Palkkahintaspirali

Palkkahintaspirali, often translated as wage-price spiral, is an economic phenomenon where rising wages lead to higher prices, which in turn lead to demands for even higher wages. This creates a self-perpetuating cycle.

The process typically begins with an increase in demand for labor or a shortage of workers, causing wages to rise. Businesses, facing higher labor costs, may respond by increasing the prices of their goods and services to maintain profit margins. This rise in prices, or inflation, erodes the purchasing power of consumers. As the cost of living increases, workers then demand higher wages to compensate for the reduced value of their earnings. This renewed wage increase further boosts business costs, leading to another round of price hikes, and the cycle continues.

The wage-price spiral can be a significant driver of inflation, making it difficult for central banks to control. Factors that can initiate or exacerbate a wage-price spiral include strong labor unions, government policies that mandate significant wage increases, and periods of high consumer demand. If unchecked, it can lead to hyperinflation. Economists often debate the extent to which this mechanism drives inflation in real-world scenarios, with some arguing that other factors, like monetary policy or supply shocks, play a more dominant role.