Wage push inflation happens when rising wages cause businesses to increase prices for goods and services. Employers may raise wages to attract or retain workers, especially during labor shortages, which benefits employees but raises business costs. These costs are often passed on to consumers, making everyday goods and services more expensive and increasing the cost of living. A financial advisor can help explain how this type of inflation affects individuals and the economy.
What Is Wage Push Inflation?
Wage push inflation is a form of cost-push inflation that occurs when businesses raise prices in response to increased labor costs. Cost-push inflation can also be driven by shortages of raw materials, increased regulation or some other factor that hikes the cost of doing business.
Wage push inflation typically happens when wages rise faster than productivity, boosting the cost of each additional unit of output for businesses. When companies pay higher wages, in order to maintain profits they often offset these costs by raising the prices of their goods and services. The resulting inflation affects the purchasing power of consumers and can impact the overall economy.
Wage push inflation often appears in industries experiencing labor shortages or increased demand for skilled workers. When labor becomes scarce, in order to maintain adequate staffing, companies tend to compete by offering higher wages, which increases their operating costs.
The resulting price increases can lead to a cycle of general inflation, as workers demand still-higher wages in order to keep up with the rising cost of goods and services. This can become especially pronounced in strong labor markets or when high economic growth boosts demand for goods and services as well as labor.
How Wage Push Inflation Works
Wage push inflation can impact various sectors of the economy, but it is especially likely to be felt in industries with high labor demands, such as healthcare, construction and hospitality. Several factors contribute to wage push inflation.
One common element is a low unemployment rate, which creates competition among employers to attract skilled workers. When unemployment is low, workers have more bargaining power, and businesses may offer higher wages to fill positions.
Minimum wage legislation can also contribute. When governments raise the minimum wage, labor costs can increase across multiple industries, especially those that rely heavily on low-wage workers. As companies pass increased costs on to consumers, this can lead to wage push inflation.
An Example of Wage Push Inflation
Wage push inflation can be seen in the labor market conditions following the COVID-19 pandemic. In labor-intensive sectors such as retail, hospitality and logistics, many companies faced worker shortages, prompting them to offer higher wages to attract employees.
For example, several large retailers and fast-food chains raised hourly wages to fill open positions. As labor costs rose, they raised prices on their goods and services to maintain profitability. This contributed to broader inflationary pressures, affecting consumers by increasing the prices of purchases such as groceries, dining and transportation.
Frequently Asked Questions
How Does Wage Push Inflation Affect Consumers?
Wage push inflation affects consumers by increasing the prices of goods and services, leading to a higher cost of living. As prices rise, purchasing power declines, making it more challenging to afford everyday items.
Can Wage Push Inflation Lead to a Wage-Price Spiral?
Yes, wage push inflation can contribute to a wage-price spiral. As wages increase and drive up prices, workers may demand further wage hikes to keep up with the cost of living, creating a cycle of rising wages and prices.
Is Wage Push Inflation Different from Demand-Pull Inflation?
Yes, wage push inflation is distinct from demand-pull inflation. Wage push inflation results from rising labor costs, whereas demand-pull inflation occurs when high demand for goods and services drives prices up. Both forms of inflation can contribute to overall inflationary pressures.
Bottom Line
Wage push inflation occurs when rising wages drive up the cost of producing goods and services, spurring producers to raise prices. Factors like low unemployment and labor shortages can lead to wage increases that then push inflation. For consumers, wage push inflation can reduce purchasing power and lead to a cycle of higher prices and wage demands.
Financial Planning Tips
- A financial advisor can recommend inflation-resistant assets to help preserve your purchasing power. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- The cost of living isn’t the same everywhere. SmartAsset’s cost of living calculator can help you see how prices for essentials vary by location.
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