Final answer:
The wage-price spiral refers to a situation in macroeconomics where rising wages lead to higher production costs and prices, which in turn cause workers to demand higher wages, fuelling ongoing inflationary pressure. This creates a lag in wage adjustments to inflation, resulting in a loss of purchasing power for workers, and can cause unemployment when wages are 'sticky' and do not decrease easily.
Step-by-step explanation:
The wage-price spiral is a concept typically discussed in the context of macroeconomics and labor economics. It involves a cycle where increasing wages lead to higher production costs, which then leads to higher prices for goods and services. In response to rising living costs, workers demand even higher wages, perpetuating the cycle. Over time, wages tend to lag behind inflation, with adjustments occurring infrequently and potentially leading to periods where workers experience a loss in purchasing power. This lag can create insecurity among workers and result in conflicts between employers and employees. For example, minimum wage adjustments for inflation that are not frequent can lead to minimum wage workers losing real income.
When wages are 'sticky' and do not adjust downward easily due to factors like minimum wage laws or employer reluctance to reduce wages for fear of harming morale, it can lead to unemployment or underemployment in the economy. This is especially prevalent in industries where wages are close to the minimum and upward adjustments are not driven by competitive pressures. As the Consumer Price Index (CPI) rises, workers in these sectors may experience a decline in their real wages.