Hitting 'big companies' wage hikes every day
At the end of June, Deputy Prime Minister and Minister of Strategy and Finance Choo Kyung-ho expressed concern at a meeting with the Chairman of the Federation of Korean Industries, noting the trend of wage increases centered on some IT companies and large corporations.
"High-ranking companies are leading competitively high wage increases in the name of performance compensation or talent acquisition. Excessive wage increases not only exacerbate the high price situation, but also widen the wage gap between large companies and SMEs, resulting in a sense of relative deprivation for the vulnerable in the labor force. In the end, there is a risk of amplifying social conflicts.”
Just a week later, on the 13th of last month, Deputy Prime Minister Chu repeatedly urged people to refrain from raising wages in a lecture held at the forum of the Korea Chamber of Commerce and Industry.
"Inflation is rising in all directions, and there is a risk that a vicious cycle of inflation may appear as labor costs rise as well."
As such, the reason why the head of the economy is wary of wage increases is because of the 'inflation vicious cycle'.
Inflation has risen a lot, but if a wage increase is made, there is concern that the increase will be passed on as an expense, resulting in additional inflation.
As if to respond to this, on the 25th of last month, the Bank of Korea published a data titled <Checking the Price-Wage Relationship in Korea> and explained the relationship between the two as follows.
“In a situation where inflation has risen significantly as in recent times, it seems impossible to rule out the possibility that the high inflation situation will be fixed as the price-wage interaction is strengthened if expected inflation becomes unstable. It is important to contain the spread of inflation expectations through
'Trauma' caused by supply shocks
In fact, it is not new that higher wages have an impact on inflation.
When the economy is good, aggregate demand increases.
To meet the increased demand, companies must increase production, which inevitably raises raw material prices as well as worker wages.
As the price of the factor of production rises, the firm naturally raises the price of the product.
If inflation is too high, the government will tighten interest rates, cut spending, and tighten.
The austerity measures stifle economic growth, leading to a decrease in demand first, followed by a decrease in production activity, which naturally leads to a decrease in the value of factors of production, including wages.
This leads to price stability.
In this way, prices and unemployment rates move in opposite directions (Phillips curve), and economic authorities have been tug-of-war between the two, sometimes choosing prices and sometimes the unemployment rate to make a living for the country.
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However, in the 1970s, stagflation occurred, in which growth stopped and unemployment rose, but prices rose.
Two oil shocks (1973 and 1979) caused oil prices to soar, causing record prices to rise.
As people cut consumption, production contracted, the economy slumped, and the number of unemployed increased.
According to the Phillips curve, if the economy enters a recession, production decreases and unemployment increases, inflation should gradually stabilize.
In fact, during the first oil shock, when the price of oil rose from $4 per barrel to $14.5 per barrel, the unemployment rate in the United States rose by nearly 1.5 percentage points, and the CPI soared from the 3% range to the 12% range.
The unemployment rate rose by about 2 percentage points during the second oil shock, when the price of oil first exceeded $30 a barrel, and the US CPI soared from 9% to 14% during the same period. cites monthly figures to better illustrate the rise.)
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Stagflation, in which the Phillips curve loses its way and a recession (recession/increase in unemployment) and inflation come together, is still a trauma among economic bureaucrats even after nearly half a century has passed.
Deputy Prime Minister Choo's public awareness of wage increases appears to be largely due to this trauma.
In fact, the current supply shock on fuel and grain markets caused by Russia's invasion of Ukraine resembles the stagflation caused by the oil shock of the 1970s, as the impact could be even greater if wage increases fueled inflation.
1970s vs 2020s: Profits, not wages
So far it has been a general theory, now it is necessary to get into the individual discourse.
It is said that the crisis of the past and the present crisis can be compared on the same line, and if not, there is a difference in what way, and we need to think about how much weight we should add to these differences to analyze the present situation. is to give
In May, Isabelle Schnabel, European Central Bank (ECB) director, gave a presentation titled <The Globalization of Inflation>.
