In the past decade or so the Euro area has seen large dips and rises in its CPI as well as a stagnant wage growth rate for many sectors of its economy. One of the most impacted sectors is manufacturing, as many workers are becoming replaced by technological advancements. Graph 1 shows a continuous increase in consumer prices of the OECD (Organization for Economic Co-operation and Development) Europe over the past 25 years, while Graph 2 shows a decrease in the growth rate of wages in countries where the Euro is used over the same time period.
Typically, when a rise in inflation occurs and consumer prices increase, wages rise as well. The 'Wage-Price Spiral' is a macroeconomic theory which states that rising wages increases disposable income, which therefore causes the demand for goods and consumer prices to rise as well. Rising prices will then cause greater demand for higher wages, which leads to higher production cost and more upward pressure on prices, creating a conceptual spiral. The trends shown in the graphs previously presented do not follow this theory.
What are some of possible causes to the trends seen in these graphs? Do you think that the existence of the European Union is part of the cause for stagnant wage growth? What is one way that European countries can combat the stagnation and reel in prices? Does this occurrence have more of a positive or negative impact on Europe overall?
Extra reading: WSJ article
Pranam and Jack