“Myth” or real danger?
The wage-price spiral is dividing economists
7/3/2022 2:03 p.m
With a concerted action, the Federal Chancellor wants to prevent a wage-price spiral. However, the existence of the phenomenon is disputed among economists – as are the proposed measures against it.
The concern that rising wages could fuel inflation is so great in Germany that the Chancellor has invited the parties to a meeting at his office. As part of the so-called concerted action, ways should be sought to alleviate the burden of rising consumer prices without triggering the dreaded wage-price spiral. While this concern is debated at the highest political level, there is some debate among economists as to whether it is a real phenomenon.
Among other things, the employer-oriented Institute of the German Economy (IW) warns of a growing danger of a wage-price spiral. He currently sees no such scenario, said its director Michael Hüther “T-Online”. “However, the risk of this increases as soon as unit labor costs rise noticeably and across the board – which would be the case with significant wage increases.”
The economist appealed to employers and unions before the concerted action planned by Chancellor Olaf Scholz for Monday. “A concerted action can be a clever solution to bring the collective bargaining partners to a uniform level of information and to sharpen the understanding of the respective conditions for action,” said Hüther. “Because employees and employers bear a great deal of responsibility in the current situation through wage policy. That should be clear to everyone.” The expert considers one-off payments, as recently proposed by Scholz, to be “a smart idea”.
“Healthy measure of wage increases necessary”
The President of the German Institute for Economic Research, Marcel Fratzscher, has a completely different opinion. The wage-price spiral is a “false myth,” Fratzscher told the DPA. The general wage development this year is rather too weak than too strong. “The more purchasing power shrinks, the greater the damage to the economy.” Lower purchasing power among people with middle and low incomes leads to a decline in consumption and thus to fewer sales and jobs in many companies.
For the director of the institute for macroeconomics and business cycle research, which is close to the union, Sebastian Dullien, it depends on the right amount of wage increases. “I think one-off payments instead of wage increases are wrong,” he told T-Online. “A normal, healthy level of wage increases is necessary and should be reflected accordingly in pay scales.” Dullien brought up the idea of a gas price cap again. Politicians should “seriously think about it,” he said. “That would also relieve households in Germany.”
The inflation rate fell to 7.6 percent in June after reaching 7.9 percent in May, the highest level since the winter of 1973-74. Fuel discounts and a nine-euro ticket for local transport provided relief for inflation-plagued consumers. Experts warn, however, that prices could jump again in September when the government’s three-month measures expire. In a wage-price spiral, inflation continues to escalate as companies pass on increased wage costs to their customers.