Wage-price spiral This mechanism has sometimes been called the wage-price spiral, and this phrase captures well the basic mechanism at work o Low unemployment leads to higher nominal wages e In response to higher wages, firms increase their prices o In response to higher prices, workers ask for higher nominal wages e Firms further increase prices, so workers ask for further Increases In wages And so on, with the result being steady wage and price inflation 2003-7-20 62003-7-20 6 Wage-price spiral This mechanism has sometimes been called the wage-price spiral, and this phrase captures well the basic mechanism at work: ⚫ Low unemployment leads to higher nominal wages. ⚫ In response to higher wages, firms increase their prices. ⚫ In response to higher prices, workers ask for higher nominal wages. ⚫ Firms further increase prices, so workers ask for further increases in wages. ⚫ And so on, with the result being steady wage and price inflation