The Bank of Korea Says "The Impact of US Inflation on Wage Growth Is Still Limited"

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jeong] Amid concerns in the United States that sharp price increases could spur wage growth, the Bank of Korea has analyzed that the possibility remains limited.

On the 22nd, the Bank of Korea stated in its report "Reviewing the Relationship Between Wages and Prices in the U.S." published in the 'Overseas Economic Focus' that "Although wages and prices have risen sharply this year, the possibility of a wage-price spiral occurring so far remains limited."

The Bank of Korea judged that the simultaneous rise in wages and prices is due to common factors where demand showed a strong recovery in goods and labor markets after COVID-19, while supply remains constrained.

According to the report, model analysis results showed that when the U.S. consumer price inflation rate rises by 1 percentage point, unit labor costs excluding the increase due to productivity improvements rose by up to 0.4%. Furthermore, the duration lasted only up to four quarters, and from the ninth quarter, unit labor costs showed a declining response.

By region, in the Euro area and the United Kingdom, similar to the U.S., the impact of consumer price inflation shocks on unit labor costs was uncertain, whereas Japan showed a significant positive effect.

The Bank of Korea analyzed, "Considering that recent wage increases are mainly due to labor shortages, weakened union bargaining power, and wage negotiation practices, the impact of prices on wage increases is still assessed as limited."

Conversely, in the U.S., unit labor cost shocks were found to have a positive effect on prices, with a larger and clearer impact compared to other countries.

In the model analysis, when the unit labor cost growth rate rose by 1 percentage point, the consumer price index increased by up to 1.33%, and the positive response remained significant continuously from the fourth quarter onward.

The report stated, "This is because companies have a stronger tendency to pass wage shocks onto product prices, and wages in the service sector, which have a relatively large spillover effect on prices, have risen, increasing inflationary pressure."

Additionally, although wages act as a pressure on price increases, long-term inflation expectations remain stable, making the current situation different from the sharp inflation surge in the late 1970s.

The Bank of Korea mentioned, "Considering the wage-to-price path, if labor market supply and demand conditions improve in the future, the rate of wage increases may slow down, reducing inflationary pressure caused by labor market factors."

However, it added, "If high inflation persists, not only demands for wage increases to compensate for real wages but also changes linking wages to prices from the employment stage may occur, making it difficult to completely rule out the possibility of a wage-price spiral."