Wage deflation occurs when the compensation which workers receive is shrinking or not keeping pace with price inflation. Typically wage deflation occurs during periods of limited economic growth and high unemployment.

Employers can offer lower wages and more restricted pay raises when there are more workers competing for each job. During times of recession or stagnant growth, employers also cut hours and overtime resulting in lower overall compensation for workers.


Increases in productivity through technology innovations can also relegate workers lower paying roles and result in wage deflation. This type of wage deflation may be concentrated in specific industries where the impact of technology or outsourcing to lower wage overseas markets is most pronounced.

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