Wage-Price Spiral: The Interplay Between Labor Markets and Inflation

Abstract

This article explores the dynamics of the wage-price spiral, a self-reinforcing mechanism wherein rising wages lead to increased prices, which in turn drive further wage demands. The study provides a comprehensive review of theoretical frameworks, historical examples, and post-pandemic labor market shifts, focusing on how wage-setting behavior and inflation expectations interact across different institutional settings. Using a macroeconomic lens, the research analyzes both advanced and emerging economies, paying particular attention to labor force participation, foreign direct investment, and trade openness in shaping inflationary outcomes. The findings emphasize the importance of credible monetary policy, coordinated wage bargaining, and macroeconomic resilience in managing inflation. The article concludes by offering policy recommendations tailored to Vietnam’s economic context, grounded in econometric evidence such as OLS regression, Granger causality, and cointegration analysis.