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Some people like to blame big business for inflation; others like to blame labor unions. Both of these views, referred to earlier as “villain theories,” are overly simplistic. It seems to be more correct to say that, rather than one or the other, it is most often the combination of big business and labor unions that generates large wage and price increases. It is often in industries where there are only a few large corporations and strong labor unions (such as steel, automobiles, steel products, machinery, rubber, petroleum, pulp and paper, electrical apparatus, tobacco, beverages and so on – a major portion of the economy) that bargaining between union and employers results in above-average wage increases. In turn, these cause upward pressures on costs and prices – the wage-price spiral – where wages and prices chase each other upward.

Often, when labor unions press for higher wages, large corporations may decide to yield in large part to the union demands and raise prices, with all major firms in the industry acting together, to cover the additional labor costs. This approach is especially likely when the economy is booming, so that a strike would be particularly costly in terms of lost business. Also, during a boom, it is easier for businesses to raise prices, as consumers are less resistant to price increases. Thus, the wage increase is the reason given by the industry for the price increase. But, with many prices rising in this way, these price increases cause labor unions to demand more wage increases – as a result, wages and prices chase each other upward, in a spiral. As stated earlier, the wage-price spiral tends to be particularly rapid during periods of economic prosperity, when large corporations are less resistant to union wage demands and consumers are less resistant to price boosts. On the other hand, the spiral usually tends to slow down during recessions, when sluggish demand makes major price increases more difficult, forcing employers in turn to resist union wage demands more strongly. Recessions, however, are far from a complete cure for this cost-push inflation, because some businesses possess enough power over their prices to continue to raise them despite sluggish demand, to meet certain profit targets. Thus, the wage-price spiral not only aggravates inflation during boom periods, but also helps to keep inflation going (although at slower rates) during economic slowdowns.

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