"Post-COVID-19 Corporate Price Pass-Through Behavior Strengthened Compared to the Past"

Wage, Intermediate Goods Import Costs, and Competitor Prices Show Unusual Simultaneous Increase

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jeong] During the COVID-19 economic recovery process, wages, intermediate goods import costs, and competitor prices all rose simultaneously, further increasing firms' price pass-through rates. It is analyzed that the simultaneous rise in labor costs along with intermediate goods import costs and competitor prices is an unusual phenomenon not seen in past recovery periods following the foreign exchange crisis or financial crisis.

On the 5th, the Bank of Korea stated in its report "BOK Issue Note: Evaluation of Recent Wage Trends and Estimation of Price Pass-Through Rates" that "Unlike in the past, recent wage increases have been accompanied by rising intermediate goods costs, reducing firms' capacity to absorb cost increases and thereby strengthening price pass-through behavior compared to before."

Using industry panel data to estimate the impact of wages on producer prices, it was found that since 2021, the price pass-through rates of marginal costs (wages and intermediate goods costs) have significantly increased in both manufacturing and service sectors.

In manufacturing, when wages rise by 10%, the producer price inflation rate increased from 0.1% to 2.0%, and the pass-through rate of intermediate goods costs to producer prices (with a 10% increase) also rose from 5.3% to 8.2%. The competitor price factor in manufacturing also strengthened compared to before, contributing to the rise in producer prices.

In the service sector, a 10% wage increase raised the producer price inflation rate sharply from 1.6% to 3.0%, and the pass-through rate of intermediate goods costs to producer prices also slightly increased from 0.5% to 0.7%. Oh Sam-il, Deputy Director of the Employment Analysis Team at the Bank of Korea's Research Department, explained, "The rise in pass-through rates is due to simultaneous increases in labor costs and intermediate goods costs, which have strengthened firms' price pass-through. However, this result suggests that if intermediate goods import prices stabilize in the future, the wage pass-through rate to producer prices could return to pre-2021 levels."

Additionally, the Bank of Korea viewed the large nominal wage increase per capita after the pandemic as largely influenced by base effects from special payments and booms in certain industries. In contrast, the increase in regular wages for permanent employees was closely related to a tight labor market and rising inflation expectations, reflecting a fundamental trend in wage conditions.

By decomposing the growth rate of regular wages for permanent employees using the wage Phillips curve, the Bank of Korea found that the recent increase in regular wages was largely explained by the rise in the vacancy rate and inflation expectations. Compared to the fourth quarter of 2019, the growth rate of regular wages for permanent employees in the second quarter of this year rose by 0.75 percentage points due to the effects of vacancy rates and inflation expectations, while other factors such as labor productivity and population caused a 0.36 percentage point decline.

Furthermore, the impact of vacancy rates and inflation expectations on regular wages for permanent employees varied by business size. Regular wages in firms with 300 or more employees were more sensitive to inflation expectations, whereas firms with fewer than 300 employees responded more to vacancy rates. Song Sang-yoon, Manager of the Employment Analysis Team at the Bank of Korea's Research Department, stated, "The rise in inflation expectations increased the regular wage growth rate by 2.58 percentage points in large firms during the second quarter, while in small firms it increased by only 1.34 percentage points. This phenomenon is due to larger firms having greater wage pass-through from prices to wages, partly because of stronger wage bargaining power through labor unions."

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