Wage-Price-Spiral or Price-Wage-Spiral? Evidence From Two Behavioral Experiments and Conclusions for the Central Bank

Abstract

Does a wage–price or price–wage spiral exist, and what are its implications? This issue has been investigated in two behavioral experiments. The findings indicate that both dynamics are possible: prices may rise first, triggering wage increases that subsequently push prices even higher, or wages may increase initially and thereby fuel inflation. Inflation erodes the real purchasing power of wages, generating distributional effects in which employees suffer real income losses while firms benefit. This redistribution raises labor demand, consistent with the Phillips curve framework. To mitigate these distributional effects, the central bank should pursue a more restrictive monetary policy in the case of a price–wage–price spiral than in a wage–price–wage spiral. In contrast, the application of similarly restrictive measures in a wage-price-wage spiral carries the risk of an increase in unemployment and corporate insolvencies.