What’s the P/E spiral?

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The price/wage spiral is a type of inflation where both prices and wages increase, resulting in every dollar spent or earned being valued less. It is more common when workers are organized into unions and can harm non-union workers. Recession or government limits can end the spiral.

The price/wage spiral represents the interdependence of prices of goods and services and wages. Both the price and the wage increase, so neither higher prices nor higher wages economically benefit the worker or the companies that sell goods and services. The price/wage spiral is a type of inflation that results in higher prices and wages, but ends up with every dollar spent or earned being valued less.

The price/wage spiral is more common when workers are organized into unions. With fewer unions in the US, the price/wage spiral is less common. However, when it does occur, it can affect everyone and is particularly harmful for non-union workers. One can look at the price/wage spiral in the medical field as an example of how this form of inflation has a broad effect on the total population in the US.

The following is a simplified example of a price/wage spiral:

The rising cost of health care and rising salaries for nurses are an example of a price/salary spiral. As nurses tend to organize in unions, they are well rewarded for their work. Rules in many states have increased the nurse/patient ratio, creating greater demand for nurses. In very simple terms, this means that hospitals should charge more because they should pay nurses more, although it should be noted that health care costs are influenced by more than nurses’ salaries.

When hospitals charge more, so do insurance companies. Workers from other unions are calling for wage increases to cover higher insurance costs. After wages increase in other fields, products manufactured, shipped, or sold in those fields increase in price. This is given to non-union workers who may find that their wages no longer cover living expenses or insurance costs.

Ultimately, disorganized workers suffer most from the price/wage spiral because they may not have the bargaining power to negotiate higher wages. Their salaries don’t grow and what they earn buys them less. So the price/wage spiral results in some poorer workers because their dollars just don’t go that far.

Recession or government limits on amounts that can be charged end a price/earnings spiral. As poverty increases among people who cannot get raises, fewer things are bought, resulting in less demand. Fewer purchased products or services can hurt companies to such an extent that they start lowering prices to get more sales. This can result in wages spiraling downwards.

The conditions for a price/wage spiral that affects an entire country must generally include highly organized workers, i.e. unions or their equivalents. Economists in 2006/2007 are looking at the price/wage spiral in developing economies like Poland and their analysis of these economies applies to examples of past inflation in the US: The price/wage spiral is a vicious cycle that tends to offer very little benefit to anyone.

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