What is Wage Push Inflation?

An increase in the price of goods caused by an increase in wages give rise to a wage push inflation. Simply put, a wage push inflation is a type of inflation in costs of goods as a result of increase in wages paid to workers. Once there is a rise in wages, a common trend that follows is an increase in the price of goods, this is to guarantee that the company still makes profit despite that money paid to workers has increased. This increase in cost of goods is not limited to a specific product, it is general. When there is an increase in the prices of goods, it must be effected on wages.

Back to:ECONOMIC ANALYSIS & MONETARY POLICY

How does Wage Push Inflation Work?

Higher wages are paid to workers for a number of reasons, the main goal of companies sis to make and maximizes profit, so they do not increase wages without any reason. Government decree and policy on minimum wage is one of the main reasons companies increase wages. An increase in wages translate to a rise in the price of goods, this is known as a wage push inflation. This type of inflation is not as a result of a general economic downturn, rather, it is the effect or a rise in wages.

Industry Factors Driving Wage Inflation

Increase to minimum wage in a country is not the only reason companies increase their wages. There are several industry factors that contribute to increased wages. Increased wages served as a form of compensation or incentive to workers of a company, especially when the company has experienced a major growth or made much profits. Another industry factors that affect wage increase is the desire of certain industries to hire talented workers who are already on a high payroll. Wage push inflation has a number of effects on consumers and the economy, whether directly or indirectly. The effect of this inflation is an inflationary spiral effect in which consumers are made to pay more money for goods purchased because businesses want to pay higher wages to their workers. The effect of this on consumers is that their expenses rises which in turn lead to decline in demand. However, if the economy witnesses more money supply or spending by the government, consumers will have more spending power which translates to an increase in demand that benefits the larger industry. Employees however do not significantly benefit from a wage push inflation, although, their wages increase, the cost of living also increases.

An Example of Wage Inflation

Here is an instance of a wage push inflation; If a business is located in a country where the federal government increases the minimum wage from $50 to $85, the business must comply with this directive by also increasing wages paid to their employees to match the standard. However, if the prices of goods are maintained, the business will find it difficult to pay the minimum wage, they might run on debt. To avoid this, the costs of goods increase as wages increase.

Related Topics

• Inflation
• Core Inflation
• Cost Push Inflation
• Demand Pull Inflation
• Wage Push Inflation
• Hyperinflation (Economics)
• Inflation Spiral (Wage-Price Spiral)
• Agflation