Emergent Inflation-Deflation Cycles from Minimalistic Wage Dynamics

Tobias Hartung Bitsch Holm, PhD Student, Copenhagen University, Denmark

We introduce a minimal agent-based model to study the endogenous emergence of inflation-deflation cycles driven by micro-level wage dynamics. Companies in the model compete by adjusting wages based on short-term profitability, while workers probabilistically choose employers according to offered wages. Despite excluding typical macroeconomic phenomena such as debt and unemployment, the model generates cyclic but non-periodic dynamics characterized by inflationary expansions followed by deflationary downturns. These cycles arise from a simple feedback loop: wage increases enhance consumer purchasing power and demand, stimulating further wage growth until high wages and large company sizes increase systemic vulnerability. Stochastic fluctuations in transactions occasionally trigger sharp declines in aggregate demand, causing cascading wage cuts and bankruptcies. The resulting dynamics qualitatively match several empirical observations, including recession durations, inflation cycles, and asymmetric asset return distributions, though discrepancies remain in company-size distributions and company mortality rates. Our results illustrate how realistic macroeconomic instability can naturally arise from minimal, interaction-driven wage mechanisms alone.