How does raising wages worsen inflation ?
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It doesn’t really, at least not for long. it is a myth. What it does is redistribute inflationary impact.
Inflation over time is due to increases in the money supply that exceeds the increase in goods and services to buy (stuff to spend it on). Like if you snapped your fingers and doubled everyone’s bank account, eventually things would just cost twice as much. That is the source of inflation. Money supply can be changed for a couple of reasons, but wage price spirals is not one of them.
The idea behind wage price spirals is that workers see inflation, demand higher wages to offset, businesses cave and then raise prices to pay for the high wages, resulting in more wage demands and higher prices again. This concept is rooted in anti-union rhetoric.
What actually happens is that competition will cap price increases and the wage increases get taken out of business margins. Other than competition, there is also a relative redistribution of purchasing power from business owners and non-workers to workers. Total demand in the economy doesn’t change, supply doesn’t change much (maybe a bit upwards since more people join workforce), it’s just that workers get to enjoy more relative to everyone else.
Wage price spirals are not positive feedback loops – they are negative feedback loops. Businesses can’t raise prices forever and people who don’t work don’t benefit from higher wages. Any wage-price spiral is short term in nature and self-correcting, though it might take a few quarters to sort out.
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