"Recovery of Korean Labor Supply Faster than US... Wage and Price Inflation Pressures Not High"

Bank of Korea BOK Issue Note Report

On the afternoon of November 15 last year, a job seeker is looking over a job posting at the "Great Job Fair" held at the aT Center in Seocho-gu, Seoul.
[Image source=Yonhap News]

The Bank of Korea stated that labor supply in South Korea continues mainly among the elderly population, and as a result, wage inflation pressure in the service sector is relatively low. It noted that "wage and price inflation pressures are lower than in major countries such as the United States."

On the 25th, the Bank of Korea explained this in a BOK Issue Note report titled "Labor Supply and Wage Inflation Pressure in Major Countries."

According to the Bank of Korea, during the recovery process from the COVID-19 pandemic, major countries including South Korea have shown a robust labor market, with an increase in job vacancies and a decrease in unemployment rates. However, the impact of labor market supply and demand conditions on wage and price inflation varies by country.

For example, in the United States, the labor force participation rate has fallen by 1.0 percentage point (2.6 million people) compared to pre-COVID-19 levels, leading to a labor supply shortage issue, which in turn has increased wage and price inflation pressures.

In contrast, South Korea’s labor supply has rapidly recovered, with the labor force participation rate exceeding pre-COVID-19 levels by 0.4 percentage points (180,000 people).

The Bank of Korea analyzed that the difference in labor supply recovery between South Korea and the United States is due more to structural factors than cyclical ones.

The Bank of Korea pointed out, "Although South Korea’s aging process has been faster than that of the United States, the labor force participation rate has continued to rise mainly among the elderly and women, so it has not faced a labor supply shortage. However, in the United States, labor supply has decreased due to aging and other factors that have persisted since before the pandemic, resulting in higher wage inflation pressure."

South Korea’s rapid labor supply recovery has increased firms’ hiring success rates, thereby easing wage inflation pressure, whereas the decline in the U.S. labor force participation rate has acted as a factor driving wage increases.

The Bank of Korea explained that while the service sector in South Korea remains robust, the increase in job vacancies mainly in the manufacturing sector has weakened the relationship between labor demand and wage growth.

The Bank of Korea analyzed, "By industry, South Korea has seen an increase in job vacancies mainly in manufacturing, whereas the United States and the European Union (EU) have experienced increases in job vacancies across both manufacturing and service sectors. In South Korea, the wage growth rate in the service sector?which has a high employment share and a high price pass-through rate between wages and prices?is relatively low, making the labor demand-wage-price channel weaker than in the United States."

However, the Bank of Korea added that as aging intensifies in South Korea, labor supply could decrease, potentially increasing wage and price inflation pressures in the future.

The Bank of Korea stated, "The speed at which aging is constraining labor supply is accelerating in South Korea as well. In the medium to long term, structural declines in labor supply are expected to bring about changes."

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