What Is Wage Push Inflation?
Wage push inflation is an overall rise in the cost of goods and services that results from a rise in wages. Employers must increase the prices they charge for goods and services to maintain corporate profits after an increase in employee pay. The overall increased cost of goods and services has a circular effect on the wage increase. Higher wages will eventually have to compensate for the increased prices of consumer goods as goods and services in the market overall increase.
Wages and salaries in the U.S. increased by 0.8% during one year ending in September 2023, according to the U.S. Bureau of Labor Statistics.
Key Takeaways
- Wage push inflation is an overall rise in the cost of goods that results from a rise in wages.
- Employers must increase the prices they charge for the goods and services they provide to maintain profits after an increase in wages.
- The increase in wages and the resulting increase in prices create a circular effect on wages.
- Higher wages are then necessary to compensate for the increased prices of goods and services.
Understanding Wage Push Inflation
Companies can increase wages for several reasons. The most common is an increase in the minimum wage. The federal and state governments have the power to increase the minimum wage.
Consumer goods companies are also known for making incremental wage increases for their workers. These minimum wage increases are a leading factor for wage push inflation. It's highly prevalent with consumer goods companies especially. Its effect is a function of the percentage increase in wages.
Industry Factors
Industry factors also play a part in driving wage increases. Companies might raise wages to attract talent or provide higher compensation for their workers as an incentive to help business growth if a specific industry were to grow rapidly. All such factors have a wage push inflation effect on the goods and services the company provides.
Economists track wages closely because of their wage push inflation effects.
Wage push inflation has an inflationary spiral effect that occurs when wages are increased and businesses must charge more for their products or services to pay the higher wages. Any wage increase that occurs will also increase the money supply of consumers.
Consumers have more spending power with a higher money supply so the demand for goods increases. An increase in demand then increases the price of goods in the broader market. Companies charge more for their goods to pay higher wages and the higher wages also increase the price of goods in the broader market.
The wage increase is not as helpful to employees as the cost of goods and services rises at the companies that are paying higher wages and in the broader market overall because the cost of goods in the market has also risen. Workers eventually require another wage increase to compensate for the cost of living increase if prices remain high. The percentage increase in wages and prices and their overall effect on the market are key factors driving inflation in the economy.
Example of Wage Push Inflation
A company must pay its employees $20 if a state raises the minimum wage from $15 to $20 as occurred in 2024 when 22 states increased their minimum wages in January. Now its cost of producing its goods and services has gone up because its cost of labor is now more expensive.
The District of Columbia has the top minimum wage of $17 an hour as of Jan. 1, 2024.
The company must increase the prices of its products on the market to compensate for the increase in costs. But the initial $5 raise in wages isn't enough to propel a consumer's purchasing power because goods and services have become more expensive. The wage must therefore be raised again, causing an inflationary spiral.
Why Do Wage Increases Cause Inflation?
Wage increases cause inflation because the cost of producing goods and services goes up as companies pay their employees more. Companies must charge more for their goods and services to maintain the same level of profitability to make up for the increase in cost. The increase in the prices of goods and services is inflation.
What Is an Inflation Target?
Governments typically set an inflation target, which is approximately 2% a year in the U.S. An inflation target allows businesses and individuals to budget for the future. It provides an indicator for companies on how much to pay their employees and how much to charge for their goods and services. It indicates to individuals how much they can expect in wages as well as how much goods and services will cost.
How Does Inflation Impact the Value of Money?
Inflation reduces the future value of current money. The value of a dollar today is worth less than it will be in the future because prices go up. The same dollar today will be able to buy fewer goods and services in future years. Money is always worth more now than it is in the future, particularly due to the investment capability of money.
The Bottom Line
Employers are forced to respond when governments order wage increases for their workers. They require more income to comfortably accommodate those extra wages so they tend to increase the pricing of their products and services. This isn’t just the result of legislation. Companies can voluntarily decide to pay their employers more for several reasons.
The result is wage push inflation.
