Last Year's Agreed Wage Increase Rate Rebounds After 3 Years... Concerns Over Wage-Driven 'Second Inflation'

Pass-Through Effect Between Prices and Wages Already Visible

[Asia Economy Sejong=Reporter Kwon Haeyoung] Last year, the negotiated wage increase rate rebounded for the first time in three years, leading to analyses that the pass-through effect between inflation and wages has already become visible. With the domestic consumer price inflation rate approaching 5% last month, concerns are rising that the wage-driven secondary inflation vicious cycle, which had already shown preliminary signs, will intensify.

According to Statistics Korea on the 6th, the negotiated wage increase rate, which refers to wages set through labor-management wage and collective agreements (wage agreements), recorded 3.6% in 2021, rebounding for the first time in three years since 2018. The negotiated wage increase rate had declined from 4.2% in 2018 to 3.9% in 2019 and 3.0% in 2020.

Last year, the public sector wage increase rate was 1.5%, down from 2.7% the previous year, but the private sector increase rate rose from 3.1% to 3.9% during the same period, turning the overall negotiated wage increase rate upward.

The negotiated wage increase rate is calculated based on the wages agreed upon at the time of deciding the increase rate, not the actual wages paid. Considering that the increase rate slowed down from 2019, before COVID-19, and rebounded after three years, it is analyzed that the labor sector's pressure for wage increases due to the inflation that began in earnest last year has already started to appear. The consumer price inflation rate last year was 2.5%, a larger increase compared to 0.4% in 2019 and 0.5% in 2020.

As signs of synchronization between inflation and wages become visible, there are expectations that wage-driven inflation will become more prominent in the second half of this year. The vicious cycle of "inflation → wage increase → corporate product price increase → additional inflation" is likely to become more pronounced. In fact, according to the minutes of the Monetary Policy Committee released on the 3rd, one committee member stated, "We cannot rule out the possibility that the pass-through effect between wages and prices through rising inflation expectations has already begun."

Despite the negotiated wage increase rate rising last year for the first time in three years, the real wage growth rate (2.0%) did not keep pace with the inflation rate (2.5%), which is expected to further stimulate labor's demands for wage increases this year. The consumer price inflation rate recorded 4.8% in April this year, with forecasts suggesting it could reach the 6% range within the year. Additionally, the expected inflation rate, which reflects consumers' anticipated consumer price inflation over the next year, hit 3.1% in April, the highest in nine years. If high inflation expectations become entrenched, companies will more easily pass production costs onto consumer prices, triggering a chain reaction that leads to a continuous rise in inflation, creating a vicious cycle.

This content was produced with the assistance of AI translation services.