<p>Today's NYTimes newsletter wrote the below</p>
<blockquote>
<p>Consider wages: If people expect high inflation, they will demand higher pay. But to pay higher wages, employers are likely to pass that cost to consumers by charging them higher prices. Higher wages could also mean elevated demand, because people will have more money to spend. This “wage-price spiral,” as economists call it, was a major contributor to high inflation in the 1970s.</p>
</blockquote>
<p>I'm sure this is simplified, so maybe I just need the complex explanation, because I don't understand why <em>&quot;higher wages could also mean elevated demand, because people will have more money to spend&quot;</em>.</p>
<p>Like, if I'm making more money but things are costing more, then I should realize that in reality, I don't have extra money to spend at all. Is that not the case?</p>
<p>Also I want to add, the NYTimes quote is referring to current events, but for scoping this question, I'm specifically interested in the <em>&quot;wage-price spiral&quot;</em>. Like I fully understand the economic theory that supply chain issues from COVID causing lower supply than demand can lead to inflation, that's not the puzzle for me.</p>

CC BY-SA 4.0
2022-04-14T11:51:21.607Z
I think that is the whole point. Since supply is "fixed", higher wages will increase demand, which increases prices, so that S=D. Note, it says "could", which means that wages could be high because of high inflation expectations, or Inflation could be high because of wage increases.
Alex
CC BY-SA 4.0
2022-04-14T15:33:57.423Z
You may want to look at this related question: https://economics.stackexchange.com/questions/45705/puzzled-by-proposed-inflation-mechanisms
Mick
CC BY-SA 4.0
2022-04-14T17:06:58.573Z
@Mick the quote of the answer that talked about the wage-price spiral didn't answer my question: *after an increase in aggregate demand, the process of adjustment of nominal prices and nominal wages results from attempts by workers to maintain or increase their real wage and by firms to maintain or increase their markups of prices over wages*. I understand the latter: that if people expect prices to be high, of course they'd negotiate for higher wages. But I don't understand the former, how does this increase aggregate demand? Shouldn't higher wages just balance out higher prices
james
CC BY-SA 4.0
2022-04-15T07:49:08.180Z
@james: I don't believe in the idea of a wage price spiral so I can not provide an answer. Indeed I would suggest that if you do get an answer you should treat it with skepticism. My hunch is that spiral supporters foolishly consider companies paying workers wages is somehow a *source* of money and therefore a contributor to increased demand. But of course it's not a source, it has to come from somewhere else so the increased demand from workers is balanced by a decrease in demand from somewhere else. I.e. no increased demand therefore no inflation.
Mick
<inflation><price><wages>
Why does the wage-price spiral of inflation exist, why do high wages/high prices not balance out?
james
# Why does the wage-price spiral of inflation exist, why do high wages/high prices not balance out?

(Asked by: username_0 on 2022-04-14)

Today's NYTimes newsletter wrote the below

> Consider wages: If people expect high inflation, they will demand higher pay. But to pay higher wages, employers are likely to pass that cost to consumers by charging them higher prices. Higher wages could also mean elevated demand, because people will have more money to spend. This “wage-price spiral,” as economists call it, was a major contributor to high inflation in the 1970s.

I'm sure this is simplified, so maybe I just need the complex explanation, because I don't understand why *"higher wages could also mean elevated demand, because people will have more money to spend"*.

Like, if I'm making more money but things are costing more, then I should realize that in reality, I don't have extra money to spend at all. Is that not the case?

Also I want to add, the NYTimes quote is referring to current events, but for scoping this question, I'm specifically interested in the *"wage-price spiral"*. Like I fully understand the economic theory that supply chain issues from COVID causing lower supply than demand can lead to inflation, that's not the puzzle for me.

**Tags:** inflation, price, wages
> **Comments:**
> **username_1**: I think that is the whole point. Since supply is "fixed", higher wages will increase demand, which increases prices, so that S=D. Note, it says "could", which means that wages could be high because of high inflation expectations, or Inflation could be high because of wage increases.  
> **username_2**: You may want to look at this related question: https://economics.stackexchange.com/questions/45705/puzzled-by-proposed-inflation-mechanisms  
> **username_0**: @Mick the quote of the answer that talked about the wage-price spiral didn't answer my question: *after an increase in aggregate demand, the process of adjustment of nominal prices and nominal wages results from attempts by workers to maintain or increase their real wage and by firms to maintain or increase their markups of prices over wages*. I understand the latter: that if people expect prices to be high, of course they'd negotiate for higher wages. But I don't understand the former, how does this increase aggregate demand? Shouldn't higher wages just balance out higher prices  
> **username_2**: @james: I don't believe in the idea of a wage price spiral so I can not provide an answer. Indeed I would suggest that if you do get an answer you should treat it with skepticism. My hunch is that spiral supporters foolishly consider companies paying workers wages is somehow a *source* of money and therefore a contributor to increased demand. But of course it's not a source, it has to come from somewhere else so the increased demand from workers is balanced by a decrease in demand from somewhere else. I.e. no increased demand therefore no inflation.  

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## 0 answers

