Wage Price Spiral

Trust in Government Is Prerequisite to Pain Sharing

The Bank of Korea (BOK) does not usually release monthly data on inflation expectations lest it should stoke inflationary psychology further. On Monday, however, the central bank broke its practice and said the June figure stayed above 4 percent, exceeding its year-to-year target of 2.5 to 3.5 percent.

It's not very hard to guess why; expectations for price hikes among economic players are showing signs of reaching a dangerous level. Businesses are even raising the prices of goods and services, even though the raw material prices for these have not increased much.

The price of flour has soared here recently, but that of rice has remained the same. Most owners of small eateries, however, have raised prices not only of ramyeon (instant noodle) but also gimbap (rice rolled with dried laver) and bibimbap (boiled rice with assorted vegetables) by up to 50 percent, claiming ``It is all but certain their raw material prices will keep going up.''

Workers have only one thing to do to cope with across-the-board price hikes and surges in living costs ― demanding wake hikes to make up for the loss in purchasing power.

This vicious cycle of a wage price spiral, once it sets in, turns into a self-sustaining inflationary process, which wipes out the effects of any wage hikes for workers, while sharply weakening the nation's economic health, as was the case of most global economies in the 1970s when the two oil shocks shook up the world.

Fortunately, however, Korea is not in such a situation yet, as most workers put job security ahead of wage hikes, as BOK Governor Lee Seong-tae noted. Worrying these officials combating inflation is the moves of unionized workers at big manufacturing companies, who will likely demand pay increases higher than inflation rates.

It is of course natural that workers demand wage hikes in proportion to consumer price increases as well as to productivity improvement, particularly in the case of some booming sectors, like shipbuilding.

Still, the big business unions should think twice. Once the wage price leapfrog turns material price-driven inflation into a structural and lasting one, there will be no winners and everyone ― employers and employees _ will be losers. Hit hardest from this worst-case scenario will be the weakest class of the economy, namely the small business employees, self-employed and non-permanent workers.

Mutual concessions and pain-sharing should be two keywords to tide over the current economic hardship, which many people are already feeling is worse than the 1997-98 financial crisis.

So the government was right in deciding to minimize public sector workers' wage hikes this year, while limiting hikes of public utility charges to an inevitable level.

It should go further to help ease the burdens for the most vulnerable sectors by phasing public service rate increases and differentiating their increase rates for industrial and household consumers.

Most important of all for the government is to send a ``consistent signal'' on price stability, not appearing to still waver between growth and stability. Consumers and businesses will be ready to make concessions only when they can have confidence in the government.

It is doubtful, however, whether the current economic team of President Lee Myung-bak is willing or able to do so.