Wage Push Inflation Definition Causes and Examples

Wage Push Inflation: Definition, Causes, and Examples

What Is Wage Push Inflation?

Wage push inflation is a rise in the cost of goods and services that results from a rise in wages. Employers increase prices to maintain profits after an increase in employee pay. The increased cost of goods and services has a circular effect on wages. Higher wages must compensate for the increased prices.

Salaries in the U.S. increased by 0.8% in the year ending September 2023, according to the U.S. Bureau of Labor Statistics.

Key Takeaways

-Wage push inflation is a rise in the cost of goods resulting from a rise in wages.

-Employers increase prices to maintain profits after wage increases.

-The increase in wages and prices create a circular effect, requiring higher wages to compensate for increased prices.

Understanding Wage Push Inflation

Companies may increase wages for various reasons, including minimum wage hikes. Federal and state governments can increase the minimum wage.

Consumer goods companies are known for making incremental wage increases, especially in the case of minimum wage hikes. The percentage increase in wages drives wage push inflation.

Industry Factors

Industry factors also drive wage increases. Companies raise wages to attract talent or incentivize workers in rapidly growing industries. These factors contribute to wage push inflation on the goods and services provided by the company.

Economists closely monitor wages due to their inflationary effects.

Wage push inflation creates an inflationary spiral when businesses must raise prices to cover higher wages. Wage increases also increase the money supply, leading to increased demand for goods and higher prices in the market.

Workers require additional wage increases to compensate for the rising cost of living and maintain their purchasing power. The percentage increase in wages and prices drives inflation.

Example of Wage Push Inflation

If a state raises the minimum wage from $15 to $20, a company must pay its employees $20. This increase in labor costs raises the cost of producing goods and services.

To compensate for the increased costs, the company raises the prices of its products. However, the initial wage increase is not enough to maintain consumers’ purchasing power. A further wage increase is necessary, leading to an inflationary spiral.

Why Do Wage Increases Cause Inflation?

Wage increases cause inflation as the cost of producing goods and services rises with higher labor costs. Companies must raise prices to maintain profitability. The increase in prices is inflation.

What Is an Inflation Target?

Governments set an inflation target, usually around 2% per year in the U.S. An inflation target helps businesses and individuals plan their budgets. It guides companies on employee pay and pricing. Individuals can anticipate wage increases and the cost of goods and services.

How Does Inflation Impact the Value of Money?

Inflation reduces the future value of money. The value of a dollar today is worth less in the future due to rising prices. Money has greater value now than in the future, particularly considering its investment capability.

The Bottom Line

Employers respond to government-ordered wage increases by increasing the prices of their products and services. This is not only due to legislation but can also be voluntary. The result is wage push inflation.