Wage price spirals are bad economics---studies prove they are not a large driver of inflation

The truth is that most workers cannot simply demand higher wages in response to inflation. Consider the difference between two hiring scenarios: wage posting and wage bargaining. Under wage posting, a worker must accept a posted wage for a job (i.e., take it or leave it); under wage bargaining, they can negotiate with their employer over their wages. Research has found that low-income workers facing better job prospects elsewhere aren’t able to bargain for higher wages in their current job — they either stay at a lower wage or they quit. (High turnover from workers quitting has high costs for companies too.) Only workers in the highest quarter of the wage distribution appear to be able to negotiate for higher wages in their current jobs.

This matters for the wage-price spiral story because higher-income workers save more of their income as their salary increases. Meanwhile, lower-income workers comparatively see their demand as consumers increase along with wage increases. (Economists chart this as the marginal propensity to consume: how much of each additional dollar is used for consumption versus savings or investment.) So even where workers can bargain for higher wages, we’d expect it to have a lesser impact any upward pressure on prices.

There is no strong evidence that points to a wage-price spiral causing today’s inflation.

Further, there is no strong evidence that points to a wage-price spiral causing today’s inflation. Simple correlations have found no relationship between the sectors with the most wage growth and where costs are going up the most. In fact, when the Bureau of Labor Statistics released its Employment Cost Index last week, wage growth was found to be decelerating. And this is reflected in other economic data about the financial health of average working people in the U.S., with household debt now above its pre-pandemic levels.

In fact, there is mounting evidence that workers are actually still underpaid compared to the value they contribute to economic growth, leading to lost potential in the economy. When wages are suppressed from employers exercising their market power — a phenomenon known as monopsony — then employment levels in the economy also tend to be suppressed. One study found that the opening of a big employer like a Walmart Supercenter led to an aggregate decrease in both earnings and employment within a county in the subsequent five years. When wages were increased at the bottom of the income distribution within a county from minimum wage levels, earnings and employment came back up across the board.

Ultimately, wages are being held lower than what would be predicted in a competitive economy. With workers strapped amid high inflation, now is certainly not the time to further push wages down. It has become increasingly clear that the wage-price spiral is — at best — a convenient misunderstanding for those who benefit from sustained levels of income inequality. Hopefully, the members of Congress who take their seats following next week’s elections will start to listen to the evidence — because the well-being of workers, and our country’s economic growth, cannot afford using myths as a driver for economic policy.