What could be the ultimate impact on the economy if wage demands consistently exceed productivity improvements?

When wage demands consistently exceed productivity improvements, it creates a scenario where the cost of labor rises without a corresponding increase in output. This condition can lead to increased costs for businesses, which may respond by passing those costs onto consumers in the form of higher prices, contributing to inflation. At the same time, businesses may find it challenging to maintain these higher wage costs if they do not see an increase in productivity. This can lead to layoffs or hiring freezes as employers seek to control labor costs, resulting in increased unemployment.

Moreover, as the costs of goods and services rise due to inflationary pressure, consumer purchasing power diminishes, further exacerbating economic challenges. In this context, the combination of rising unemployment and inflation creates a difficult economic environment, often referred to as stagflation, leading to slower overall economic growth.

In contrast, lower prices for goods and services typically require a decrease in demand or an increase in productivity, neither of which aligns with the scenario of rising wages outpacing productivity. Stable economic growth usually occurs when wage increases match productivity gains, and higher levels of investment are often a result of stable economic conditions that encourage business expansion, which is unlikely when businesses face higher costs without corresponding productivity improvements.