What Is Wage-Push Inflation?

•••
By
Danielle Zanzalari
Updated April 28, 2022
Reviewed by
Erika Rasure
DEFINITION
Wage-push inflation is an economic theory that states inflation
occurs due to wages increasing. The theory claims that these higher
wages will cause businesses to raise the price of their final goods,
which can cause inflation.

Wage-push inflation is an economic theory that states inflation occurs due to wages
increasing. The theory claims that these higher wages will cause businesses to raise
the price of their final goods, which can cause inflation.

Let’s take a closer look at what the economic theory of wage-push inflation is and
how it works.

Key Takeaways
 Wage-push inflation is an economic theory that states rising wages cause inflation.
 This type of inflation can occur due to union negotiations and new industries.
 There is little empirical evidence to support wages as the predominant cause of inflation.

Definition and Examples of Wage-Push Inflation

Wage-push inflation is the general increase in prices caused by wages rising in
society. If wages rise, corporations typically raise the price of their final goods and
services. As many goods become more expensive, the overall price level rises and
there is inflation. As overall price levels rise, workers realize that their wages do not
buy as many goods and services as they did before. Workers ask for raises, which
creates a wage-price spiral.1

Wage-push inflation is one example of cost-push inflation. Cost-push inflation occurs

when supply falls due to increases in labor, raw materials, or capital goods, resulting
in inflation.

How Does Wage-Push Inflation Work?

Wage-push inflation can occur for a few reasons, in theory. One is due to unions
negotiating set wage increases at fixed intervals for their members. When unions
negotiate higher wages for their members, this can push up the cost of the final goods
at retailers, which could cause inflation.
Another cause of wage-push inflation is a new industry that may increase wages
significantly to attract talent. If other businesses raise wages to compete with the new
industry, this can push up wages for many jobs. As a result, firms may increase the
price of their final goods sold to consumers, which would then raise the price level.
Since the price level increased due to wages rising, this may be considered to be
wage-push inflation.

The wage-push theory for inflation started in the late 1960s to early 1970s, as there
was an acceleration of wages and prices in Europe while monetary growth slowed.
Due to rising wages and increased demand for goods and services, price levels rose.2

Is Inflation Caused by Wage Increases Common?

Since wage-push inflation’s birth, research has debunked its theoretical role as a cause
of inflation. Instead of higher wages leading to higher prices and inflation, higher
prices lead to higher wages.3 In other words, wages do not push up prices—instead,
it’s the other way around.

Alternatively, a more commonly accepted hypothesis, which is supported using data,

states that inflation is caused by excessive monetary growth. This is a well-known
economic theory called the quantity theory of money.

Alternatives to Wage-Push Inflation

While wage-push inflation doesn’t have much evidence to back it up, there are several
types of inflation theories that are accepted as legitimate explanations for why
inflation occurs.

Monetary Policy

One main inflation theory is that central banks cause inflation by increasing money
supply, which pushes down interest rates. This makes it easier for businesses and
consumers to borrow money to purchase goods and services. As more businesses and
consumers buy goods, aggregate demand for goods and services will increase. Since
there will be more people competing for limited goods and services, prices rise and
inflation follows.

Supply Shock

Another cause of inflation is a supply shock. A disruption in supply, such as a natural

disaster or high raw material prices, can reduce overall supply temporarily and lead to
inflation.

Consumer Expectations

Lastly, expectations play a role in inflation. If people and firms anticipate higher
prices, they will negotiate for higher wages or have automatic price increases built
into contracts.
Historical Examples
It’s not required for all of these theories to occur simultaneously for there to be
inflation. However, sometimes a combination of all three causes does happen. 

For example, in November 2021, there was 6.8% inflation year-over-year. This was
due to a combination of increased aggregate demand from economic stimulus
packages and expansionary monetary policy of the Federal Reserve, supply chain
shocks, and higher consumer inflation expectations.4

A similar situation occurred in the late 1960s and early 1970s when there was
monetary growth, an oil energy crisis (which hurt supply), and higher consumer
inflation expectations