© 2024 91.9 KVCR

KVCR is a service of the San Bernardino Community College District.

San Bernardino Community College District does not discriminate on the basis of age, color, creed, religion, disability, marital status, veteran status, national origin, race, sex, sexual orientation, gender identity or gender expression.

701 S Mt Vernon Avenue, San Bernardino CA 92410
909-384-4444
Where you learn something new every day.
Play Live Radio
Next Up:
0:00
0:00
0:00 0:00
Available On Air Stations

One economist calls it a doom loop, others say it's a myth: The 'wage-price spiral'

JUANA SUMMERS, HOST:

It's a phrase that strikes fear into the hearts of central bankers everywhere - wage-price spiral - a nightmare scenario of ever-increasing inflation. But some economists say the idea of wage price spirals is overblown. They even go so far as to call it a myth. Adrian Ma and Darian Woods from our daily economics podcast, The Indicator, explain.

ADRIAN MA, BYLINE: Economist John O'Trakoun describes wage price spirals as a kind of doom loop.

JOHN O'TRAKOUN: Workers demand higher wages to keep up with the elevated cost of living. And businesses, they raise the prices of their products and services in order to cover these higher labor costs. And so it just keeps reinforcing itself. Higher wages leads to higher prices, leads to higher expectations, all spiraling around, swirling around the toilet bowl, leading to very bad outcomes.

DARIAN WOODS, BYLINE: John works at the Federal Reserve Bank of Richmond, and he recently wrote about the wage price spiral for the bank's blog. He says that the last time the U.S. saw something like a wage price spiral was in the 1970s. And by the end of that decade, the inflation rate peaked at over 14%. And while multiple causes added to the inflation during that period, John says that one big factor was this feedback loop between wages and prices.

O'TRAKOUN: So back then, more of the economy was in manufacturing. A lot of these workers were in unions, and so they had wages that were pegged to inflation.

MA: It was in their contract, right? So if inflation went up, so did the workers' wages. But rising wages really ate into the company's profit margins. So they passed that cost on to the customers, leading to more inflation. John says this really strong link between wages and prices contributed to the inflation spiraling higher and higher.

WOODS: But in the decades that followed, the tight relationship between wages and prices starts to break down. John points to a few reasons. For one thing, union membership plummeted, so those contracts requiring inflation-adjusted raises for big groups of workers became less common.

MA: Meanwhile, companies found ways to grow their profit margins - for example, by getting cheaper production materials from overseas, outsourcing and automating jobs or combining with other companies. That way they could afford to give workers the occasional raise and not have to raise prices. And this is part of the reason that by the time we get to the late 2010s...

O'TRAKOUN: It seemed like wage price spirals were just in the '70s, and they were, like, a thing of the past. We vanquished it, and it's over.

MA: And that was pretty much the consensus until the pandemic. The past couple years, prices and wages have increased faster than usual. And John says there are signs that these two things are starting to move together more. So does that mean the conditions for a spiral are making a comeback? Well, Jason Furman, an economist at Harvard, wouldn't go that far. I mean, he doesn't worry about a wage price spiral going up and up and up into an infinite doom loop. But what Jason is worried about is something he calls wage price persistence.

JASON FURMAN: Which is where once inflation gets high and once wage growth gets high, they both stay high for a while, and they feed into each other staying high for a while.

MA: And if that's what happens, Jason says we're probably not going to get that soft landing we're all hoping for - right? - the one where we whip inflation but avoid a recession.

(SOUNDBITE OF MUSIC)

WOODS: Darian Woods.

MA: Adrian Ma. NPR News. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Adrian Ma
Adrian Ma covers work, money and other "business-ish" for NPR's daily economics podcast The Indicator from Planet Money.
Darian Woods is a reporter and producer for The Indicator from Planet Money. He blends economics, journalism, and an ear for audio to tell stories that explain the global economy. He's reported on the time the world got together and solved a climate crisis, vaccine intellectual property explained through cake baking, and how Kit Kat bars reveal hidden economic forces.