflation has a broad-based effect on the total population in the US.

The following is a simplified example of price/wage spiral: The rising cost of health care, and the rising salary of nurses are an example of price/wage spiral. Since nurses tend to be organized into unions, they are well compensated for their work. Rules in many states have increased the nurse to patient ratio creating a higher demand for nurses. In very simple terms this means hospitals must charge more because they must pay nurses more, though it should be noted that health care costs are influenced by more than nurse’s salaries.

When hospitals charge more, so do insurance companies. Workers from other unions then ask for wage increases to cover higher insurance costs. Once salaries rise in other fields, the products made, shipped or sold in those fields go up in price. This is conferred to non-union workers who may find their salaries no longer meet their living expenses or their insurance costs.

Ultimately, unorganized workers suffer most from price/wage spiral, because they may not have the bargaining power to negotiate higher wages. Their salaries do not spiral upward and what they earn buys them less. Thus price/wage spiral results in some workers being poorer because their dollars simply don’t stretch as far.

Recession or government limits on amounts that can be charged ends a price/wage spiral. As poverty increases among people who can’t get raises, fewer things are purchased, resulting in less demand. Fewer goods or services purchased can damage businesses to such an extent that they begin to lower prices in order to get more sales. This may result in wages spiraling downward.

Conditions for price/wage spiral that affects a whole country must generally include highly organized workers, i.e., unions or their equivalent. Economists in 2006/2007 are observing price/wage spiral in developing economies like Poland and their analysis of these economies applies to inflation examples in the past in the US: Price/wage spiral is a vicious cycle that tends to offer very little benefit to anyone.