Wage–price spirals: what is the historical evidence?

Abstract

AbstractHow common are wage–price spirals, and what has happened in their aftermath? We construct a new historical database of wage–price spirals—identified as episodes with consumer price inflation and average nominal wage growth rising jointly for at least a year—going back to the 1960s for a large sample of advanced economies. We find that only about a quarter of such episodes were followed by sustained accelerations in wages and prices. Instead, nominal wage growth and inflation tended to stabilize at a higher level on average, and then gradually revert, with real wage growth broadly unchanged. A decomposition of average wage dynamics during wage–price spiral episodes using a wage Phillips curve suggests that nominal wage growth normally stabilizes at levels consistent with observed inflation and labour market tightness. After historical episodes exhibiting rising inflation, falling real wages, and tightening labour markets—similar to what was observed in the early post‐COVID‐19 recovery in 2021—inflation tended to decline and nominal wage growth to rise, allowing real wages to gradually catch up. Our findings suggest that an acceleration of nominal wages against a backdrop of rising inflation does not necessarily signal that a persistent wage–price spiral dynamic is taking hold.