Price shock expected to ease with wage increases in the second half of this year... Concerns rise over wage-price vicious cycle increasing

[Asia Economy Reporter Seo So-jeong] An analysis has emerged suggesting that if high inflation and employment recovery continue, wage growth rates are likely to increase in the second half of this year.

In the report titled "Recent Assessment of Wage Pressure in the Labor Market and Implications," released on the 25th by the Bank of Korea, it stated, "With recent sharp rises in prices and signs of recovery in the labor market, there is concern about a secondary effect where inflation leads to wage increases."

According to the report, consumer prices recorded a high increase of 4.1% in March due to rising raw material prices, supply bottlenecks, and demand recovery, while nominal wages rose 4.6% last year, surpassing the pre-pandemic level (4.0% during 2017?2019) due to base effects and labor market recovery.

Breaking down last year's wage growth by category, the contribution of special payments increased significantly, but the contribution of fixed payments gradually rose toward the latter half of last year.

The report explained, "Although the contribution of fixed payments, which have high persistence in wage changes, was 2.6 percentage points in 2021, below the pre-pandemic level (3.6 percentage points during 2017?2019), the upward momentum observed since the second half of last year is expected to continue for some time. The fact that fixed payments, rather than special payments paid irregularly, are increasing suggests that wage growth will not be a temporary phenomenon."

Furthermore, as wage increases have recently spread across various industries, wage growth rates have also rapidly recovered. The report diagnosed, "Key variables significantly affecting wages have generally returned to pre-COVID-19 pandemic levels, and employment indicators have improved, leading to changes in major labor market conditions that increase wage pressure."

The report estimated that price shocks significantly affect wages with a lag of one quarter, attributing this lag to annual wage negotiation practices and labor market rigidity. The recent rapid inflation surge could act as wage pressure from the second half of the year onward. However, wage shocks do not significantly impact the Consumer Price Index (CPI) but have a significant effect only on prices of specific items (personal services excluding dining out).

The report emphasized, "Wage pressure in the labor market is gradually increasing," adding, "Since the vicious cycle of inflation → wage increases → further inflation cannot be ruled out, it is important to stably manage the inflation expectations of economic agents."