Bonuses for South Korean chip workers put the central bank on inflation warning
An employee counts 50,000 authentic South Korean banknotes in this file photo at KEB Hana Bank’s Counterfeit Notes Response Center in Seoul, South Korea, Aug. 14, 2017. The wining continued in the first of four days as US national security officials seek to end talk of a war against North Korea. Photographer: SeongJoon Cho/Bloomberg via Getty Images
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Few workers can claim that their bonuses have been so large that the country’s central bank takes notice.
But in South Korea, that comes as workers from the tech industry receive bonuses worth millions of won, prompting the Bank of Korea to warn of rising inflationary pressures.
In a report on June 17, the central bank wrote that inflation this year was mainly supported by the increase in energy prices due to the war in Iran. But, he adds, even if that friction eases, inflationary pressures may gradually increase as income conditions improve and wage growth picks up.
Most notably, the BOK said the payment of large performance bonuses recently seen at some large companies in the IT sector could spread to broader wage increases, translating into increased inflationary pressures.
This comes as South Korea is already experiencing above-target inflation, with the BOK predicting full-year inflation to reach 2.7%, above its 2% target.
The BOK’s remarks come after reports that workers in technology companies are being paid huge bonuses, especially those under SK Hynix and Samsung Electronics.
Although the exact amount was not disclosed by the companies, SK Hynix agreed last September on a wage deal that will set aside 10% of operating profit as bonuses for its employees.
Samsung workers have reportedly agreed that 10.5% of their profits at the semiconductor operation will go towards special bonuses for chip workers, after threatening an 18-day strike in May.
According to an anonymous union source cited by Reuters, a memory chip worker with a base salary of 80 million won ($52,400) is expected to receive a total bonus of about 626 million won ($410,000) this year.
SK Hynix employees are expected to receive more than 700 million ($454,851) in bonuses if the company achieves an annual profit of 250 trillion won this year, according to Reuters calculations.
The BOK said that in general, bonuses will not have a significant impact on demand pressure, as they cannot be permanently increased from income.
But when “special bonuses grow abnormally and significantly,” wage growth could spill over into other sectors, sharply increasing both inflationary and demand-side pressures, the central bank said.
“In particular, because recent performance bonuses in the IT industry have been paid at a very high rate, the possibility that their actual impact will be greater than expected cannot be ruled out,” it added.
Retail businesses are celebrating
While the central bank is worried, some businesses are already preparing for these workers to lose their breath in their stores.
BOK Vice Governor Lee Jiho said at a press conference on June 17 that “sales have increased significantly in areas such as Suwon and the luxury goods sections of supermarkets, and this may spread gradually.”
South Korean media reports said some workers in the tech industry spent big on luxury goods at department stores, with accounts for workers buying bags, jewelry and watches.
The BOK said that in Gyeonggi Province – home to major factories of Samsung Electronics and SK Hynix semiconductor – the growth of card payments this year was higher in areas near chip manufacturing facilities and nearby residential areas than in other regions.
South Korean media outlet Chosun Ilbo said luxury consumption has “grown rapidly” in the southern provinces of Gyeonggi, where Samsung and SK Hynix are headquartered.
Luxury sales at the store’s Shinsegae branch in Gyeonggi province rose 53.6% year-on-year, the newspaper reported in May, with high-end jewelry up 146.3% and luxury watches up 85.3% over the same period. Overall retail sales increased by 19%, according to the newspaper.
Shares of South Korean supermarket workers have also rallied on rising expectations that high-end spending will strengthen.
Lotte Shopping, the retail arm of Lotte Group, has grown more than 148% year-to-date, with its share price jumping 67% in the past three months alone.
Shares in Hyundai Department Store are up 120% year to date, and have gained 113% in the past three months, while Shinsegae led the pack with a 190% gain in share price since the start of the year.
Most of Shinsegae’s gains have been recent, with its shares jumping 107% in the past three months.
