Who’s Setting the Price Tag? How Inflation Shifted from Worker Wages to Big Business Markups
Comparing the 1979–1982 wage-price spiral to the post-2021 corporate markup surge — and why the Federal Reserve keeps reaching for the same tool no matter which one is driving prices
To understand how inflation really works, it helps to look at it not as a mystery of numbers, but as a tug-of-war over who pays the bill when economic shocks hit.
By comparing two distinct eras — the inflation crisis of 1979–1982 and the post-2021 inflation wave — we can see how the drivers of inflation have completely flipped. In the late 1970s, price increases were driven by workers demanding higher wages to keep up with rising costs. Post-2021, price hikes were driven by large corporations using supply disruptions as cover to expand their profit margins.
Era 1: The 1979–1982 Volcker Shock
When rising wages fueled the inflation spiral.
The background. In the late 1970s, double-digit inflation was triggered by global oil crises and slowing economic growth. At the time, organized labor held significant power. Millions of everyday workers belonged to unions, and many labor contracts included automatic cost-of-living adjustments (COLAs) that raised wages whenever prices went up.
When energy and food costs spiked, workers had the leverage to demand higher pay to protect their families’ purchasing power. Businesses then raised their prices to protect their profit margins, which led workers to ask for even higher pay. This created a classic “wage-price spiral.”
The policy response. In October 1979, Federal Reserve Chairman Paul Volcker took drastic action. The Fed raised interest rates past 20%, intentionally slowing the economy down to break the inflation cycle.
The result.The “Volcker Shock” effectively ended the wage-price spiral by putting millions of people out of work:
- Loss of worker leverage. As unemployment hit 10.8% in 1982, workers lost the power to demand higher pay. Real wages fell.
- A shift in power. Combined with major anti-union policy moves during the 1980s, the balance of power permanently shifted away from workers and toward corporate employers.
- Long-term impact. From 1980 onward, the share of economic output going to worker pay steadily declined, while corporate profits and financial returns surged.
Era 2: Post-2021 “Sellers’ Inflation”
When big business markups drove price spikes.
The background. The inflation that followed the COVID-19 pandemic and the 2022 invasion of Ukraine looked fundamentally different. Decades of union decline meant workers did not have the bargaining power to cause a wage-price spiral; in fact, worker pay actually fell behind rising shelf prices.
Instead, landmark research by economists Isabella Weber and Evan Wasner showed that post-2021 inflation was driven primarily by “sellers’ inflation” — large corporations using cost disruptions to pad their profit margins.
How sellers’ inflation works, in three steps:
- The cost shock. A major bottleneck occurs (such as microchip shortages, shipping logjams, or energy spikes) that hits an entire industry at once.
- Implicit price coordination. Because a few dominant corporations control most major industries (like meatpacking, grocery retail, or shipping), the cost shock acts as a green light. Every major company knows its competitors are facing the same costs, so they can all raise prices at the same time without worrying about losing customers to a cheaper rival.
- Price over volume. Rather than just passing along the exact extra cost of raw materials, large corporations realized they could hike prices even higher because consumers already expected inflation. Businesses shifted to a strategy of selling slightly fewer goods, but at significantly higher profit margins.
Data from the Federal Reserve Bank of Kansas City and the U.S. Bureau of Economic Analysis confirmed that corporate profit expansion accounted for over 50% of the initial surge in U.S. inflation in 2021 — far outpacing the impact of wage increases.
The policy mismatch. Despite the evidence that corporate markups were driving prices up, the Federal Reserve used the exact same playbook from the 1970s: rapid interest rate hikes aimed at cooling down the job market. This exposes a fundamental flaw in traditional inflation control:
- The wrong tool.Raising interest rates doesn’t unblock supply chains, produce more goods, or force a monopoly to lower its profit margin.
- Unfair burden. By relying only on interest rate hikes, the government attempts to fix a profit-driven problem by slowing down hiring and raising borrowing costs for everyday families and small businesses, while big corporations keep their record markups.
Side by Side: 1979 vs. Post-2021
| Dimension | The 1979–1982 Volcker era | The post-2021 era |
|---|---|---|
| Main engine of inflation | Wage-price spiral — workers demanding higher pay to keep up | Profit-margin expansion — big business marking up prices above cost |
| Worker leverage | Strong (high union density, automatic cost-of-living raises) | Weak (low union density, wages falling behind shelf prices) |
| Who benefited during the shock? | Workers attempted to protect their pay; corporate profits were squeezed | Corporations successfully expanded margins; big business hit record profits |
| Government strategy used | Massive interest rate hikes to slow hiring and reduce worker power | Standard interest rate hikes, despite profits driving the price hikes |
| Unused alternative solutions | Joint government-business-labor wage and price agreements | Targeted windfall profit taxes, price-gouging oversight, antitrust enforcement |