What is noteworthy about this announcement is that we went through a pandemic crisis before the current crisis, and in the process of overcoming it, governments around the world released money into the market on an unprecedented scale.
In fact, the US Federal Reserve declared unlimited quantitative easing in March 2020, saying that it will buy US Treasury bonds and mortgage-backed securities as much as necessary. We also decided to help companies that are experiencing difficulties.
This meant that major players in the US economy, such as the Treasury Department, banks, and corporations, would be provided with the live ammunition they need to overcome the Corona crisis without worrying about the fiscal deficit.
In addition, the lockdown caused by the pandemic has resulted in households accumulating significant excess savings.
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This unrestricted quantitative easing and massive accumulation of disposable income is where the current crisis differs most from the crisis of the 1970s.
Personally, I think Director Isabelle Schnabel captured the characteristics of the current crisis caused by this difference very well.
According to Isabelle Schnabel, excess income leads to massive demand, which leads to corporate-led inflation.
Excess Savings -> Stimulation of Demand (suppressed by Corona) -> Improving Pricing Power of Firms
"Strict lockdowns across virtually all countries allowed households around the world to accumulate huge amounts of involuntary excess savings.
...
Although excess savings are distributed equally both across and within economies, they have visibly boosted corporate pricing power by generating an environment in which consumers worldwide are both more willing and more able to tolerate price increases.
...
There is abundant empirical evidence suggesting that the pass-through of input costs is generally weak in the face of adverse supply shocks, such as rising energy costs, and strong in response to a preferred demand shock.
So, for firms to be able to raise their prices in the way they are doing it today, they need to be operating in a market environment in which demand is strong and hence pricing power is high."
Source: <The Globalization of Inflation>
To prove this empirically, Isabelle Schnabel shows the proportions of taxes, workers' wages, and corporate profits, respectively, in the GDP deflator, which is used as an indicator of inflation.
In fact, from the fourth quarter of 2019, before the outbreak of the corona virus, to the fourth quarter of 2020, when the corona epidemic was in full swing, wages contributed a lot to the change in the deflator and took up a large proportion. In the third and fourth quarters of this year, corporate profits are driving inflation.
That's right.
In the current inflation crisis, it was not the state (taxes) or workers (wages), but the corporations (profits) who were benefiting the most, and companies were leading the price increase in the process of maximizing profits.
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Worried about corporate profits?
Going back to the beginning, high wages are highly likely to lead to high prices, but high wages are not the only ones that lead to high prices.
As the European study showed, in the current inflation crisis, which came after the pandemic crisis and unlimited quantitative easing measures, companies can lead the high price flow by shifting cost pressures to consumers.
Even if we compare the crisis of the 1970s and the crisis of today on the same line, I think this is the difference that should be weighted.
If so, how much influence did corporate profits have on the recent record price rise in Korea?
We asked the Bank of Korea team, which published the data titled <Checking the Price-Wage Relationship in Korea>, whether the relationship between price and profit had ever been analyzed and what results would have been obtained if it did.
However, what came back was the answer, "I couldn't find any special papers or reports on the effect of profit on prices."
(Unfortunately, the National Accounts data released by the Bank of Korea provided only nominal figures on wages and profits, so reporters could not figure it out on their own without additional data disclosure and analysis.
) I soared.
This is the highest growth rate since November 1998, when the exchange rate soared due to the IMF crisis.
With inflationary pressures weighing down the Korean economy stronger than ever, can we get through the current crisis without properly understanding the culprits behind the inflation?
As in European studies, if we do not provide analysis or countermeasures on the impact of companies on inflation even though companies have led the inflation, maybe we are pouring water into the bottom of the poison?
I can't help asking whether a wage increase is a real solution, saying that it stimulates the economy while reducing the tax burden on companies and reinstating the head of the economy who have been punished for being economically vigilant.