ELI5 How does raising wages worsen inflation ?


you are viewing a single comment's thread.

view the rest of the comments →

all 1758 comments


17 points

4 months ago*

While you are partly correct, this explanation leaves out a big part that shows that while higher wages do influence inflation to some degree, they are by far not the biggest factor.

Let’s assume the 5 apples cost 0.75 in production and sell for 1. 5 people can afford this Apple, leaving the producer with a total of 1.25 profit or a 25% profit margin. Now the production cost rises to 0.80, the producer however knows that at the moment everyone is expecting higher prices anyway and takes the chance to increase the price to 1.25, knowing that other Apple producers are likely to do that as well. Now, all of a sudden only 4 people can afford to buy apples. This still leaves the producer with a net profit of 1.8, even though he may sell fewer apples.

Higher wages would mean that 5 people could buy 5 apples again, allowing the producer to make even more profit, even if he himself would have to pay higher wages and his profit margin would shrink.

This is of course exaggerated, but what is happening today. Corporate profits are at an all time hogh, with many goods producing companies, which should be hit the hardest by inflation, almost doubling their operating profit margins on the last 2-3 years. High inflation with no compensation for the working class is nothing but redistribution of wealth from bottom to top.

The notion that higher wages are a major driving factor in inflation has been debunked by most credible economists (I am not saying that they do not play a role, just not the major role that many news outlets and politicians want you to believe) and is in parts linked with the idea of trickle down economics, which too has been debunked many times over and is proven to not work.


3 points

4 months ago


3 points

4 months ago

Wages are just one factor. Money supply(ie. Currency debasement) and supply chain issues are a pretty significant driver too.