Wage-Price Spiral

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Definition of 'Wage-Price Spiral'

A wage-price spiral is a situation in which rising wages cause prices to rise, which in turn causes wages to rise again, and so on. This can lead to a vicious cycle of inflation, as businesses pass on their higher costs to consumers in the form of higher prices, and consumers are forced to demand higher wages to compensate for the higher cost of living.

There are a number of factors that can contribute to a wage-price spiral. One is strong economic growth, which can lead to increased demand for goods and services, and thus higher prices. Another is a tight labor market, in which there are more job openings than there are people to fill them, which gives workers more bargaining power and allows them to demand higher wages.

Government policies can also play a role in wage-price spirals. For example, if the government increases the minimum wage, this can lead to higher wages for low-wage workers, which can then ripple through the economy and cause prices to rise.

Wage-price spirals can be difficult to stop once they start. One way to break the cycle is to slow down economic growth. This can be done by raising interest rates, which makes it more expensive for businesses to borrow money and invest. Another way to break the cycle is to increase the supply of labor. This can be done by increasing immigration or by encouraging people to return to the workforce.

Wage-price spirals can have a number of negative consequences. They can lead to higher inflation, which can erode the value of savings and investments. They can also lead to a decline in economic growth, as businesses become less profitable and are forced to cut back on production. In extreme cases, wage-price spirals can lead to a recession or even a depression.

It is important to note that wage-price spirals are not inevitable. They can be prevented or mitigated by careful economic management. By understanding the factors that can contribute to wage-price spirals, policymakers can take steps to avoid them.

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