What is the wage-price spiral, and why is it dangerous for an economy?
Answer (1)
The wage-price spiral is a cycle where rising prices lead to demands for higher wages, and then those higher wages lead to even higher prices. It becomes a repeating loop that can make inflation worse and harder to control.How it WorksImagine that prices of basic goods—like rice, electricity, and transportation—increase because of inflation. Workers now need more money to buy the same items, so they ask their employers for a salary increase. If employers agree, their costs go up. To make up for the higher payroll expenses, they raise the prices of their products again. These new price hikes make the cost of living rise even more, leading to more salary demands. And the cycle continues.This is dangerous for the economy because it creates persistent inflation. Instead of inflation being a short-term issue, it becomes embedded in every part of economic life. Businesses cannot predict costs. Consumers find it hard to plan their spending. The Bangko Sentral ng Pilipinas (BSP) may then be forced to raise interest rates very high to slow down the economy, which could lead to job losses and recession.Real-life Scenario of Wage-price SpiralIn the 1970s, many countries experienced stagflation—high inflation with slow economic growth. Wages were rising fast because of worker pressure, but so were oil prices and production costs. Companies raised prices, workers asked for more pay, and the cycle caused the economy to suffer.In the Philippine context, if a spike in fuel prices causes inflation, and then labor groups demand wage hikes across all regions, this can start a wage-price spiral. If prices continue to go up, even higher wages won’t be enough to maintain buying power, especially for minimum wage earners.To prevent this, governments often use targeted wage increases, price monitoring, and careful inflation control through monetary policy. The goal is to avoid a spiral and maintain stable, predictable prices and wages.
