Saturday, November 11, 2017

What was it that got the wage-price spiral started?

It had to be something other than the wage-price spiral.

What was the initial shock that started the Great Inflation? In Ronald Reagan and the Politics of Freedom, Andrew E. Busch says what everybody thinks -- it started with a wage-price spiral:

I disagree. There had to be some other "push" that got things started.


In macroeconomics, the price/wage spiral (also called the wage/price spiral or wage-price spiral) represents a vicious circle process in which wage increases cause price increases which in turn cause wage increases, possibly with no answer to which came first.

This is totally unsatisfactory!

From InvestingAnswers:

The general idea behind a wage-price spiral is a simple one of supply and demand. People can do only two things with money: save it or spend it. If they have more money on hand, they likely will spend at least some of that money. Accordingly, putting more money in people's hands creates more demand for goods and services. Thus, something like a wage increase across the board (think, for example, of a rise in the minimum wage) creates more demand for goods and services and drives up the prices of those goods and services.

So the Minimum Wage caused the Great Inflation? No.

From Chron:

When an economy is operating at near full employment and people have money to spend, demand for goods and services increases. To meet the demand, companies expand their businesses and hire more workers. However, at near full employment, most workers already have jobs. So companies have to lure workers with higher wages, which, of course, increases the companies' costs, explains the website Biz/ed. The workers then push for higher wages to meet the higher prices and expected price hikes, which increases company costs again. Theoretically, this continues in an inflationary spiral until a loaf of bread costs the proverbial wheelbarrow full of cash.

Full employment creates a wage-price spiral? That sounds reasonable...

So they're saying the 1965-1971 spike in employee compensation (relative to GDP) is what got the wage-price spiral going. But most of that spike occurred after the Great Inflation was already under way! And the other spikes, did they also cause wage-price spirals that led to Great Inflations?

And what about the 1960-65 decline in employee compensation? Prices were going up then, too. "Full employment" may be a plausible story of the Great Inflation, but it doesn't seem to explain how the wage-price spiral got started.

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