Wage-Price Spiral

There always persists a negative relation between the unemployment and the inflation but the story behind this negative relation effect is always followed by a wage-price spiral.

Beginning with the decrease in unemployment, wage-price spiral does not seem to end, but the effect is shown by the race between wages and prices. Decrease in unemployment indicates a rise in employment and such an increase in employment give some power to the workers to demand a higher nominal wage and so facing the demand of workers, firms respond by increasing the nominal wage. In order to curtail the driven cost, there occurs a rise in price and so the price of goods increases and the purchasing power of the worker decreases.

Increase in price makes the workers unable to buy the same basket of goods; they were able to buy earlier. In response to this situation, workers demand a further increase in their nominal wages to continue buying the same basket of goods and so again an increase in nominal wage contributing to a rise in price level and this process goes on..

This race between wages and prices results in steady wage and price inflation.

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