Will inflationary pressure persist in Asia-Pacific? Inflation in the region is still lower than it is in the U.S. or Europe, but it is increasing. Key drivers of this are supply-side stress from higher energy, food, and other commodity prices. An important question is the extent to which these conditions will cause more lasting inflation.

Labor market developments are one factor that will determine the persistence of inflation and the breadth of price increases. In Asia-Pacific, the picture is mixed. We expect wages to add to a rise in consumer prices pressures in Hong Kong, New Zealand, Singapore, and South Korea. In Australia, Japan, Taiwan, and Thailand, there is no push to inflation from labor markets, but there is some risk of rising wage inflation this year. In Malaysia and Indonesia, wage pressures are below trend after falling substantially over the pandemic period and may rise back toward trend given the ongoing economic recovery.

Wage Inflation Mixed

Available high-frequency wage data show wages are accelerating in New Zealand, Singapore, and South Korea, while wage inflation is modest in other parts of the region. Higher-frequency labor market data are unavailable for some emerging economies; consequently, for these economies we focus on the lower-frequency trends.

Chart 1

Chart 2

One factor supporting wages is lower unemployment. As economies recover from the pandemic, employment markets have strengthened, particularly for the high-income economies in Asia. Some economies are facing worker shortages. Unemployment rates are below their 10-year averages in Australia, Japan, New Zealand, the Philippines, and South Korea. In several emerging economies employment markets are not noticeably tighter than normal because there is still a need to find jobs for expanding labor forces.

Chart 3

Wage Phillips curves plot the association between nominal wage growth and unemployment. Lower unemployment should typically mean more demand for labor and hence higher wages. In practice, however, wage determination can be disassociated from unemployment rates because of various factors, such as firm and worker bargaining power, non-monetary compensation, and stickiness of wages or employment.

In Asia, the wage Phillips curves relationships vary greatly across economies. Hong Kong, Japan, Singapore, and Thailand show the expected association where lower unemployment is linked to higher nominal wages. In Australia and New Zealand, the wage Phillips curves have a negative slope; however, they are quite flat. This means that wage gains remain at similar magnitudes despite changes in the unemployment rate. In Malaysia and Taiwan, the wage-unemployment relationship is weak and in South Korea it is even more obscure. In these economies wages sometimes rise despite elevated unemployment.

Chart 4

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Chart 6

Examining wage developments alone is insufficient when determining the inflation outlook. What ultimately matters for wage transmission on to broader consumer prices are the dynamics of unit labor cost--that is, the wage adjusted for workforce productivity. If wages are rising because workers are producing more goods, then unit labor costs are not rising and there is no pressure on final consumer prices. On the other hand, if wages are rising without an increase in productivity, then unit labor costs increase, and firms' margins are eroded; and this will eventually drive up final prices.

Over an eight- to ten-year horizon, unit labor cost is tied with overall inflation in Asia (chart 7). The chart also shows that wage inflation is not as closely linked with inflation as unit labor costs. For example, in economies such as China or South Korea, and judging by wages only, we would expect much higher consumer price inflation pressures from labor markets. Productivity gains in these economies have kept unit labor costs low and limited wage pressure on overall inflation.

Chart 7

The magnitude of growth in unit labor costs is very close to inflation. This is what we would expect provided there is no structural change in labor markets. Taiwan and Thailand stand out in the chart as economies where increases in unit labor costs were weak relative to inflation. This suggests a declining share of economic gain went to workers. Structural factors could therefore be at play in labor markets. Structural changes could include declining share of labor in output or reduced worker bargaining power.

Wages are particularly sticky, especially for downward revisions. Consequently, when there is an economic downturn, unit labor costs jump (productivity falls but wages stay the same). But weak economic conditions prevent firms from passing on these costs to the market. Over the following recovery period, firms smooth out their margins and pass on fewer gains to workers. This results in an aligned medium-run relationship between unit labor costs and wider inflation.

Let's turn to higher-frequency dynamics that will influence consumer price inflation in the current environment. Unit labor costs are rising in New Zealand, South Korea, Singapore, and Hong Kong (see chart). These costs rose sharply in early 2020 because of economic downturns, but then fell as economies recovered. They are now rising again as productivity gains taper out while wages rise, which will push up inflation.

Chart 8

While we don't have high-frequency estimates for unit labor costs in Malaysia and Indonesia, these two economies are closer to the group of economies in chart 8. In Malaysia and Indonesia, the development of unit labor costs was similar--an increase in 2020 and a decline in 2021.

On the other hand, in several parts of Asia-Pacific, wage pressures remain muted. Chart 9 shows unit labor costs developments for Australia, Taiwan, Thailand, and Japan. There has been no significant increase recently, which means that inflationary pressure arising from labor markets is limited. However, labor markets are strong in several sectors and economic recovery is moderating. As such there could be increases over the next few quarters. In Thailand, employment prospects are yet to return to pre-pandemic levels because of the weakness in the tourism sector.

Chart 9

In some economies, such as Japan, Taiwan, or Thailand, there are structurally low increases in wage cost. In these economies, underlying inflation pressure may still occur because of demand conditions--even if the impact from labor markets on consumer prices is modest. A similar caveat applies to economies experiencing wage cost increases: if demand conditions are adverse, then firms may be unable to pass on these higher costs to consumers.

The region is divided into two groups based on the path of unit labor costs. The first group includes New Zealand, Singapore, Hong Kong, and South Korea. Here we see increases in unit labor costs amid tight labor market conditions. This implies some wage pressures on consumer prices. Malaysia and Indonesia see similar trends as this group.

The second group includes Australia, Japan, Thailand, and Taiwan. Here there is limited pressure on inflation from labor markets, but rising unit labor costs can't be ruled out. Inflation may yet rise in this group, but wider demand conditions will be more influential.

Asia-Pacific economies are moving down different core inflation paths (see "Varying Core Inflation Paths Drive Monetary Policy Divergence," July 25, 2022). One factor that will determine developments is labor markets, and fluctuation in unit labor costs across Asian economies will largely determine whether wages affect broader consumer prices.

Related Research

• Varying Core Inflation Paths Drive Monetary Policy Divergence, July 25, 2022
• Economic Outlook Asia-Pacific Q3 2022: Overcoming Obstacles, June 27, 2022,
• Interest Rates To Rise Across Asia-Pacific, April 13, 2022

Editor: Lex Hall

Designer: Halie Mustow