Politicians and ministers are opposing wage demands on the grounds that conceding them would start a ‘wage-price spiral’. It is not only socialists who are exposing this as a myth. Economic commentators are too. For instance, an article by The Times economics editor, Mehreen Khan, on 29 November was headed ‘Forget the mythical wage-price spiral and get to grips with reality’. An earlier article, on the Conservative Home website on 22 July by Ryan Bourne, was headed ‘The wage-price spiral explanation of inflation is a dangerous myth’.
Khan wrote that ‘the “wage-price spiral” myth persists despite most evidence pointing to the contrary’ and called it a ‘zombie trope that refuses to die’. Bourne explained why it is impossible for a wage increase to cause prices generally to rise:
‘Economically, showing that wage demands do not create inflation is fairly simple. Take a hypothetical company with a big, unionised workforce. Suddenly the union demands a competition-busting 20 percent pay rise, and the firm reluctantly acquiesces, raising its prices to compensate. For a given level of total money expenditure in the economy (what we might dub “aggregate demand”), the business’s higher relative price loses some custom. As the business cuts back on production in lieu of higher prices, workers are laid off. Yet this increases the pool of labour available to other firms, reducing wages elsewhere. Lowering costs of production, this greater worker availability ultimately feeds through into lower prices for other businesses. In other words, without an increase in economy-wide spending, workers in one firm demanding wage hikes don’t generate price rises across the board. Inflation cannot originate from certain trade unions or greedy workers at particular companies’.
What he is saying is that a wage increase can lead only to a redistribution of demand, with some prices going up and other prices going down but having no effect on the ‘level of total money expenditure in the economy’.
Bourne works for the Cato Institute, which is an American free-marketeer think tank funded by Big Business, but he is making the same point as Karl Marx had made in 1865 in his address to British trade unionists published after his death as Value, Price and Profit. Instead of ‘aggregate demand’ Marx spoke of the total new value produced by the working class:
‘This given value, determined by the time of his labour, is the only fund from which both he and the capitalist have to draw their respective shares or dividends, the only value to be divided into wages and profits. (…) Since the capitalist and workman have only to divide this limited value, that is, the value measured by the total labour of the working man, the more the one gets the less will the other get, and vice versa. Whenever a quantity is given, one part of it will increase inversely as the other decreases. If the wages change, profits will change in an opposite direction’.
Bourne’s example is a wage increase in a particular company but even a general increase in wages could not cause prices across the board to rise. It, too, would merely redistribute paying demand; the demand for goods that workers consumed would go up increasing their price, while the demand for goods bought by capitalists and their hangers-on from profits would go down decreasing their price. Some workers would have to change jobs but the overall demand for goods and services would remain the same.
This is the real reason why employers and governments oppose wage demands – wages can only increase at the expense of profits, whether at company or economy level. The ‘wage-price spiral’ myth persists because it’s useful as an apparently more plausible argument against wage demands than baldly saying they will reduce profits.
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