Monday, 27 June 2011

BRIC Wage Pressures Start to Materialise

Throughout the 2000s, virtually unlimited supply of labour kept a lid on wages in the BRIC countries. The rural hinterland released masses of labour to the cities who accepted wages not far from the subsistence levels people could earn at home. BRIC labour markets were more Ricardian than classic, with the rents going to the corporate sector that was happy to save through retained earnings and to reinvest. Stolper-Samuelson effects translate higher low-wage jobs into lower prices for low-wage goods. So despite stagnant wages in advanced countries, their purchasing power was roughly maintained. These times seems to be over.

In its 81st Annual Report, the Bank for International Settlements has documented the wage pressure in the BRIC countries. (Disclaimer: You need to know that I belong to those who hold the BIS reports in highest esteem as no other mainstream international organisation is more professional and independent from policy interference.) Recently, inflation in emerging market economies has been much more volatile mostly due to more volatile food and fuel prices. And wages pressures have been rising.

The BIS does not , as I did,  focus on the labour supply side to explain wage inflation.  "Dwindling economic slack and persistent inflation in these countries have been pushing up wage demands. Moreover, given the globalised nature of many supply chains, underlying inflation pressures in the advanced economies are affected indirectly by a pickup in unit labour costs in the emerging market economies. Indeed, profit margins may have become tighter and a further squeezing of price margins due to higher costs may eventually force firms to pass on a greater share of the increase in input prices to consumers.

My prediction in November 2007, given in the Vienna Hofburg at an IIASA conference ( came a touch too early but it seems now validated. Then I had concluded: China's impact on wages and inflation worldwide will morph drastically in the forthcoming years, as both salaries and prices are growing steadily.

BIS concludes:  "As a consequence, advanced economies may see core inflation pick up through the back door of global supply chains despite moderate wage pressures in their domestic labour markets." The Stolper-Samuelson effect, it seems, has stopped to support advanced-country central bankers in their job to keep inflation pressures down.

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